Another Lawsuit Challenging State Regulation of Hemp Synthesized Intoxicants

Seth Goldberg
Seth A. Goldberg

Another lawsuit challenging state regulations that attempt to curb the use of hemp-synthesized intoxicants (HSI) in consumer products was commenced last week.

In a complaint filed in federal court in Alaska on November 2, 2023, AK Industrial Hemp Assoc. et al. v. Alaska Department of Natural Resources, et al, the plaintiffs challenge the constitutionality of Alaska regulations that prohibit the sale in Alakska of hemp products for human consumption that contain delta-9 THC or synthetic cannabidiol.

There are now more than half a dozen lawsuits challenging state regulations that target HSIs, which further demonstrates the need for Congress to make clarifying changes to the definition of hemp in the 2023/24 Farm Bill to correct the loophole that has resulted in the proliferation of these intoxicating and potentially unsafe substances.

On November 17 at 12:00 eastern, Duane Morris will be hosting a webinar about the “loophole” in the definition of hemp in the 2018 Farm Bill that has led to the proliferation of HSIs, including the science behind HSIs; litigation challenging state regulation of HSIs; and the 2023/24 Farm Bill and HSI policy. 

Virginia’s Restriction of Hemp Synthesized Intoxicants Upheld by Federal Court

Seth Goldberg
Seth A. Goldberg

On October 30, 2023, in Northern Virginia Hemp and Agriculture LLC, et al., v. The Commonwealth of Virginia, the U.S. District Court for the Eastern District of Virginia  refused to enjoin a Virginia statute, SB 903, aimed at curbing the production and distribution of products containing intoxicating chemical compounds derived from federally lawful hemp (“Hemp Synthesized Intoxicants” or “HSIs”).  SB 903 imposes upon hemp products,  including edibles and smokables, industrial hemp extracts, and any other consumable substance, a limit of no greater than .3% total THC concentration and no more than two milligrams of total THC per package or amount of cannabidiol that is no less than 25 times greater than the amount of total THC per package.

This restriction, referred to as a “Total THC Standard,” is intended to prevent the sale to consumers of ingestible, smokable, and otherwise consumable products that contain intoxicants derived from federally lawful hemp that are the functional equivalent of the delta-9 THC in federally unlawful marijuana. Such products have proliferated since the 2018 Farm Bill because chemical processes can be used to convert the chemicals in hemp into intoxicating compounds like delta-8 THC.

The Court in No. VA Hemp determined that the plaintiffs were unlikely to succeed on the merits of their claims because, among other things, the 2018 Farm Bill did not preempt states from regulating hemp products sold in their states.

 

 

AG Consumer Protection Lawsuits Target Delta-8 and Perceived “Loophole” in 2018 Farm Bill

Seth Goldberg
Seth A. Goldberg

The Nebraska Attorney General and the California Attorney General have filed lawsuits recently under their states’ consumer protection statutes targeting the manufacturers of hemp products containing Delta-8 THC, noting the health and safety risk to consumers of these products.  Such products, known as “hemp synthesized intoxicants” or “HSIs” are often just as intoxicating as the Delta-9 THC in state-legal adult-use and medical marijuana, but may not be subject to the same types of licensure, testing, and packaging/labeling requirements imposed under state cannabis programs. 

As I have previously written, the manufacture and distribution of HSIs appears to be the result of a perceived loophole in the 2018 Farm Bill’s legalization of hemp and its “derivatives, extracts, cannabinoids, isomers.”  Proponents of HSIs assert that, in defining hemp in the 2018 Farm Bill, Congress did not prohibit the chemicals in hemp from being converted into psychoactive compounds.

Opponents of HSIs argue that hemp was legalized as an agricultural commodity, and the 2018 Farm Bill was focused on the production (cultivation) of hemp, not consumer finished products that could be manufactured using its constituents.  They posit that Congress did not intend for the chemicals in hemp to be converted into a host of compounds just as intoxicating as Delta-9 THC. 

State AG consumer protection lawsuits against manufacturers of products containing HSIs are an attempt to curb their proliferation.  Congress may address the perceived loophole that is being exploited to manufacturer HSIs in the forthcoming Farm Bill. 

