Month: August 2019

Hemp stakeholders have been eagerly waiting for the release of rules and regulations by the U.S. Department of Agriculture (“USDA”). Although the 2018 Farm Bill removed the hemp and its derivatives from the Controlled Substances Act, it did not provide clear, consistent and reliable standards to safely and lawfully produce the crop. Instead, the new law tasked the USDA with adopting those standards with which states and Native American tribes wishing to regulate the crop within their borders will have to comply.

Earlier this summer, the USDA announced in a notice published in the Federal Register that it aimed to release its interim final rule in August. However, various comments recently made by USDA representatives suggest that the agency is struggling to meet its deadline. Specifically, the agency seems to be wrestling with the drafting of THC testing standards.

THC Testing standards matter because THC concentration is the key factor in differentiating hemp from marijuana. It is the difference between a regulated agricultural commodity and a Schedule I controlled substance. Without a national THC testing standard marijuana and hemp are virtually impossible to differentiate because they look, smell and feel the same.

Pursuant to Section 297B (a)(2)(A)(ii) of the 2018 Farm Bill, states and Native American Tribes seeking regulatory authority over the production of hemp must submit a plan to the USDA that includes, in part,

a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe[.]”

As I explained in a prior post, there is no “postdecarboxylation” testing method per se, and although the congressional intent of the 2018 Farm Bill apparently was to refer to a testing method known as gas chromatography (“GC”), this method has been heavily criticized by stakeholders because it tends to increase the THC concentration in the hemp sample and pushes it over the 0.3 percent limit.

So it isn’t entirely surprising that the USDA is struggling to craft THC testing standards with so little guidance.

Unfortunately, this delay is further exacerbating state and local enforcement authorities’ ability to differentiate hemp from marijuana. As of now, most jurisdictions lack the resources to test for specific levels of THC and differentiate hemp from its illegal cousin, marijuana. The patchwork of testing standards across states has further hindered the lawful sale of hemp nationwide. After all, why impose a 0.3 percent THC threshold if the states are imposing 50 different testing standards?

Establishing a reliable and uniform testing standard is only one of many other standards the USDA needs to promulgate in order to fulfill the intent of the 2018 Farm Bill. Implementing a procedure for tracking the source of the crop and its finished products is as important as the adoption of a uniform testing standard. Indeed, the 2018 Farm Bill legalized hemp grown pursuant to a state or Native American tribe plan. This means that not all hemp is treated equal, even if the tested crop contains no more than 0.3 percent THC.

As such, hemp industry players must maintain records showing the source of the plant, including but not limited to the grower’s license under which hemp was cultivated as well as the certificate of analysis (“COA”) for each batch of hemp or finished hemp product tested showing that they contain no more than 0.3 percent THC. If your company is dealing in hemp, you should know exactly where it was grown and should be prepared to prove it.

The lawful production and sale of hemp and hemp products is a complex business that requires cautious planning and due diligence. As such, hemp stakeholders should consult with lawyers who thoroughly understand the field in order to mitigate their risks and thrive in this fairly unregulated market.

A few weeks ago, we addressed the need for hemp sellers and purchaser to enter into agricultural production agreements (“APAs”), and in doing so, avoid unnecessary litigation. APAs are generally entered into at the beginning of a contractual relationship. In other cases, parties will forego a formal APA, and opt for a simpler, more “casual” way of doing business by using a purchase order, sometimes known as a “PO.”

A PO is a contractual document generated by the purchaser to authorize a purchase transaction. When the PO is accepted by the seller (typically on the seller’s preferred form), it becomes a binding agreement on both parties. A PO sets forth the description of the goods, their quantities, their prices, payment terms and the date of performance or shipment. It can also incorporate a wide array of associated terms and conditions. If the parties are operating without an underlying APA, it’s very important that the seller include these.

