In a decision that reads as one of the strongest endorsements of state-based intoxicating hemp regulatory controls in recent memory, the U.S. District Court for the District of New Jersey (“Court”) recently upheld, in part, and struck down, in part, New Jersey’s recently enacted New Jersey Hemp Act Amendments (“NJHAA”). While the lasting impacts of the Court’s opinion may not be fully understood until the New Jersey legislature tweaks the NJHAA and/or the executive branch issues interpretative guidance, the opinion appears to uphold the propriety of the state-based regulatory infrastructure underlying the NJHAA, including a state’s authority to restrict the sale of intoxicating hemp products to only regulated channels such as state-licensed cannabis and alcohol outlets.

Brief Background on the NJHAA
As we previously discussed in September, the NJHAA creates state-based controls and a regulatory infrastructure governing the intoxicating hemp cannabinoid marketplace. At a high level, the NJHAA:

• Distinguishes between lightly regulated hemp products and more heavily regulated intoxicating hemp products.
• Provides the New Jersey Cannabis Regulatory Commission (“CRC”) with primary regulatory authority over intoxicating hemp products, making it responsible for not only promulgating regulations governing the licensing, form factors, packaging, labeling, and testing requirements for intoxicating hemp products but also for enforcement related to non-compliant and unlicensed operators.
• Permits intoxicating hemp beverages, i.e., intoxicating hemp products in beverage form, to be distributed and sold by state-licensed alcohol distributors and retailers.
• Establishes a timeline for rulemaking between and among the CRC, New Jersey Department of Agriculture, the New Jersey Attorney General’s Office, and the Alcoholic Beverage Control (“ABC”).

The NJHAA was signed into law on September 12, 2024, resulting in the immediate prohibition on sales of intoxicating hemp products to anyone under the age of twenty-one (21), and the requirement that intoxicating hemp products be removed from the shelves of stores within New Jersey by October 12, 2024 until such time as regulations governing these products are implemented by the CRC.

The Legal Challenge
On September 24, 2024, the plaintiffs in the case – a collection of hemp producers and distributors (collectively, the “Intoxicating Hemp Producers”) – filed a complaint seeking a preliminary injunction to enjoin the named defendants – the NJ Attorney General, Chair of the CRC, and NJ Secretary of Agriculture (collectively, the “State”) – from enforcing portions of the law, which was scheduled to take effect on October 12, 2024.

In its briefs, the Intoxicating Hemp Producers invoked the now familiar refrain in lawsuits challenging state laws and regulations governing intoxicating hemp products that several aspects of the new law are preempted by the 2018 Farm Bill under the doctrines of express and implied preemption. The Intoxicating Hemp Producers also argued that provisions of the NJHAA violate the dormant Commerce Clause by discriminating against out-of-state hemp manufacturers, distributors and sellers. At the heart of the Intoxicating Hemp Producers’ dormant Commerce Clause argument was the NJHAA’s definition of “Intoxicating Hemp Product,” which means any product “cultivated, derived, or manufactured in this State from hemp regulated under the [Farm Bill] or the ‘New Jersey Hemp Farming Act’ that is sold in this State that has a concentration of total THC greater than 0.5 milligrams per serving or 2.5 milligrams per package” (emphasis added). Critically, the NJHAA carves out only Intoxicating Hemp Products (which, by definition, do not include out-of-state intoxicating hemp products), from the list of Schedule I controlled substances under the New Jersey Controlled Dangerous Substance Act (“CDSA”). According to the Intoxicating Hemp Producers, the practical impact of the geographical constraint in the operative definition is to legalize all home-grown intoxicating hemp products while effectively criminalizing any out-of-state versions of the very same products.

In contrast, the State argued that the Farm Bill’s express preemption clause addresses only the narrow issue of interstate hemp “transportation and shipment,” which the NJHAA does not expressly address. In response to the Intoxicating Hemp Producers’ dormant Commerce Clause argument, the State argued that the NJHAA is facially non-discriminatory, effectuates a legitimate public interest in protecting the health and safety of New Jersey residents, and that any anticompetitive impacts are only “incidental” and therefore permissible under controlling dormant Commerce Clause jurisprudence, including the venerable Pike standard. Finally, the State argued that even if certain provisions of the NJHAA are unconstitutional, the remaining provisions of the law are severable and should not be thrown out with the bath water.

In a split decision of sorts, the Court sided with the Intoxicating Hemp Producers on their express preemption and dormant Commerce Clause arguments while agreeing with the State that the undisputed provisions of the NJHAA are severable.