 

Cannabis Banking Ticks Up, But the Industry Needs SAFE Banking

Seth Goldberg
Seth A. Goldberg

Just ahead of the Senate Banking Committee’s vote on the Secure and Fair Enforcement (SAFE) Banking Act, the Financial Crimes Enforcement Network (FinCEN) has reported that a total of 812 banks and credit unions filed reports in the 2d quarter 2023 indicating they are actively providing banking services to cannabis industry participants, referred  to by FinCEN as Marijuana Related Businesses, which is the highest number since FinCEN began reporting on cannabis banking activity in 2014.  However, those 800 or so banks are just a fraction of the thousands of FDIC banks that could be providing banking services to the cannabis industry.   Even with the increase in banks providing their services to the cannabis industry since 2014, the industry remains burdened by a dearth of banking.   Cannabis companies, employees, and consumers are not able to access traditional financing, payroll services, credit cards, ACH, and debit services, which are the lifeblood of other consumer packaged goods industries.  Meanwhile, banks are routinely analyzing entering the cannabis space, but deciding against it because of the cost of compliance, among other reasons.  SAFE Banking would provide access to critical banking services.

Changes to the Controlled Substances Act for Cannabis to make it a Schedule III Drug – The Winds May Be Blowing this Way

Earlier today, on August 30, 2023, the U.S. Department of Health and Human Services (HHS) officially recommended that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act (CSA) – a landmark recommendation from HHS which indicates that HHS no longer considers cannabis to be a drug with high abuse potential and no medical value.

After completing a scientific review into cannabis per a requested review from the Biden Administration, HHS advised the Drug Enforcement Administration (DEA) that it believes marijuana should be placed in Schedule III of the Controlled Substances Act.

Note, HHS’s recommendation is NOT binding on the DEA but given the report’s findings and growing public sentiment is likely that the DEA agrees with the recommendation and shifts its policy.

Historically, cannabis has been federally prohibited as a Schedule I controlled substance. As noted by many pundits, the rescheduling to Schedule III would have major implications for researchers who have long criticized the Schedule I classification that creates significant barriers to access for studies.

For researchers, this change would likely mean that they would no longer need to go through the onerous registration process with the DEA in order to access cannabis for studies as a Schedule III drug. The shift to Schedule III would also enable various federal tax deductions to become applicable to the cannabis industry and unlock value for them that is currently stuck in an onerous tax structure under the Internal Revenue Code. Schedule III drugs are not subject to the same onerous structure under federal rules.

The cannabis ball is now firmly in the DEA’s court as the DEA has the final authority to schedule a drug as Schedule III rather than Schedule I under the CSA (or transfer a controlled substance between schedules or remove such a drug from scheduling altogether).

Parting Hits – With Congress due to reconvene after Labor Day, and the Biden Administration looking for a win on moving this issue along, look for pressure to continue to mount for some type of Congressional action in the Banking arena under a SAFE legislation bill and for the DEA to move through their rule making process in a swift and firm manner.

Duane Morris has a full service cannabis group that helps clients and investors in a wide array of cannabis-related issues including, but not limited to, licensing, fundraising, intellectual property protection and real estate.  If you have any questions, please do not hesitate to contact Brad Molotsky or the attorney with whom you regularly communicate at Duane Morris. 

Bipartisan House Bill Shows Feds May Be Relaxing Stance on Marijuana in Employment Decisions

Although several states have relaxed their stances on marijuana, and in turn protected employees’ lawful off-duty use of marijuana, employees (and often contractors) of the federal government are usually excluded from these protections.  Marijuana remains a Schedule I substance under federal law, and thus is unlawful, without exceptions.

However, the federal government is starting to take steps towards softening its stance on marijuana, which may be welcomed news to many considering that the federal government is the largest employer in the United States.

On July 27, 2023, Representatives Jamie Raskin (D-MD) and Nancy Mace (R-SC) introduced bipartisan legislation in the U.S. House of Representatives that would allow job applicants who are current or former marijuana users to receive federal security clearances and have access to federal job opportunities.  The Act, titled the Cannabis Users’ Restoration of Eligibility Act, or the “CURE Act,” would amend the Intelligence Reform and Terrorism Prevention Act to prohibit current or past use of marijuana from being a consideration with respect to a person’s eligibility for security clearances or eligibility for employment with the federal government.

Individuals who are denied security clearance or employment will also be afforded the opportunity to have that decision reviewed by the applicable federal agency under the Act.  If it is determined that current or past marijuana use was the reason for the denial, the agency is to reconsider the same.

