Category: Cannabis

Missouri Cannabis Regulators Show Me a Well-Considered Clarification of Earlier Rule Essentially Banning Hemp Products

I can only assume that being a cannabis regulator is a challenging and usually thankless job. The laws are relatively new and constantly evolving. Operators are always pushing the science faster than regulators can promulgate thoughtful new rules. And of course, there is no shortage of bad actors in the cannabis business.

That said, Budding Trends has been tough on cannabis regulators when it seemed warranted. And we’ve had no shortage of material.

We wanted to take this occasion to applaud the recent letter from the Missouri Department of Health & Senior Services announcing a substantial rollback of Gov. Mike Parson’s Executive Order that appeared to ban all “psychoactive cannabis products.”

The governor’s order would, by its terms, essentially destroy the state’s market for products containing hemp-derived THC. To be fair, the stated purpose of the order – to keep psychoactive cannabis products out of the hands of children – is a noble goal and one shared by any responsible operator in the hemp-derived THC business. Unfortunately, the plain language of the order goes much further and threatens to end the sale of most hemp products in Missouri.

In comes Missouri Department of Health & Senior Service Deputy Director and General Counsel Richard Moore to the rescue. In a recent letter, Moore “clarify[ied] any misunderstandings about the Department’s efforts to keep Missourians and their children safe from psychoactive cannabis products, sometimes called intoxicating cannabis products.” As part of this clarification, and in furtherance of the department’s commitment to “transparency in its enforcement efforts,” the department will limit its focus to (1) hemp-derived THC products targeting children and (2) “any deception, fraud, false pretense, false promise, misrepresentation, unfair practice or the concealment, suppression, or omission of any material fact in connection with the sale or advertisement of [hemp-derived THC products].”

The department does not have any intention, however, of initiating enforcement actions against other hemp-derived THC products. Specifically, “[h]emp or cannabidiol (CBD) products which are collected by extraction and have not been changed into a new substance, such as hemp protein powders, hemp milk, hemp flower, hemp teas or other drinks, CBD gummies, CBD drink additives, or foods with CBD” are not the focus of the department’s enforcement efforts.

I believe this represents a fair compromise that accomplishes both the governor’s stated and worthwhile goals of eliminating deceptive hemp operators and those who would sell hemp-derived THC products to children, as well as keeping the hemp regime implemented by the Missouri Legislature in place.

More states would do well to consider this approach. For an example of the opposite approach, consider our recent post on Mississippi’s potential ban on hemp beverages. Consider, too, a much different approach taken by the solicitor general of South Carolina, which we will write about in the coming days.

And perhaps most importantly, consider whether Congress can fashion a similar compromise as it considers federal hemp policy in the next Farm Bill in the coming months.

© 2024 Bradley Arant Boult Cummings LLP
For more news on Hemp Derived THC Regulation, visit the NLR Biotech, Food & Drug.

A Study in THC-O: Unpacking the Recent Anderson Case

Recently, the United States Court of Appeals for the Fourth Circuit handed the Drug Enforcement Administration (“DEA”) a big loss when it comes to hemp. In Anderson v. Diamondback Investment Group, LLC, the court ruled that the DEA’s interpretation, which classified a host of hemp-derived products as illegal, was incorrect.

I’ve previously written about the impact of Loper Bright Enterprises v. Raimondo on cannabis and hemp in this blog, and Anderson is one of the first cases to show how courts will handle cannabis law post-Chevron. In Loper, the Supreme Court ended the long-standing doctrine of Chevron deference. That doctrine required federal courts to defer to an agency’s interpretation of an ambiguous statute, so long as it was “reasonable,” even if the court didn’t agree with it. Now, courts don’t have to give the DEA (or any agency) that kind of leeway. If the agency’s interpretation isn’t the best reading of the statute, it is merely persuasive material at best.

This reminds me of my days of clerking on the Court of Common Pleas. Oftentimes, lawyers would cite other non-binding Common Pleas decisions, and the judge would merely say he would consider them but did not view them as binding. It’s almost like déjà vu for me now with Loper, on a grander scale.

Since Loper was decided, everyone has had theories about how it could impact things like cannabis rescheduling or the legality of hemp-derived cannabinoids. In particular, the DEA has been flexing its muscles with opinion letters about what it considers to be legal or illegal cannabinoids. This is where Loper comes into play. In theory, the DEA can still issue its opinions, but the courts aren’t going to roll over and accept those interpretations without question anymore. That’s exactly what happened in Anderson.