Express Preemption Analysis
The Court agreed with the Intoxicating Hemp Producers that the relevant portions of the NJHAA that effectively criminalize the transport or shipment of out-of-state intoxicating hemp products within the state are preempted by the express preemption provision of the Farm Bill (7 U.S.C. § 1639o). Indeed, the Court opined that “once the NJHAA becomes operative on October 12, 2024, it will effectively be a crime to transport or ship out-of-state intoxicating hemp products to, or through New Jersey.” (Emphasis added.) The Court noted that although there is no express language in the NJHAA that conflicts with the Farm Bill’s express preemption provision, the effect of the law is to criminalize conduct the Farm Bill specifically shields from state regulation – that is the transportation and shipment of hemp through the State of New Jersey.

Having concluded that such provisions of the NJHAA are expressly preempted by the Farm Bill, the Court declined to address the Intoxicating Hemp Producers’ implied preemption arguments. Notably, the Court confirmed that the Farm Bill’s express preemption provision “standing alone” does not preclude a state from prohibiting the possession and sale of industrial hemp within the state. Rather, it prohibits states from regulating the “transportation and shipment” of hemp.

Dormant Commerce Clause Analysis
The Court also agreed with the Intoxicating Hemp Producers that the NJHAA’s disparate treatment of in-state and out-of-state intoxicating hemp products was facially discriminatory and therefore unconstitutional under the dormant Commerce Clause, which prohibits states from imposing restrictions that benefit in-state economic interests over out-of-state interests. On that score, the Court noted that “[t]he New Jersey Legislature included the phrase ‘in this State’ to the definition of ‘Intoxicating Hemp Product,’ and therefore intended to create disparate treatment between hemp cultivated in New Jersey and hemp-derived from outside of New Jersey.” According to the Court, the relevant provisions of the NJHAA are therefore discriminatory on their face and subject to “heightened scrutiny” which they could not survive because the NJHAA’s disparate treatment of in-state and out-of-state intoxicating hemp products is plainly protectionist. However, the Court was also careful to clarify that the State could impose certain restrictions on out-of-state intoxicating hemp products short of an absolute ban and confirmed that “[t]o the extent that Defendants profess concerns that out-of-state products might avoid the controls imposed by state production and licensure standards, the state may impose reasonable quality and purity standards for products sold in state.”

Severability Analysis
Although siding with the Intoxicating Hemp Producers on the two critical constitutional questions at issue, the Court handed the State a victory on the key state law question – that is, the question of severability. According to the Court:

Post-Decision State of Play
Although invalidating only the constitutionally-barred provisions of the NJHAA, the opinion is somewhat opaque regarding the current enforceability of remaining provisions in the law except for the ban on sales of THC-containing products to anyone under 21 years of age, which the Court expressly countenanced. Indeed, the Court seemingly encouraged the legislative and executive branches to intervene in some fashion but left unanswered the question of whether such intervention would be a precondition to enforcement of the law, stating:

To date, the only interpretive guidance issued by any segment of the executive branch has been the CRC, which, within days of the issuance of the Court’s decision, acknowledged this apparent enforcement quagmire, posting on its website as follows:

At the bottom, there remain some lingering questions regarding the status of the other substantive provisions of the NJHAA, which include registration requirements for entities intending to engage in sales of Intoxicating Hemp Products and instruction to the CRC and ABC to promulgate regulations governing packaging, labeling and testing of such products. However, age-gating transactions related to intoxicating hemp products remain the law of the land (at least for New Jersey), with more to come from other interpretive guidance from the executive branch and/or a fix coming in the form of legislative amendments.

Presumably, given the Court’s recognition of the clear interest of the State in exercising its police powers to ensure the health, safety, and welfare of its citizens relating to intoxicating hemp products, the quickest fix is either: (1) guidance from the Attorney General’s Office that it: (a) will enforce the provisions of the NJHAA evenhandedly as to in-state and out-of-state intoxicating hemp products, and (b) will not enforce the law against anyone simply transporting intoxicating hemp products through the State of New Jersey; or (2) new legislation that: (a) amends the definition of intoxicating hemp product to remove the language specifying that it be produced “in this State”; and (b) makes clear that mere interstate transport is permissible. In the interim, the primary regulator under the NJHAA, the CRC, has indicated that – at least for the moment – it will not “begin enforcement of these provisions at this time.” Caution should be exercised, however, so as not to overlook the enforcement mechanisms granted to local governmental authorities related to intoxicating hemp products, which are separate and distinct from those of the CRC.

More to come.