On July 21, 2020, the U.S. Food & Drug Administration (FDA) issued draft guidance outlining the agency’s current thinking on the development of drugs containing cannabis or cannabis-derived compounds. The new guidance is disappointing to many in the cannabis industry because it does not provide insight into the FDA’s views on the marketing of nondrug, hemp-derived CBD products.
To read the full text of this Duane Morris Alert, please visit the firm website.
Yesterday, the U.S. District Court for the Eastern District of California stayed the matter styled Glass v. Global Widget d/b/a Hemp Bombs, a consumer class action alleging that Hemp Bombs, which manufactures CBD-infused edibles, tinctures and capsules, falsely advertised the amount of CBD in its gummies, and thereby sold products that were misbranded and adulterated under the Food, Drug & Cosmetics Act (FDCA), on the basis that the regulation of CBD is withing the primary jurisdiction of the FDA, which is in the process of developing regulations and guidance over CBD. We have previously written about two other consumer class actions arising out of similar clams of misbranded CBD products that have also been stayed recently under the “primary jurisdiction” doctrine.
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 February 26, 2020, the United States Department of Agriculture (USDA) took a significant step toward allaying industry concerns by announcing that it delaying enforcement of the interim final rule (IFR) requirement that hemp producers only use testing laboratories registered with the Drug Enforcement Administration (DEA).
When the IFR was published in late October of 2019, it faced near-immediate criticism from industry participants and stakeholders who, among other things, voiced concerns that the DEA registration requirement would create a bottleneck given capacity issues. Appearing to respond to those critiques, the USDA explained that its enforcement discretion “will allow additional time to increase DEA registered analytical lab capacity.”
Notwithstanding other applicable provisions of law, the requirement that hemp testing labs be DEA-registered largely foreclosed the potential for a single laboratory facility to test both hemp and marijuana, as the DEA, which is a division of the U.S. Department of Justice, continues to treat marijuana as an illegal, Schedule I controlled substance. While this delay may provide an opportunity for labs that currently test medical and recreational marijuana pursuant to state law to also test hemp for compliance with the 2018 Farm Bill, it is not certain that the DEA registration requirement will not be reinstated. It is also not clear what further requirements states may impose.
Under the USDA’s guidance, hemp testing may be “conducted by labs that are not yet DEA registered until the final rule is published, or Oct. 31, 2021, whichever comes first.” Until that time, labs conducting hemp testing are still subject to the other compliance requirements of the IFR, including those related to methods of testing.
On January 21, 2020, an Idaho state court held the Idaho State Police had the authority to seize a shipment of federally lawful hemp that was transported through Idaho in January 2019. Idaho State Police v. One White 2013 Freightliner Commercial Vehicle et al. Although the hemp businesses involved had turned to federal courts for help, when we last left off with the story, the Ninth Circuit had held that the federal courts should abstain from hearing the case until the Idaho state courts fully resolved both the pending criminal and civil actions. Big Sky Scientific LLC v. Jan Bennetts et al.[1]
Big Sky Scientific, LLC, a Colorado-based hemp processor, had purchased hemp from a state-licensed hemp cultivator in Oregon after passage of the 2018 Farm Bill. The parties arranged to ship the hemp from Oregon to Colorado via motor carrier. En route to Colorado, the shipment entered Idaho, where the Idaho police seized the cargo and arrested the driver, alleging violations of Idaho state law. Idaho initiated a state court criminal proceeding against the driver, and a state court civil proceeding against the hemp itself, to ensure the hemp would not be returned to Big Sky.
In response, Big Sky filed a motion for a temporary restraining order and preliminary injunction in federal court to force the Idaho State Police to return the seized cargo and stop seizing hemp shipments that pass through the state. The federal District Court ruled in favor of the Idaho State Police, and on appeal, the Ninth Circuit declined to rule on the merits of the case, and instead sent it back to state court. Shortly after the Ninth Circuit’s ruling, prosecutors announced the state reached a plea deal with the trucker that had been charged with illegally transporting hemp through Idaho. With the criminal case resolved, only the civil proceeding against the hemp itself remained.
In the state court civil proceeding the state police “implicitly conceded that the plant and plant parts it seized were entirely low-THC C. sativa.” With this fact established, the court turned to the statutes at issue—the 2014 Farm Bill, the 2018 Farm Bill, and the Idaho Controlled Substances Act—to consider whether federal law regarding an entity’s ability to transport hemp in interstate commerce preempted Idaho state law. Central to this argument is a provision in the 2018 Farm Bill that provides “No state or Indian tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with” the Agricultural Marketing Act.
It was undisputed that the hemp seized by the state police was cultivated prior to passage of the 2018 Farm Bill. Therefore, in order for Big Sky to prevail, the court would need to find the provision of 2018 Farm Bill that protects hemp transportation applied retroactively to hemp cultivated under the 2014 Farm Bill. The Idaho police argued it did not, and the court agreed: “the plain language of the [2018] Farm Bill . . . applies only to low-THC C. sativa grown after the enactment of the 2018 Farm Bill and after the various regulations . . . have been promulgated.”
