Yesterday, a California court federal court judge did not follow other federal courts in staying a consumer class action brought on behalf of CBD product consumers on the basis of the FDA’s primary jurisdiction over the regulation of CBD products. The Court in Rodriguez v. Just Brands USA Inc. et al., 2:20-cv-04829, C.D. Cal., determined that claims that CBD product maker Just Brands’ labeling did not accurately state the amount of CBD in its products could give rise to state law claims for breach of warranty and fraud that should not be stayed because, according to the Court, the FDA’s forthcoming regulations would not alter the expectation that CBD product manufacturers would accurately convey the amount of CBD in their products.
The decision in Rodriguez should be on the radar of the entire cannabis industry, as it demonstrates how products liability and consumer class action lawsuits may be brought under state statutory and common law to seek damages for improperly labeled cannabis products. Cannabis – hemp and marijuana – product manufacturers should be sure to build into their internal compliance safeguards against such claims.
Relatedly, on the radar for hemp-derived CBD is legislation proposing to categorize CBD as a dietary supplement under the FDA’s regulatory regime for drugs, dietary supplements and foods and beverages under the Food, Drugs and Cosmetic Acts. That bill will be introduced today by Sens. Ron Wyden (D-Ore.), Rand Paul (R-Ky.), and Jeff Merkley.
Given the billions of dollars of revenues, including tax dollars, generated by the industry, which are generated by cannabis companies and companies that provide services to the industry, cannabis banking is truly a public concern. The very laws that seek to create transparency as to the public fisc, such as the Bank Secrecy Act, have forced cannabis to be a cash business, which means not all of the cannabis dollars may be accounted for as in other industries, thereby undermining the objectives of those laws. The SAFE Banking Act would resolve those concerns by allowing core and ancillary companies to utilize all of the electronic banking, checking, payroll, and accounting functionality that businesses in all other industries enjoy. There is no question the passage of this legislation would provide a game-changing boost to the cannabis space.
Senators Dan Laughlin (R) and Sharif Street (D) are introducing legislation that would legalize marijuana for adult recreational use in Pennsylvania. This is the first time a republican senator has backed such a bill. The proposed legislation will attempt to generate revenue for the commonwealth and to promote social equity by way of increasing the number of licenses to operate, imposing a 6% sales tax, and imposing a 10% excise tax that would go toward a Cannabis Business Development Fund to provide aid, grants, and technical assistance to businesses and individuals in areas that have been disproportionately impacted by criminal prosecution for cannabis violations. Expungement of cannabis crimes would also be available.
Laughlin’s pragmatic views may encourage his republican colleagues in PA’s legislature to join him. As Laughlin stated during a press conference: “Our proposal prioritizes safety and social equity. And furthermore, it will let Pennsylvania’s robust agricultural industry participate in marijuana cultivation.” And both Laughlin and Street encouraged PA legislators to keep pace with lawmakers in New Jersey and New York, stating in their co-sponsorship memo: “This year our neighbors in New Jersey have signed adult use marijuana into law and our neighbors in New York are likely to legalize. It is our duty to taxpayers to seize the initiative and legalize marijuana concurrently with bordering states. Failure to do so risks permanently ceding hundreds of millions of dollars of new tax revenue as well as thousands of jobs at a time when taxpayers can least afford it.”
During his confirmation hearing on February 22, 2021, Attorney General nominee Merrick Garland’s comments hearkened back to the Obama-era de-prioritization of enforcement against marijuana-related crimes under the Cole memorandum, stating: “This is a question of the prioritization of our resources and prosecutorial discretion… It does not seem to me a useful use of limited resources that we have, to be pursuing prosecutions in states that have legalized and that are regulating the use of marijuana, either medically or otherwise. I don’t think that’s a useful use.”
In addition, Garland explained that social justice warranted such deprioritizing, acknowledging that people of color are arrested for non-violent marijuana-related crimes at far greater rates than white people. According to Garland, the federal government should not be expending resources criminalizing non-violent marijuana related crimes, as doing so in the past “has disproportionately affected communities of color and damaged them after the original arrest because of the inability to get jobs.”
While proposed legislation such as the MORE Act and the SAFE Banking Act could provide greater certainty for the cannabis industry, until such time as laws like those are passed, the establishment of priorities regarding federal enforcement of state-legal cannabis would encourage greater participation in the cannabis industry, as the risks of federal enforcement would become more clear and thus easier to weigh against the rewards of entering the still emerging market. The DOJ has been largely hands off of the state-legal cannabis market since the Cole memorandum, even though it was rescinded by AG Session, but clarity from Merrick Garland would nonetheless be very well-received by industry participants.
In connection with a crackdown on CBD manufacturers pursuant to its “Operation CBDeceit,” the FTC announced today settlements with six CBD-infused product manufacturers who, according to the FTC, allegedly made a “wide range of scientifically unsupported claims about their ability to treat serious health conditions, including cancer, heart disease, hypertension, Alzheimer’s disease, and others.” Under the settlements of the respective Complaints against them, each of the manufacturers will be required to pay a fine, and cease making “unsupported health claims” in connection with the marketing of their products.