The Act, in its current form, is silent as to whether federal agencies can continue to test current employees for marijuana, and what actions, if any, agencies can take against current employees who test positive for marijuana.

The CURE Act has a ways to go before it becomes law, and it is likely to meet significant resistance along the way.  Nevertheless, the progress marijuana has made in becoming more acceptable and mainstream is evident, and those on Capitol Hill are taking notice.

FDA Issues Warning Letters Against Delta-8 THC Gummies

Seth Goldberg
Seth A. Goldberg

I previously wrote about the American Trade Association for Cannabis & Hemp’s policy paper that called for the federal and state regulation of hemp -synthesized intoxicants like Delta-9 and Delta-10 THC, issued on June 24, 2023.   Last week, the FDA issued warning letter to six different manufacturers of gummies containing Delta-8 THC:  Delta Munchies, Dr. Smoke LLC (also known as Dr. S LLC), Exclusive Hemp Farms/Oshipt, Nikte’s Wholesale LLC, North Carolina Hemp Exchange LLC and The Haunted Vapor Room. 

The warning letters explain that the products at issue are adulterated under the Food, Drug and Cosmetics Act, because Delta-8 THC has not been authorized by the FDA as a “food additive.”  They note that the FDA has received numerous adverse event reports pertaining to products containing Delta-8 THC, especially such products ingested by children, and emphasize the FDA is particularly concerned about the marketing of gummies containing Delta-8 to children.   In this connection, the warning letters also claim the products at issue were marketed in a deceptive manner in violation of the FTC Act.  

The manufacturers were told to cease and desist the sale of the allegedly offending Delta-8 containing products.  The warning letters will likely result in further investigation by the FDA and a process by which the manufacturers will work with the FDA to resolve the issues raised in the warning letters.

Bi-Partisan Legislation to Legalize Cannabis in Pennsylvania Proposed

Seth Goldberg
Seth A. Goldberg

Pennsylvania Senators  Dan Laughlin (R) and Sharif Street (D) have proposed legislation to legalize cannabis in Pennsylvania.  Senate Bill 84 includes an 8% sales tax, 5% excise tax, restrictions on marketing to youth, expungement of prior cannabis convictions, and other social justice measures, such as social and economic equity licenses.  Given the legalization of cannabis in Pennsylvania-border states, such as New York, New Jersey, Delaware, Maryland, and Ohio, the legalization of cannabis in Pennsylvania is necessary to ensure PA cannabis consumers purchase their products in state, which will allow the Commonwealth to enjoy the associated tax revenue, and PA residents to enjoy the economic benefits, such as more jobs and construction, associated with expanding the current medical marijuana program.

ATACH Calls for the Regulation of Hemp-Synthesized Intoxicants

Seth Goldberg
Seth A. Goldberg

Since the legalization of Hemp under the 2018 Farm Bill, a market has grown  for products that synthesize Hemp-derived compounds into intoxicants that provide a high for consumers.  Manufacturers of such products claim they are legal because they were synthesized from federally legal Hemp.  Because FDA and most states do not have regulations specifically addressing such Hemp-synthesized intoxicants, products containing Delta-8, Delta-10 and a synthesized version of Delta-9 are being marketed widely, and with little, if any, federal or state regulation.  Consequently, such products propose a health and safety risk to consumers, and undermine state-legal cannabis programs throughout the U.S.  Last week, the American Trade Association for Cannabis & Hemp issued a comprehensive policy paper calling for the regulation of Hemp-synthesized intoxicants.  ATACH urged federal and state lawmakers, as follows:

    • Amend the definition of hemp to account regulation for final product

    • Adopt standards for all intoxicating cannabinoids, whether from marijuana or hemp

    • TTB should regulate intoxicating products in adult-use settings

    • FDA should provide a pathway for non-intoxicating cannabinoids such as CBD

    • State labs should be provided with federal technical assistance

    • Retail sales should be limited to adults 21 or over anywhere intoxicants are available

    • Intoxicating cannabinoid products should be regulated in marijuana programs

    • Regulators should adopt uniform testing and labeling standards

    • Enforcement efforts should be supported, and regulations should promote public health and safety

 

 

NYS Office of Cannabis Management June 2023 Updates

This week, the New York State Cannabis Advisory Board (CAB) and the Cannabis Control Board (CCB) held meetings to discuss the current state of the cannabis industry and proposed regulations and legislation. The CCB is the approval and oversight body of the Office of Cannabis Management and is responsible for approving the regulatory framework for New York’s cannabis industry. This includes licensing cannabis businesses and approving the regulations and rules that will govern the cannabis industry in the state.