The court then turned to the question of whether the hemp at issue, which was grown in accordance with Oregon state law, was even compliant with the 2014 Farm Bill. The court held that Oregon’s 2014 hemp program was non-compliant for two crucial reasons.
First, Big Sky argued that the Oregon cultivator’s sale of his hemp crop “may be considered research into the marketing” of hemp—a common assertion among hemp businesses that sell their crops and are licensed pursuant to a 2014 Farm Bill program. But the court scoffed at that rationale. “That argument is absurd on its face. . . . he wasn’t growing the crop to help the Oregon Department of Agriculture do research, he was trying to make money.”
Second, the court found Oregon’s hemp law was so dissimilar to both the 2014 and 2018 Farm Bills that hemp cultivated under Oregon’s program could not be considered compliant with federal law. The 2014 and 2018 Farm Bills define hemp as only those Cannabis sativa L. plants with a THC concentration of 0.3% or less, but the Oregon hemp laws only require the 0.3% THC concentration to apply crop wide. “Through the miracle of legal linguistics and basic math, C. sativa plants that would be ‘marijuana’ under Oregon law if grown individually, suddenly became ‘hemp’ if grown in the right field.” Additionally, while federal law defines hemp only with respect to Cannabis sativa L., Oregon law does not limit the definition to only that strain of cannabis. Thus, a field of Cannabis indica with a crop-wide average of 0.3% THC would be lawful hemp in Oregon, but illegal federally. Accordingly, the Court found there is insufficient evidence that the hemp at issue was botanically within the federal definition of cannabis permitted under the 2014 Farm Bill
This last holding could portend continued problems for hemp transportation through Idaho, and perhaps elsewhere. For example, while this litigation was ongoing, in November 2019, Idaho Governor Brad Little issued executive order 2019-13, which ordered “the State of Idaho permit, on and after October 31, 2019, the interstate transportation of hemp produced in accordance with the 2014 Farm Bill or the 2018 Farm Bill and the rules and regulations promulgated thereunder.” Although clearly intended to prevent future litigation on this issue, under the Idaho state court opinion, if a state in which the hemp was grown has a definition of hemp not identical to the federal definition, the grower/transporter might be required to offer proof that the its hemp meets the federal definition. Stay tuned.
For Further Information
If you have any questions about this blog post, please contact David Landau, Joe Pangaro, any of the attorneys in our Cannabis Industry Group or the attorney in the firm with whom you are regularly in contact.
[1] Duane Morris filed an amicus brief on behalf of the American Trade Association for Cannabis and Hemp in support of Big Sky, arguing that an adverse ruling would have a serious negative impact on the hemp industry. (Duane Morris is the national law firm partner of the American Trade Association for Cannabis and Hemp.). Duane Morris has previously written about the oral argument before the Ninth Circuit and the court’s subsequent decision that remanded the case to state court.
To register for the event, visit the Food and Drug Law Institute website.
Since the 2018 Farm Bill passed in December 2018, removing hemp from the Controlled Substances Act and thus legalizing it under federal law, consumer goods containing the hemp-derivative cannabidiol (CBD) have become exceptionally popular. With that growing popularity among consumers has come increased scrutiny by federal regulators whose mission is consumer safety and protection, such as the Food and Drug Administration and Federal Trade Commission, and now by the plaintiffs’ bar, which files consumer class actions based on advertising. As the recent spate of warning letters and consumer class actions demonstrate, hemp-derived CBD product manufacturers and others in the supply chain for those products have to be mindful of the claims they make to consumers about their products.
Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”
When the United States Department of Agriculture released the interim final rule for the hemp program in October 2019, many stakeholders—including businesses and state agencies—were caught off guard by certain testing-related requirements contained in the rule. Because hemp is now legal under the 2018 Farm Bill if it contains no more than 0.3 percent THC concentration, testing for THC levels is critical. However, significant questions and issues with the testing requirements must be clarified.
On November 20, 2019, Senators Ron Wyden and Jeff Merkley, both from the state of Oregon, submitted a letter to the secretary of the USDA, in which they flagged—“in no particular order”—five controversial testing-related requirements and requested modifications to those requirements. Below, we have summarized the senators’ concerns and proposed solutions to three particularly controversial testing-related requirements in the interim final rule.
Duane Morris partner Neville M. Bilimoria is quoted in the Law360 article, “CBD Rules In Limbo As FDA Grapples With New Cannabis Era.”
Hemp may have been legalized less than a year ago, but CBD derived from it is already on its way to becoming a multibillion-dollar industry. However, sales of everything from CBD gummies to lattes are occurring in a legal gray area as the U.S. Food and Drug Administration struggles with regulating the largely unstudied ingredient. […]
“This is a watershed year for the FDA and its coming to grips with the increasing demand from the consumer public over marijuana, cannabis, CBD, hemp. It’s trying to catch up to what the consumers are touting as being therapeutic uses for CBD and THC,” Mr. Bilimoria said. “It’s basically saying, ‘Wait, everybody slow down. We’re the FDA. We rely on science before we can approve any uses and regulate any uses of cannabis or CBD.'” […]
Mr. Bilimoria said he can’t blame the FDA for “taking it slow,” but said doing so is frustrating when CBD is already all over store shelves. […]
To read the full article, visit the Law360 website (subscription required).