Without getting into the weeds of the case too much, here’s the gist: an employee was fired after drug tests allegedly showed cannabis use. She sued her employer, claiming she was using legal hemp-derived products. The court said she didn’t provide enough evidence to prove those products contained less than 0.3% Delta-9 THC—the magic number that separates hemp from cannabis under federal law. So, in the district court’s view, she did not have a case.

But the important part for us is what the court said about the 2018 Farm Bill and the DEA’s interpretation of cannabinoids like THC-O. THC-O is a synthetic compound made from hemp derivatives, and there’s been a long debate about whether products like THC-O or Delta-8 THC fall under the “hemp” umbrella.

The DEA considers synthetic cannabinoid-controlled substances, and they’ve argued that products like THC-O are illegal. The Ninth Circuit took on this issue a few years ago in AK Futures LLC v. Boyd Street Distro, LLC, where they ruled that Delta-8 THC products derived from hemp with less than 0.3% Delta-9 THC were legal under the 2018 Farm Bill.

In Anderson, the Fourth Circuit agreed with the Ninth Circuit’s logic, holding that “we think the Ninth Circuit’s interpretation of the 2018 Farm Act is the better of the two.” The court went even further, rejecting the DEA’s argument outright, thanks to the post-Loper world we now live in, where the DEA’s interpretation no longer gets automatic deference.

Here’s the key takeaway: according to the Fourth Circuit, if a product is derived from hemp and doesn’t contain more than 0.3% Delta-9 THC, it’s legal—even if it’s been processed into something like Delta-8 THC. But if a cannabinoid is made entirely from synthetic materials, it’s not hemp, and it’s not protected by the 2018 Farm Bill.

Now, before anyone starts thinking this is an all-clear for hemp products, there’s still a lot to unpack. While Anderson pushes back against the DEA’s overreach, it doesn’t mean every hemp-derived product is automatically legal. The 0.3% Delta-9 THC threshold is still critical, and businesses need to make sure they’re playing by the rules. Plus, this ruling doesn’t mean states won’t have their own say about what’s legal within their borders.

To sum it all up, the Anderson decision is important because it reinforces that courts are not bound by the DEA’s interpretations, especially post-Loper. This decision helps the hemp-derived cannabinoid market. As always, businesses must stay compliant with both federal and state laws to avoid legal headaches.

©2024 Norris McLaughlin P.A., All Rights Reserved
For more news on Hemp Classification Litigation, visit the NLR Biotech, Food, and Drug section.

George Washington’s Whisky Distillery, 21st Century Edition

You might think the laws of King Edward I of England (1239-1307), George Washington’s whisky distillery, and an 1807 “Treatise on the Law of Idiocy and Lunacy” have little to do with the federal criminal code of 2024. And you might think they have even less to do with contemporary federal regulation of cannabis. But the Supreme Court’s test for the Second Amendment right to keep and bear arms requires litigants and courts to become historians scouring the archives. So, the U.S. Court of Appeals for the Fifth Circuit recently held a federal criminal statute barring unlawful users of controlled substances from possessing firearms and ammunition, 18 U.S.C. § 922(g)(3), was unconstitutional as applied. The government’s prosecution of a “non-violent, marijuana smoking gunowner” was dismissed (United States v. Connelly, — F.4th — (5th Cir. 2024).

Those intrigued by the ins and outs of historical firearms regulations, and the back and forth between the Supreme Court and Fifth Circuit on that issue, can study the court’s opinion. The facts, however, were straightforward and seemingly commonplace. The defendant “would at times smoke marijuana as a sleep aid and for anxiety.” So do countless Americans, in full compliance with applicable state laws allowing just such uses. The defendant owned a firearm. Again, nothing remarkable there. Yet federal officials charged the defendant with violating criminal law. The Fifth Circuit put an end to the prosecution, as it did in a similar case last year, United States v. Daniels, 77 F.4th 337 (5th Cir. 2023), vacated, 144 S. Ct. 2707 (2024) (for reconsideration in the light of United States v. Rahimi, 144 S. Ct. 1889 (2024)), which we discussed last year here.

Three takeaways stand out for the industry:

1. The federal classification of cannabis does not trump constitutional rights.

Noticeably absent from the Fifth Circuit’s reasoning was any deference to the federal scheduling of cannabis as a controlled substance. That may be due to the unique historical test applicable to the Second Amendment. Still, the opinion shows the Constitution has no cannabis exception. Judicial statements like “[m]arijuana user or not,” the defendant “is a member of our political community and thus” has constitutional rights are a welcome change in emphasis. When facing an enforcement challenge, industry participants should evaluate constitutional challenges they may have. The Constitution may just win the day.

