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.”
Among other key provisions, the new regulatory framework provides for USDA’s approval of State and Tribal Land hemp programs established under the 2018 Farm Bill, which will end debate as to whether hemp activities in a State or Tribal Land receiving such approval are federally lawful. To be approved, those plans will have to contain stringent requirements for testing the THC content of hemp to ensure it does not meet the definition of marijuana, and contain procedures for the enforcement of violations of the State or Tribe’s hemp program. Importantly, the regulatory framework provides for USDA’s granting of hemp production permits in states and territories that do not establish hemp programs for approval by USDA.
Yesterday, I blogged about a Washington Post article that reported that vitamin E acetate in marijuana vaping products is being considered as possibly being linked to alleged vaping related lung injuries. I cautioned cannabis manufacturers, processors and dispensaries, i.e., the cannabis supply chain, that articles like WP’s, which referred to vitamin E acetate in cannabis vapor as a “contaminant,” could be the impetus for product liability lawsuits.
Today, WP provided an update to yesterday’s article. WP now states as many as 450 vaping illness cases have been reported across 33 states. Up from yesterday’s report of 250 cases across 25 states. WP’s new article refers to the vaping related health claims as possible a “new lung disease” based on a study by the New England Journal of Medicine that reports about a possible lung disorder being experienced by certain consumers of vape. However, WP appears to acknowledge scientists have not yet identified a specific chemical in vape, or whether vaping of nicotine or marijuana, is resulting in an increased risk of the lung disorder reported by NEJM. Indeed, scientific research and investigation is needed in this area.
Nevertheless, as I explained yesterday, having represented pharmaceutical companies in product liability matters involving alleged “contaminants,” product liability lawsuits are often, if not usually, filed without any scientific proof of injury causation. Accordingly, the cannabis supply chain should be careful to ensure the safety of their products, and implement necessary compliance measures.
Likewise, cannabis consumers should be mindful that many of the reports of vaping related health issues concern “black market” vape products, not those manufactured by state-licensed cannabis companies who are required by law to maintain strict standards for their products.
Today, the Washington Post reported that federal and state regulators have identified the chemical vitamin E acetate as being contained in certain cannabis vaping products allegedly linked to lung injuries. According to WP, 215 cases possibly arising out of cannabis vapes containing the chemical have been reported in 25 states, and two deaths have been linked to marijuana vaping.
WP refers to vitamin E acetate in cannabis vapor as a “contaminant,” which is a loaded term that could get the attention of the plaintiffs’ product liability bar. Articles like this are often the impetus for lawsuits to be filed. Consequently, products’ liability claims may soon become a reality for the cannabis vape supply chain.
However, as even the WP article makes clear, whether vitamin E acetate in marijuana vapor can cause an increased risk of injury of any kind to vaping consumers is being investigated, and has not been proven. The article also identifies the fact that many users of marijuana vape also vape nicotine, which is likely one of many confounding factors. Thus, product liability claims asserting injuries from marijuana vaping brought now are likely to be unsupported by science.
Nevertheless, those in the cannabis supply chain, e.g., manufacturers, processors, and sellers, should be aware of the likelihood of such claims, as product liability claims are often asserted without any scientific evidence of causation. Those in the supply chain should know that a range of compliance measures can be implemented to better protect against against such claims.
On July 22, the FDA issued a Warning Letter to Curaleaf with regard to Curaleaf’s “CBD Lotion,” “CBD Pain-Relief Patch,” “CBD Tincture,” and “CBD Disposable Vape.” The Warning Letter explains FDA’s view that Curaleaf’s CBD products are effectively “unapproved new and misbranded human drug products” because the claims Curaleaf has made about them on Curaleaf’s website and social media accounts demonstrate “they are 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,” but Curaleaf has not obtained prior approval from the FDA to market them as such. The Warning Letter also explains the FDA’s view that the subject products are not “dietary supplements” because (i) CBD has already been approved as an active pharmaceutical ingredient (epidiolex), (ii) CBD was not marketed as a dietary supplement or a conventional food prior to such FDA approval of CBD as an API; and (iii) the subject products are not “intended for ingestion,” which is a requirement of a dietary supplement. The FDA also warned about Curaleaf’s products with respect to animals, which I have not summarized. The FDA provided Curaleaf 15 days to establish a corrective action plan and to report such plan to the FDA. The Warning Letter demonstrates the FDA is actively monitoring CBD manufacturer websites and social media for over the line claims, and that CBD manufacturers need to follow the FDA’s guidance given the unsettled regulatory structure with respect to CBD.
As with CVS, Walgreen’s decision to sell hemp-derived in CBD in select states, as opposed to rolling those products out nationally, is likely the result of the still developing federal regulatory framework for hemp, which includes forthcoming regulations and guidance from USDA and FDA, and differences in the laws pertaining to hemp and hemp-derived CBD products from state-to-state.
Notwithstanding the challenging regulatory environment, the mass marketing of hemp-derived CBD, now that hemp is no longer a federal controlled substance, provides a lucrative opportunity for the hemp-derived CBD supply chain – cultivators, processors, and retailers, including the major pharmacy chains. However, the “select state” approach Walgreens and CVS have taken demonstrates that careful is analysis of the federal and state laws and regulations at play is necessary before entering the hemp-derived CBD market.