Whether hemp sellers and purchasers adopt an APA and/or a PO with associated terms and conditions, they should ensure that the following five terms are incorporated in their agreement:

1. Proof of Authorization to Grow Hemp.

The US Department of Agriculture is working on regulations under the 2018 Farm Bill and will eventually approve of hemp cultivation plans submitted by states. Until then (and for a year following the adoption of the USDA regulations), the 2014 Farm Bill remains in effect. Pursuant to the 2014 Farm Bill, every state that allows hemp cultivation requires that hemp be produced under a license, permit, or other authorization issued by its state department of agriculture. Accordingly, a hemp agreement should mandate that the seller (i.e., grower and/or processor), provide a copy of its license registration with the state department of agriculture in which the hemp is grown and/or processed. In addition, a well-drafted hemp agreement should further require that the seller provide information regarding the harvest lot and process lot identifiers with every delivery of the goods.

2. Testing Requirements.

The 2018 Farm Bill legalized hemp by removing the agricultural crop from the definition of marijuana under the Controlled Substances Act. What differentiates hemp from marijuana is merely its tetrahydrocannabinol (“THC“) concentration, which must not exceed 0.3 percent on a dry weight basis. Therefore, it is vital that the hemp or hemp product sold meet this THC limit. The seller should attach to each delivery a copy of a certificate of analysis (“COA”) from a licensed third-party lab that show compliance with this testing requirement. A prudently-drafted hemp agreement will also afford the purchaser the right to inspect and test the goods to ensure the sufficiency of testing under all applicable laws.

3. Packaging & Labeling.

States with robust regulatory systems require hemp and hemp products be packaged and labeled in conformance with rules adopted by their department of agriculture. As such, the hemp agreement should designate which party is responsible for labeling and its associated costs, as well as what would happen in the event of non-compliance.

4. Representations and Warranties.

Most agreements contain an abundance of representations and warranties; however, hemp agreements take this concept further and cover everything from program compliance concepts to product safety. This also tends to be one of the most heavily negotiated area of any hemp sale agreement.

5. Limitation of Liability.

This section also tends to be heavily negotiated, as the parties determine who would be responsible for problems and to what extent. Many things could go wrong given the perishable nature of hemp and the risk of THC fluctuation from the time of harvest all the way to the manufacture of a finished product. Under this provision, each party will seek indemnification for anything beyond its control.

As reflected in this non-exhaustive list, hemp is a unique commodity that requires contractual terms beyond those found in generic agreements. As such, any agreement entered by hemp sellers and purchasers should, at a minimum, include the five terms discussed above to help mitigate their risks. For more information on hemp APAs and POs, please contact our regulatory attorneys.

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, and Georgia. This week, we look at Hawaii.

Hawaii is one of the growing list of states that has created an industrial hemp cultivation pilot program. The Hawaii Department of Agriculture (“DOA”) launched the state’s hemp cultivation program and issued the state’s first license in June 2018. In May 2019, Hawaii enacted SB-1353, a bill that required DOA to establish a permanent hemp program under the 2018 Farm Bill, among other things. It’s important to note that DOA’s authority only falls on cultivation and not processing or retail sales, but DOA warns that processing could subject a person to different sets of regulations or different legal authorities.

But if you thought Hawaii would be friendly to Hemp CBD products, think again. Sort of like California, a May 2019 press release by the Hawaii Department of Health (“DOH”) states that the sale of CBD infused-products is unlawful in Hawaii. DOH’s Food and Drug Branch echoes this press release on its website:

• Products containing CBD are not generally considered safe and there may be potential health risks associated with them.
• It is illegal to add CBD to food, beverages and cosmetics that are manufactured, distributed and sold in Hawaii.
• CBD may not be sold as a “dietary supplement.”
• CBD may not be marketed by asserting health claims because that would constitute prohibited misbranding or false advertising.
• CBD is the active ingredient in an FDA-approved prescription drug. Therefore, it cannot be put into food, beverages and cosmetics, sold as a drug without a prescription, or marketed as a “dietary supplement.”

