HIGHLIGHTS:
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The 2018 Farm Bill, enacted nearly four months ago, included a provision that was designed to legalize industrial hemp on a broad scale. However, there are several caveats and lingering uncertainties for companies that are moving quickly in the hemp-derived cannabidiol (CBD) market.
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Because the new law builds on the success of the U.S. Department of Agriculture's (USDA) industrial hemp pilot program that was authorized in the 2014 Farm Bill, which was predominantly restricted to research universities, there is enough of a regulatory foundation for companies to aggressively pursue the CBD market if they adhere to existing and evolving regulations, and are mindful of what can be gleaned from recent case law.
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In entering or evaluating the market, companies should evaluate several gating issues, and then make case-by-case determinations regarding the legality of the anticipated work.
As we have previously written (see Holland & Knight's alerts, "Legalized Industrial Hemp Production Is Coming (But It's Not Here Yet)," March 11, 2019, and "The Road Ahead for Cannabis-Derived Goods," Jan. 28, 2019), the 2018 Farm Bill included a provision from Senate Majority Leader Mitch McConnell (R-Ky.) that was designed to legalize industrial hemp on a broad scale. Fittingly, the current status of the much-anticipated legal hemp and cannabidiol (CBD) market can be described through lyrics from the popular Grateful Dead song: Though there's more than a "Touch of Grey," there's also more than enough of an underlying regulatory framework for industry to proclaim, "We will get by."
In other words, since the new law builds on the success of the U.S. Department of Agriculture's (USDA) industrial hemp pilot program that was authorized in the 2014 Farm Bill, which was predominantly restricted to research universities, there is enough of a regulatory foundation for companies to aggressively pursue the hemp-derived CBD market if they adhere to existing and evolving regulations, and are mindful of what can be gleaned from recent case law.
Subtitle G of the 2018 Farm Bill defines "hemp" as, essentially, any part of the cannabis plant or cannabis derivative that contains less than 0.3 percent delta-9 tetrahydrocannabinol (THC) on a dry weight basis. CBD is one such derivative, so as long as it contains less than 0.3 percent THC, it is now legal. But there are several caveats and lingering uncertainties. Therefore, in entering or evaluating the market, companies need to evaluate the following gating issues, and then make case-by-case determinations regarding the legality of the anticipated work.
Issue No. 1: 2014 Farm Bill vs. 2018 Farm Bill
The first item to note is that the hemp provisions in the 2014 Farm Bill — which govern the growing and processing of industrial hemp, which has not been legalized in every state — remain in place until new regulations are finalized. That is, hemp can legally be grown only in those states that have a USDA-approved pilot program under the 2014 Farm Bill. The Agricultural Marketing Service at USDA is currently writing those regulations to implement the provisions in the 2018 Farm Bill, which includes interagency (e.g., Drug Enforcement Agency, Department of Justice, Environmental Protection Agency) and intra-agency (e.g., Risk Management Agency, Rural Development) consultations. USDA's goal is to have a proposed rule ready for review and public comment by June or early July, with the ultimate goal of finalizing the rule before the 2020 planting season. Per the 2018 Farm Bill, states have to write their own rules governing licensing, testing, enforcement and other considerations, but USDA has to approve those rules before they go into effect, and USDA isn't going to approve anything until its own rules are finalized.
Issue No. 2: THC Limitations and Extraction
The 0.3 percent THC threshold poses several challenges to growers and processors. For example, because THC concentration is affected by climate, a strain of hemp that is generally compliant in one state may not be compliant in all states. And when hemp derivatives like CBD are processed, the methods utilized can inadvertently increase the concentration of THC to levels above the legal limit.
Anticipating issues like these, the Senate Agriculture Committee insisted on including "safe harbor" provisions in the 2018 Farm Bill, so that well-intentioned hemp producers are allowed to remediate any violations without being subject to criminal enforcement. However, some state plans, such as Kentucky's, require hemp producers to "consent to forfeiture and destruction, without compensation, of...[m]aterial found to have a measured delta-9-THC content in excess of zero and three-tenths (0.3) percent on a dry weight basis" as a condition for applying for a grower license. Whether and how states determine the intentions of growers that grow hemp with THC concentrations of greater than 0.3 percent, the extent of permissible remediation and the stage in the production timeline at which such remediation is allowed are all open questions at this point. Thus, there are a few key analyses to undertake to ensure that the hemp, CBD oil and other CBD products that individuals or companies produce are indeed compliant under federal law.
Issue No. 3: Interstate Commerce
The 2018 Farm Bill also legalized the interstate commerce of hemp and related products, but there are still state laws in place that prohibit transporting hemp because it remains a controlled substance under state law. For example, in Big Sky Scientific LLC v. Idaho State Police, the police in Idaho seized a shipment of hemp that was grown in Oregon and was en route to Colorado. Because Idaho doesn't yet have a USDA-approved plan for hemp — they were not one of the states with a pilot program under the 2014 Farm Bill — the court agreed with the state's argument that until such a plan is established and approved, no hemp can be produced "in accordance with" the hemp provisions in the 2018 Farm Bill. Sen. McConnell has since said he will make legislative corrections to avoid situations like this, which are counter to the intent of the law.
Issue No. 4: Changes in FDA Regulations
The U.S. Food and Drug Administration (FDA) recently announced that it will consider changing how it regulates CBD products. Currently, because CBD is an active ingredient in an approved drug, it is regulated as a drug itself, and cannot be added to foods or marketed as a dietary supplement unless and until FDA issues regulations allowing such use. However, FDA has opted against enforcement when CBD is used in cosmetics (i.e., not in a drug, food or supplement) and when no claim of therapeutic benefit is being made. Some companies market their CBD products with bogus claims about treating or curing diseases, and these are the companies FDA is rightfully targeting.
Conclusion and Takeaways
Taken together, what all this boils down to is that while there are still risks for companies that are moving quickly on CBD, due to the underlying regulatory framework, those risks can mostly be mitigated if (and only if) those companies stay on top of the complex and evolving rules that cut across states, Congress and multiple federal agencies. Timing is critical, and what is illegal now may not be in the coming months. But given that USDA, FDA and Congress are all moving quickly to resolve many of the thorniest compliance issues, as well as the significant first-mover advantage in a new and growing market, there is significant opportunity for companies that are willing to work within the confines of the established law to adequately mitigate risk.