CVS Pharmacy’s announcement that it will be selling hemp-derived CBD topicals, including creams, sprays, roll-ons, lotions and salves in Alabama, California, Colorado, Illinois, Indiana, Kentucky, Maryland and Tennessee, should really come as no surprise, as the mass marketing of CBD has been an eventuality since hemp was removed from the Controlled Substances Act’s definition of marijuana with the signing of the 2018 Farm Bill in December 2018. CBD’s therapeutic benefits, without the psychoactivity of THC, have made products containing CBD the darling of the cannabis industry.
However, as CVS’s decision to market hemp-derived CBD products in select statesdemonstrates, the 2018 Farm Bill was not a total green light. USDA has yet to establish regulations fully implementing the federal hemp program, which would allow states to establish their own rules for cultivation, processing and sale of hemp, meaning state-by-state differences in the laws concerning cannabis, including hemp, must be assessed before marketing products like hemp-derived CBD. Such federal regulations should be promulgated later in 2019, ahead of the 2020 growing season.
In addition to USDA, FDA has authority over CBD-containing products under the Food, Drug and Cosmetics Act, adding another layer of regulatory complexity that makes the 2018 Farm Bill’s removal of hemp from the CSA more of a yellow light for marketing hemp-derived CBD. Thus, manufacturers and distributors of CBD products must assess how CBD fits in with FDA and state rules concerning drugs and drug approvals, active pharmaceutical ingredients, health claims and labeling, and foods and beverages. FDA has said it is evaluating CBD closely, and should be providing guidance later in 2019.
Because the light is still yellow on the marketing of hemp-derived CBD, manufacturers and distributors should carefully evaluate the federal and state regulatory framework before marketing their CBD products.
Update: The Senate passed this bill on December 11, 2018; the House of Representatives passed it on December 12, 2018. It was signed into law on December 20, 2018.
Duane Morris will be following further developments and issuing updates.
The 2018 Farm Bill removes hemp from the Controlled Substances Act;
The 2018 Farm Bill confers on the Department of Agriculture (“DOA”) authority over hemp, including CBD derived from hemp;
States desiring to have primary regulatory authority over hemp must submit a plan to DOA pursuant to which the state will establish hemp regulations to provide for the growth and use of hemp, including CBD derived from hemp;
No laws will be erected to prohibit the interstate transportation of hemp, or CBD derived from hemp;
The Food and Drug Administration may intensify its involvement with CBD as more products for human consumption hit the market;
Banking and insurance for hemp derived CBD products should become increasingly available as those products are no longer “unlawful”; and
CBD derived from unlawful marijuana is still unlawful.
Enter the 2018 Farm Bill, known as the “Agriculture Improvement Act of 2018,” set forth in final form in a Conference Report yesterday, and which will be voted on as early as this week and could be signed into law next week. The 2018 Farm Bill defines hemp as follows: The term ‘hemp’ means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis. It goes on to explicitly remove hemp from the Controlled Substances Act, as follows:
SEC. 12619. CONFORMING CHANGES TO CONTROLLED SUBSTANCES ACT. (a) IN GENERAL.—Section 102(16) of the Controlled Substances Act (21 U.S.C. 802(16)) is amended— (1) by striking ‘‘(16) The’’ and inserting ‘‘(16)(A) Subject to subparagraph (B), the’’; and (2) by striking ‘‘Such term does not include the’’ and inserting the following: ‘‘(B) The term ‘marihuana’ does not include— ‘‘(i) hemp, as defined in section 297A of the Agricultural Marketing Act of 1946; or ‘‘(ii) the’’. (b) TETRAHYDROCANNABINOL.—Schedule I, as set forth in section 202(c) of the Controlled Substances Act (21 U.S.C. 812(c)), is amended in subsection (c)(17) by inserting after ‘‘Tetrahydrocannabinols’’ the following: ‘‘, except for tetrahydrocannabinols in hemp (as defined under section 297A of the Agricultural Marketing Act of 1946)’’.
The 2018 Farm Bill confers on the DOA the regulation of hemp, and contemplates federal regulations that would allow for states to become the “primary regulator” of hemp. Importantly, the 2018 Farm Bill explicitly provides for the interstate transportation of hemp and prohibits states from restricting the interstate transportation of hemp, stating “nothing in this title or an amendment made by this title prohibits the interstate commerce of hemp (as defined in section 297A of the Agricultural Marketing Act of 1946 (as added by section 10113)) or hemp products…No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State or the territory of the Indian Tribe, as applicable.”
Significantly, the 2018 Farm Bill does not remove CBD derived from THC-containing marijuana from the Controlled Substances Act. Consequently, the DEA’s pronouncement as described above is still in effect, CBD derived from unlawful marijuana is still unlawful. However, there is now clarity. CBD derived from “hemp,” as defined in the 2018 Farm Bill, and grown pursuant to state regulations established pursuant to the 2018 Farm Bill, is lawful and may not be the subject of federal prosecution.
Banking: It should be underscored that banks and other financial institutions, such as investment firms and insurance companies, that have been cautious or reluctant about CBD products because of their connection to unlawful marijuana may view the 2018 Farm Bill as a green light for banking, investing and insuring hemp derived CBD products as hemp and CBD derived from hemp are no longer “unlawful.”
Most importantly, the 2018 Farm Bill does not eliminate the regulation of hemp or CBD derived from hemp. Rather, it envisions the promulgation of additional federal regulations and state regulations intended to promote its growth and use, and federal agencies like the FDA may increase their involvement with CBD. Those interested in participating in the hemp and hemp derived CBD markets should retain counsel well-versed in the pertinent state and federal regulations to provide guidance that will allow for the achievement of business objectives.