AUTHOR
Susan Burns is a cannabis business lawyer in St. Paul, Minnesota and is listed among the Top 200 Cannabis Lawyers.
She may be reached at susan@sburnslegal.com.
https://cannabis.top200lawyers.com/item/susan-burns-susan-burns-llc/
The Agricultural Act of 2014 a/k/a “The Farm Bill” defined industrial hemp as “the plant Cannabis sativa L. or any part of such plant, whether growing or not with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” Four years later, hemp was removed from the definition of marijuana in the Controlled Substances Act (CSA) and the definition was amended to include …” including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers …” via the 2018 Farm Bill.
The 2018 Farm Bill also explicitly preserved the FDA’s authority over hemp products, including over food, dietary supplements, human and veterinary drugs, and cosmetics. This preservation of rights is made under the auspices of maintaining safeguards to help ensure consumer access to safe and accurately labeled hemp products.
In addition, many states have regulations that govern hemp-derived products, including tinctures and infused edibles and beverages. Many business owners in the hemp-derived cannabis industry appear to think that because hemp and its derivatives have been removed from Schedule I of the Controlled Substances Act, they don’t need to be concerned with legal aspects of running their business.
Nothing could be further from the truth.
While true that hemp-derived is typically less regulated than its marijuana counterpart, it is still a business and, as such, an industry that is subject to all the typical business rules and regulations, and therefore liability risks. And, it carries additional risks because of the nature of the products, not to mention that it is a nascent industry with many unknowns.
Risks in the hemp derived industry evolve as the industry matures, and the consequences appear in court. Lawsuits range the gamut from products liability for contaminated products to consumer class actions to regulatory enforcement actions on top of the usual business disputes.
It’s not a surprise that business risks are on the rise because cannabis is a multi-billion-dollar industry. With industry growth comes risk – from the regulatory enforcement side as well as litigation. In strategic planning for hemp-derived business growth, it is instructive a few of the recent proceedings.
Regulatory
The results of the Federal Trade Commission’s (FTC)“Operation CBDeceit” resulted in a series of enforcement actions. Operation CBDeceit was launched to enforce regulations against misleading health claims. The operation resulted in settlements of six enforcement actions.
According to the FTC, cannabis companies, particularly CBD product manufacturers, “that represent expressly or by implication that what they sell can prevent, treat, or cure serious medical conditions will be held to the highest substantiation standards and marketers can expect careful scrutiny of those promises.”
In Operation CBDeceit, the settlements involved companies that marketed gummies, lozenges, oils, balms, and other products containing cannabidiol (CBD) claiming they prevented or treated serious diseases and health conditions.
In another regulatory enforcement action, the Securities and Exchange Commission (SEC) acted against cannabis companies and individuals in the industry for suspected securities fraud, including federal lawsuits in California and Illinois alleging inflated stock prices, sale of illusory securities, or conversion of money raised from the sale of unregistered securities.
Litigation
Hemp-related litigation spans the spectrum from seed-to-sale. A variety of liability theories have been advanced.
Seeds – Misrepresentation
In Rock Hemp Corp. v Dunn, Rock Hemp claimed it purchased 6,000 hemp seeds from defendants Adam Dunn, Ryan Davies, and Shawn Kolody to make CBD oil, but the seeds were not of the quality that defendants promised. Specifically, Rock Hemp claimed the seeds were not as productive as defendants represented and the THC levels were higher than permitted under Wisconsin law. Rock Hemp Corp. v. Dunn, 574 F. Supp. 3d 624 (W.D. Wis., 2021)
Cultivation + Interstate Transport
In United States v Mallory, Mallory, using the business name CAMO HEMP WV LLC, applied for and received a Research and Marketing Cultivation of Industrial Hemp License from the West Virginia Department of Agriculture (WVDA) to grow plants.
The seeds used by Defendants were purchased from a supplier in Kentucky and shipped directly to Grassy Run Farms in West Virginia. The seeds were planted and grown on property located in Mason County, West Virginia.
The United States alleged Defendants conspired to violate the law with respect to the project, and they failed to follow the project description submitted by the CAMO Defendants to the WVDA. Specifically, the United States argued that Defendants violated the Controlled Substances Act (CSA), 21 U.S.C. § 801 et seq., when they obtained the cannabis seeds from Kentucky.