These statements by the DOH make pretty well clear that they are following the federal Food and Drug Administration’s (“FDA”) guidelines (by repeatedly citing/referring to them), but they also cite Hawaii’s food, drug, and cosmetics laws, similar to what California has done. In fact, Hawaii appears to have gone further than both the FDA and California in prohibiting Hemp-CBD in cosmetics. Hawaii’s position on Hemp-CBD is one of the strictest in the nation as the sale of Hemp CBD products such as foods, beverages, cosmetics, dietary supplements, unapproved drugs, or any other kind of Hemp CBD product that makes health claims, appears to be unlawful in Hawaii.

The bottom line is that the sale of many different kinds of Hemp CBD products in Hawaii appears to be unlawful, at least according to the DOH. Anyone who follows this blog knows that these laws are fluid and changing rapidly, so stay tuned to the Canna Law Blog for further developments.

Commercial marijuana activity remains a federal crime, and the Bank Secrecy Act (“BSA”) generally prohibits financial institutions from accepting marijuana-generated dollars. Financial institutions that work with marijuana businesses must conduct due diligence to ensure that marijuana businesses are complying with state law. That includes regularly submitting Suspicious Activity Reports (“SARs”) to the Financial Crimes Enforcement Network (“FinCEN”). Regulated commercial hemp activity is not a federal crime, but hemp’s close proximity to marijuana makes it a generally high-risk endeavor for financial institutions who generally don’t have a high risk tolerance to begin with. That has made it very difficult for many hemp and hemp-derived CBD (“Hemp-CBD”) businesses to access bank accounts. That is changing.

On August 19, the National Credit Union Administration (“NCUA”) released Interim Guidance on Serving Hemp Businesses. The Guidance lays out what credit unions need to incorporate into their Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance programs in order to work with hemp businesses.

First, credit unions need to maintain appropriate due diligence procedures for hemp-related accounts and comply with BSA and AML requirements to file Suspicious Activity Reports (SARs) for any activity that appears to involve potential money laundering or illegal or suspicious activity. It is the NCUA’s understanding that SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for that business. Credit unions need to remain alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.

Second, if a credit union serves hemp-related businesses lawfully operating under the 2014 Farm Bill pilot provisions, it is essential the credit union knows the state’s laws, regulations, and agreements under which each member that is a hemp-related business operates. For example, a credit union needs to know how to verify the member is part of the pilot program. Credit unions also need to know how to adapt their ongoing due diligence and reporting approaches to any risks specific to participants in the pilot program.

Third, when deciding whether to serve hemp-related businesses that may already be able to operate lawfully–those not dependent on the forthcoming USDA regulations and guidelines for hemp production–the credit union needs to first be familiar with any other federal and state laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity. For example, a credit union needs to know if the business and the product(s) is lawful under federal and state law, and any relevant restrictions or requirements under which the business must operate. For example, certain hemp-derived products may now or in the future be regulated by state health departments and/or the U.S. Food and Drug Administration.

NCUA’s guidance is written for credit unions but these guidelines are important for hemp businesses because it gives insight into what credit unions are going to need from hemp businesses. Below are some questions any hemp business should be prepared to answer when seeking an account with a credit union.

Where was the hemp grown? For cultivators, this question should be easy as they are the ones growing hemp and can easily provide a credit union a copy of the license or permit provided by a state department of agriculture that authorizes the production of hemp under the 2014 Farm Bill, which currently governs domestic hemp cultivation, or the 2018 Farm Bill which will govern cultivation after the USDA starts approving state hemp plans. Companies that are manufacturing products that contain hemp or selling finished Hemp-CBD products, this may present more of a challenge if they haven’t been closely tracking the source of their hemp. Manufacturers and distributors should have copies on file of every hemp cultivator who grew hemp that is contained in their products and should be prepared to explain to a credit union how they keep track of this information.