In issuing its press release today the FTC attached the Consent Agreement and the FTC’s findings of violations of the FTC Act, which are set forth in a draft Complaint. These documents illustrate the FTC’s procedures in actions like these, and highlight the FTC’s concerns regarding allegedly misleading representations about CBD-containing products in violation of the FTC Act. Specifically, the FTC views health claims in connection with marketing such products to be misleading unless they “rely upon competent and reliable scientific evidence that is sufficient in quality and quantity based on standards generally accepted by experts in the relevant disease, condition, or function to which the representation relates, when considered in light of the entire body of relevant and reliable scientific evidence, to substantiate that the representation is true.”
Significantly, the FTC has not required the settling manufacturers to remove their products from the shelves and to cease selling them. They must, however, remove any unsupported health claims. Moreover, it would not be surprising if the announcement of these settlements spawns consumer fraud litigation against the manufacturers, which is often a much more serious concern to the business.
It is unclear how “Operation CBDeceit” will be implemented when the Biden administration takes over. For now, however, CBD manufacturers should continue to be mindful of their packaging, labeling and other marketing materials.
Voters in the five states where the legalization of marijuana was on the ballot voted in favor.
In the populous states of New Jersey and Arizona, voters legalized marijuana for recreational use by adults over the age of 21. Given New Jersey’s proximity to New York and Pennsylvania, where medical marijuana programs have been popular, legalization in New Jersey could have a domino effect in the northeast, especially considering the tax revenue that will be gained by New Jersey from New York and Pennsylvania residents who travel there every day for work, the Jersey shore and casinos, and other reasons.
Voters in South Dakota and Montana also voted to legalize marijuana for recreational purposes, South Dakota voters also approved medical marijuana, and voters in Mississippi voted to legalize marijuana for medical purposes to treat 22 qualifying health conditions.
Three decisions staying CBD class actions in two months may signal a trend, especially considering that the Courts in these cases refer to the other’s decisions. Such a trend may keep the plaintiffs’ bar at bay, as it would cast doubt on the viability of consumer class actions asserting CBD violations, or at least it could make the cases less appealing to the plaintiffs’ bar because a stay makes the timing of a settlement or resolution even more uncertain.
As a commercial litigator who has handled a broad range of claims in highly regulated industries over the past 20 years — particularly in complex matters such as class actions involving claims brought by consumers and shareholders — and given my experience spearheading the development of Duane Morris’ cannabis industry group, which has included providing regulatory and business advice to a number of businesses and individuals with cannabis-related interests, I have been expecting the maturing cannabis industry to eventually mirror other industries when it comes to using commercial litigation to resolve disputes between businesses and to address claims of injury allegedly experienced by aggreived consumers and shareholders. It appears the time has come. Now, as opposed to even just a few months ago, not a day goes by when the daily legal news outlets that report on litigation matters filed in federal and state courts around the country do not include matters pertaining to adult use marijuana, medical marijuana, and/or hemp.
Today alone, legal news outlets are reporting about a shareholder deriviative action being filed against the manufacturer of cannabinoid-containing transdermal patches, a maker of mobile hemp dryers suing a distributor for alledgedly stealing trade secrets, a publicly-traded company that owns cannabis brands being sued for breach of contract by an MSO arising out of a failed merger agreement. Claims like these are among the many product liability, stock-drop and securities fraud, tradmark infringement, FLSA, and employment litigation matters to be filed in 2020 relating to cannabis; not to mention the federal and state regulatory cannabis-related enforcement actions also commenced. Just as in other industries, COVID-19 is likely to spur litigation in the space because of strains on resources and performance caused by business disruptions and the slower economy. To be sure, the plaintiffs’ bar has cannabis on its radar.
Thus, now more than ever, it is critically important for cannabis businesses to implement the necessary compliance measures, including making sure appropriate insurance coverage, e.g. premises, products, and D&O, has been obtained, that could protect their businesses from the cost and disruption of commercial litigation. Likewise, cannabis-specific nuances, such as the enforceability of contracts and jurisdictional questions, require careful evaluation by experienced counsel advising plaintiffs and defendants who are considering filing, or who have been brought into, a commercial litigation.
On April 20, the FDA issued warning letters to two CBD companies – BIOTA Biosciences and Homero Corp., dba Natures CBD Oil Distribution – directing them to remove statements from their labeling and advertising on websites and social media claiming that CBD can cure opioid addiction among other illnesses. I am attaching the FDA’s warning letter, as it provides very useful information to the market as to the FDA’s current views of CBD products. As set forth in the warning letter, the FDA continues to view CBD as (1) an unsafe food additive; (2) not satisfying the definition of a “dietary supplement,” and (3) as unapproved new drugs if marketed as “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the structure or any function of the body.” In the case of Homero, the CBD products were advertised with the following claims, among others:
“Natures Pure CBD Oil has been effective in the treatment and eradication of opiate use.”
“CBD Oil Inhibits the reward-facilitating effect of morphine”
“Vaping CBD Oil to Treat Asthma . . . Your best best [sic] to combat Asthma is by vaping CBD Oil.”
“Natures Pure CBD is a strong anti-oxidant that can alleviate lower epileptic seizures, psychotic disorders, and has neuroprotective qualities.”