Upon hearing the parties’ arguments, the Court allowed Defendants to harvest, dry, and process the cannabis, but the Court prohibited Defendants from transporting or selling it after it was processed. United States v. Mallory, 372 F. Supp. 3d 377 (S.D.W. Va., 2018)
Processing
The Hemp Industrial Association brought a declaratory judgment action in a case that involved a Drug Enforcement Administration rule issued in response to a recent round of statutory amendments to the Controlled Substances Act, 21 U.S.C. § 801. As relevant here, the rule stated that only hemp derivatives, extracts and products exceeding 0.3% delta-9 tetrahydrocannabinol (THC) would be stringently regulated by the CSA.
Plaintiffs sought a declaration that two necessary byproducts of the hemp-production process — specifically, intermediate hemp material (IHM) and waste hemp material (WHM), both of which unavoidably exceed 0.3% delta-9 THC — did not qualify as controlled substances subject to the CSA’s registration requirements. They likewise pursued an injunction preventing DEA from enforcing the CSA against such material.
The case is also instructive in describing the hemp process. As described in the case, the hemp process begins with cultivation and harvest of hemp plants, which are then transferred to third-party processors for “milling” and “extraction.” Deploying a series of complex procedures, the processors separate the hemp flower from the remainder of the plant, extract cannabinoids from raw flower material (the remains of which are then discarded) and evaporate the resulting oil in order to remove extraneous solvents, fats, and lipids. Evaporation generates two outputs of particular relevance: intermediate hemp material, and waste hemp material.
Both substances “naturally (and unavoidably) exceed” 0.3% delta-9 THC concentration, as prior steps in the production process strip away the low-THC and THC-free parts of the hemp plant. According to Plaintiffs, however, neither of the substances that exceed 0.3% THC are added to or otherwise used as an ingredient in any consumer product. Intermediate hemp material is further refined into extracts or isolates containing less than 0.3% delta-9 THC, which are in turn used as ingredients in consumer products. (The case does not include mention of what is done with the waste hemp material.
Plaintiffs requested that the Court approve the process to alleviate their fear of criminal enforcement and obviate any need to obtain a Schedule I registration from the DEA. Of relevance was that it is a transitory part of the process, and the over-the-limit, or “hot,” materials are not sold or used.
The ultimate issues in the case were not decided because the Court dismissed because of lack of subject-matter jurisdiction. But issues that arise in processing and potential liability need to be addressed. Hemp Indus. Ass’n v. United States DEA, 539 F. Supp. 3d 120 (D.D.C., 2021)
Manufacturing
In Chandler v WFM-WO, Chandler alleged Defendants sold a defective product that caused him to lose his job. On or about June 2, 2011, Chandler purchased from Whole Foods a bottle of hemp seed oil manufactured by Manitoba. He began to use the oil on a daily basis. On or about June 30, 2011, Chandler was randomly selected for a drug test by his employer and tested positive for THC in his system. He was terminated. Chandler alleged that he never used marijuana and that Defendants’ product was the source of the THC. He sought $180,636 in damages for products liability, gross negligence, and negligence.
The claims in this action based on faulty preparation and testing of the hemp oil Chandler used were discussed because the Tennessee statute of limitations had run, and the claims were barred. Chandler v. WFM-WO, Inc., 13-2450 (W.D. Tenn., 2014)
Final sales
Defendants sold cannabidiol (“CBD”) products under the brand “JustCBD,” which included CBD-infused “compounds, tinctures, and edibles.” On October 2, 2018, and March 17, 2019, Plaintiff purchased JustCBD vape cartridges, gummies, and dog treats after reviewing and relying on the “product packaging, which promised specific quantities of CBD.” Plaintiff claim that that he later discovered, through independent lab testing commissioned by counsel, that JustCBD products contained between 10% to 100% less CBD content than promised on its labels.
Accordingly, Plaintiff complained that he “paid a substantial premium due to the false and misleading CBD claims. The Court granted Defendant’s motion to dismiss under the primary jurisdiction doctrine, pending regulatory guidance from the FDA. Rodriguez v. Just Brands USA, Inc., LEXIS 94413 (C.D. Cal., 2021)
Class Actions
There have also been private class actions. For example, a class action lawsuit filed by medical marijuana patients, alleging that the cannabis testing lab intentionally inflated the amount of THC in the flower and that the three grower defendants conspired with the testing lab to sell product with over-inflated THC content to increase their profits.
Summary
While many of these cases were dismissed on procedural grounds, they underscore the importance of considering legal issues that can—and do—arise in this blossoming industry. Because of industry growth, almost every lawyer will eventually be touched by the plant. Best practices dictate that you affiliate with counsel with subject matter knowledge because legal issues, which are already nuanced in every industry, are that much more complex in this area of growth. Specialty issues arise in all areas from seed to sale … and everything in between. And after.