Who is buying hemp? According to the Guidance, the NCUA does not believe that credit unions are required to submit SARs when working with hemp businesses, but they are still mandated to submit SARs for suspicious activity. That means the credit union is going to watch a hemp business’ account activity closely. If a hemp business is receiving payments from a suspicious account, that will raise red flags. Also, most states that allow for hemp cultivation do not allow the direct sale of raw hemp to unlicensed individuals. Some states issue processing, manufacturing, or wholesaling licenses. Hemp cultivators should be prepared to explain who is buying their hemp and should provide a credit union copies of the license or permits of their buyers, if applicable. Cultivators should also be prepared to explain how they transport hemp to buyers, especially if raw hemp is moving across state lines as many states have specific regulations on the topic. If a state doesn’t require a license to process or manufacture hemp, hemp cultivators should be prepared to explain that as well.

What products are you selling, where are you selling them, and how are they marketed? Lets cut to the chase: much of the interest in hemp is due to Hemp-CBD and the legality of Hemp-CBD varies widely from state-to-state and that the Food and Drug Administration’s (“FDA”) position is that Hemp-CBD cannot be added to food, dietary supplements, or unapproved drugs. NCUA indicated that credit unions must be aware of restrictions and regulations under other state and federal law. This question is going to be a major focus for distributors of Hemp-CBD products, but hemp manufacturers or cultivators should be prepared to answer this as well if they are selling directly to consumers or know that they are in the production chain of Hemp-CBD products. Credit unions are going to look out for Hemp-CBD in foods and dietary supplements, as the FDA has clearly stated that Hemp-CBD may not be legally added to these products. The credit union will also want to see marketing materials to watch out for medical claims as such claims will cause the FDA to categorize a product as an unapproved drug. The FDA’s position on Hemp-CBD in cosmetics and smokable hemp is not as hostile but some states have enacted laws or regulations prohibiting smokable hemp. States also differ widely on how they treat Hemp-CBD, generally including: what types of products are prohibited, standards for THC testing, requirements for labeling and packaging, manufacturing standards, and whether products must be registered in a given state, just to name a few examples. Hemp businesses should be prepared to explain how they are complying with regulations in each state where they do business.

How are you monitoring regulatory changes? With the ever-changing laws and regulations, hemp businesses should expect to discuss the efforts they make to stay up-to-date on law and policy regarding hemp. A credit union is going to want to know that its hemp clients are well informed and carefully tracking the industry with procedures in place to comply with new regulations.

The above questions are not a comprehensive checklist, but if you are prepared to answer each in detail, you’ll be in a good position when it comes time to meet with your local credit union. If not, contact our Hemp-CBD attorneys to help get your business on track.

Recently I wrote about the two dominant global MLM essential oil companies based in Utah: Young Living and doTERRA. Last month Young Living announced it is entering the CBD oil market, but doTERRA publicly stated on its website that it will not (yet) follow suit, even though everyone and their dog are clamoring for CBD oil and CBD oil-derived products. doTERRA only hints that it may produce CBD oil if it can be produced according to doTERRA’s rigorous standards for its products, but “Right now, it is not possible to deliver a CBD oil that meets [doTERRA’s] CPTG^® standards.”

Instead, doTERRA has gone to great lengths to educate its distributors (wellness consultants) both about the medical and legal issues surrounding CBD oil. On its website in a post modestly titled Everything You Need to Know About CBD, doTERRA provides a part-medical part-legal treatise, complete with embedded video, a PowerPoint presentation, and 24 footnotes to medical journals and federal laws. Its thoroughness means that it is a beast to digest if you did not double major in pre-med and pre-law, but doTERRA makes some compelling points about the current unsettled state of CBD.