Cannabis Advisory Board Meeting

On June 13, 2023, the CAB met at CUNY School of Law in Queens to discuss the revised proposed regulations after receiving 3,500 public comments. These regulations range from focusing on achieving environmental and sustainability targets in the industry to rules for third-party platforms. Current proposals involve allowing the current Registered Organizations (i.e. vertically integrated medical cannabis operators) to co-locate three adult use dispensaries among their eight medical dispensaries.  The CCB will vote on the final regulations at its first meeting in September. The CAB and CCB’s hope is to have a live functioning cannabis industry “with all the bells and whistles.”

The Conditional Adult-Use Retail Dispensary (CAURD) License is the first retail dispensary license available to businesses in New York State. These licenses are awarded to justice-involved New Yorkers and their family members. A “justice-involved” individual is someone who has been convicted of certain marijuana-related offenses in New York.

The State hopes to create a foundation to support an equitable industry. The CAB discussed the benefits of being a part of the CAURD Academy, which offers live education, seminars, office-hour meetings, calls with operators from other states, one-on-one mentorship, vendor demos, and access to accountants. Twenty-five licensees have taken part in the Academy thus far.

The CAB also discussed the NY Social & Economic Equity Plan and its recent report analyzing the national landscape of the cannabis market. Between 1980 and 2021, cannabis-related misdemeanor and felony convictions resulted in lost lifetime earnings of approximately $31 billion, and Black and Hispanic people accounted for 83% of those losses.

Acknowledging that it is inherently difficult for small operators to compete against large corporations, regardless of funding, the CAB agreed that New York State must protect its two-tiered market, enforce antitrust laws, protect against predatory practices, and approve regulations that are pro-competition and pro-employee. The CAB noted that cannabis cultivators and farmers want a clear path to licensure, additional Registered Organizations, and a community-driven incubator program.

Cannabis Control Board Meeting

On June 15, 2023, the CCB met in Buffalo to discuss recent Board updates and hear from the public. Chair Tremaine Wright opened the meeting by assuring New York residents that the state is continuing to open more dispensaries, expand access, and further develop New York’s cannabis supply chain.

The CCB approved Resolution No. 2023-23: Consideration of Conditional Adult-Use Retail Dispensaries. This adds 36 CAURD licenses in the Bronx, Brooklyn, Manhattan, Queens, Central NY, Mid-Hudson, and­‒for the first time‒the Finger Lakes. Seven dispensaries were approved in the Finger Lakes region. This approval brings the number of CAURD to 251. Wright said these locations will help farmers get more of their product to market.

The Board then presented updates to the market. There are currently 13 open retailers statewide with more than 40 in development. Twenty-one percent of New Yorkers now live in a city with legal cannabis access. Some dispensaries are delivery-only, which is a new form for the state. Consumers are asked to look for a QR code on the window of the dispensary confirming that it is approved by the state. Retail sales are growing; cannabis sales year-to-date are $22.6 million. Some of the dips in sales were attributed to pop-up shops that have transition to brick-and-mortar spaces, which often require a brief shutdown to build out a new space. Product innovations are occurring regularly. Flower sales make up 51% of the revenue, with the rest split between beverages, complex caramels, premium vapes, and more. This widening of product options draws more consumers to the legal market.

The Executive Director reported next that under a newly enacted law, the Office of Cannabis Management (OCM) and the taxing authorities began raids on unlicensed businesses since June 7, 2023. This law allows OCM to take action against businesses selling cannabis without licenses, bolsters OCM authority by conducting regulatory inspections, utilizes court orders to padlock doors if necessary, and allows OCM to seize illicit cannabis.

Each location inspected is issued a notice of violation for selling cannabis without a license. The maximum penalty is $10,000 per day, plus potential additional penalties and consequences if sales continue.

Finally, during the closing comments, board member Reuben McDaniel resigned, presumably as a result of the perceived conflict of interest of his being both a CCB board member and also as the president of DASNY.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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