On the legal side, doTERRA takes a conservative approach:

• doTERRA advises its distributors to “remain cautious” against products that may not follow the Federal Food, Drug, and Cosmetics Act (the “FD&C Act”) that may put health and safety at risk. This point is well taken, as we mentioned in a prior blog post entitled Four Important Considerations for Any Hemp CBD Company.
• Relatively little medical and scientific research has been completed regarding CBD and its “perceived health benefits” (see FDA Says It Is Speeding Up The CBD Regulation Process). This point is also well taken with respect to U.S. regulators. Neither the FDA nor the USDA have issued implementing regulations yet regarding hemp-derived CBD.

Young Living is aware of these potential legal issues with the current state of CBD, and it has taken proactive steps to mitigate potential negative effects. In its acquisition of Colorado-based Nature’s Ultra that produces 0.0% CBD oil (no THC content), Young Living has opted to keep Nature’s Ultra as a separate operating company rather than integrating its operations within Young Living. Nature’s Ultra’s CBD oils can be purchased with Young Living’s essential oils blended into its products rather than the other way around.

On the medical side, doTERRA provides extensive information regarding cannabinoids:

• The human body has cannabinoid receptors that are broken down into two categories:
  • CB1 receptors – affect the brain and central nervous system (pleasure and reward) (more widely distributed throughout the body).
  • CB2 receptors – immune system (inflammatory system) (less widely distributed than CB1 receptors).
• THC works directly on both CB1 and CB2 receptors.
• CBD works indirectly on both CB1 and CB2 receptors by slowing down the work of an enzyme called fatty acid amide hydrolase (“FAAH”), which breaks down anandamide (your body’s naturally-produced cannabinoid as a response to strenuous exercise (runner’s high), stress (fight or flight), and other related stimuli (stepping on a pile of your kid’s Legos in the dark)), which is why anandamide is called an endocannabinoid).
  • A slower breakdown in anandamide means it is present in the body longer and continues to interact with the body’s CB1 and CB2 receptors.

Finally, in good competitive market fashion, doTERRA educates its distributors that it already has a superior product to CBD oil called Copaiba oil:

• Copaiba oil contains beta-caryophyllene (“BCP”), which is a cannabinoid and a sesquiterpene (delivers oxygen molecules to cells) found in hundreds of different plant species.
• Copaiba oil comes from distilling the oleoresin of varieties of copaiba trees, which are found in Brazil. The resin is harvested similar to the method used to extract maple sap from maple trees.
• BCP interacts directly with the body’s CB2 receptors (“no risk of psychoactive effects”), “soothing tissues and helping to manage healthy inflammatory responses.”
• doTERRA’s copaiba essential oil contains 55% BCP content, which is the “highest BCP content of any known oil.”
• Its efficacy means only “a drop or two” is needed for its BCP to start affecting the human body, so its price point is significantly lower than CBD oil per application (They can’t call it a “dose” because “These statements have not been evaluated by the Food and Drug Administration” and “This product is not intended to diagnose, treat, cure, or prevent any disease.”)
• Copaiba oil has been produced under doTERRA’s rigorous proprietary CPTG® standards.

But at the end of the day, copaiba oil is not CBD oil. BCP is not CBD, even though it contains two of the same three letters and may be confusingly similar enough for doTERRA’s wellness advocates to have an opening in the conversation to educate the market about BCP’s benefits. doTERRA is hoeing a hard row right now, but there is a segment of the doTERRA and Young Living essential oil market that is hesitant to use products that have not been approved by the FDA or that have any trace of THC content, as I explained my prior blog post. If copaiba oil is as effective as and can be purchased at a fraction of the price of CBD oil, it may get some takers, but because it does not interact with the CB1 receptors, it may be a hard sell. And copaiba oil is not as cool or edgy as CBD oil. Will doTERRA eventually produce CBD oil? Almost certainly. Will doTERRA’s consultants be able to educate the market about copaiba and BCP and keep pace with Young Living’s sales of its CBD oil through Nature’s Ultra? Probably not. The developments over the next several months will be interesting as these two competitors continue to fight for market dominance.