2. Analogies to regulation of alcohol carried more weight than analogies to other regulatory schemes.

The government tried to analogize cannabis users to several regulatory schemes, including a tenuous (at best) analogy to mental health. Nothing doing there. The Fifth Circuit instead analogized to alcohol regulation, concluding that both alcohol and cannabis can cause a temporary, potentially “impairing influence.” So, just as the federal government does not charge firearms owners with violating 18 U.S.C. § 922(g)(3) because they occasionally consume alcohol, the government could not prosecute the defendant because she occasionally consumed cannabis.

This decision suggests that future enforcement targets might find success in analogizing cannabis to alcohol. Subject to appropriate regulatory control and responsible personal use, alcohol consumption is an accepted part of American society. Indeed, as the Fifth Circuit took pains to note, American acceptance of alcohol consumption dates to the colonial period. Just ask George Washington. And it’s still going strong today. Manufacturers and distributors of alcoholic beverages can advertise their products widely — watch the Super Bowl — and they benefit from access to the banking system, stock market, and other financial opportunities closed to the cannabis industry. Situating the cannabis industry in that established history may help show that cannabis should follow a similar pattern. And it may call into question differential regulatory treatment of the two industries.

3. Supposed “dangerousness” cannot justify treating cannabis differently.

The Fifth Circuit declined the government’s invitations to analogize cannabis users to “dangerous” persons, like political traitors, whom the Constitution might permit disarming. That is, of course, a marked shift from the historical justification for the federal ban on cannabis — a supposed propensity to “incite[] violent crimes,” that modern medicine shows is false.

Rejecting the supposed “dangerousness” of occasional cannabis users furthers questions about whether prohibitions on cannabis serve a legitimate purpose. Recall Justice Clarence Thomas’s 2021 statement questioning the federal approach as a contradictory and unstable “half-in, half-out regime” that “strains basic principles of federalism and conceals traps for the unwary” (Standing Akimbo, LLC v. United States, 594 U.S. 2236 (2021) (Thomas, J., statement respecting denial of certiorari)). As more courts reject federal attempts to treat cannabis users differently from other citizens, future litigants may consider asserting constitutional due process or equal protection challenges to regulations. After all, as Connelly shows, courts stand ready to vindicate constitutional rights, “[m]arijunana user or not.”

© 2024 Bradley Arant Boult Cummings LLP
For more on Cannabis Regulations, visit the NLR Biotech Food Drug section

FTC/FDA Send Letters to THC Edibles Companies Warning of Risks to Children

Earlier this week, the Federal Trade Commission (FTC) and Food and Drug Administration (FDA) sent cease-and-desist letters to several companies warning them that their products, which were marketed to mimic popular children’s snacks, ran the risk of unintended consumption of the Delta-8 THC by children. In addition to the FDA’s concerns regarding marketing an unsafe food additive, the agencies warned that imitating non-THC-containing food products often consumed by children through the use of advertising or labeling is misleading under Section 5 of the FTC Act. The FTC noted that “preventing practices that present unwarranted health and safety risks, particularly to children, is one of the Commission’s highest priorities.”

The FTC’s focus on these particular companies and products shouldn’t come as a surprise. One such company advertises edible products labelled as “Stoney Ranchers Hard Candy,” mimicking the common Jolly Ranchers candy, and “Trips Ahoy” closely resembling the well-known “Chips Ahoy.” Another company advertises a product closely resembling a Nerds Rope candy, with similar background coloring, and copy-cats of the Nerds logo and mascot. This is not the first time the FTC has warned companies about the dangers of advertising products containing THC in a way that could mislead consumers, particularly minors. In July of 2023, the FTC sent cease-and-desist letters to six organizations for the same violations alleged this week – there companies copied popular snack brands such as Doritos and Cheetos, mimicking the brands’ color, mascot, font, bag style, and more.

This batch of warning letters orders the companies to stop marketing the edibles immediately, to review their products for compliance, and to inform the FTC within 15 days of the specific actions taken to address the FTC’s concerns. The companies also are required to report to the FDA on corrective actions taken.

Copyright © 2024, Hunton Andrews Kurth LLP. All Rights Reserved.
For more on Cannabis, visit the NLR Biotech Food Drug section

Supreme Court Decision Overturns Chevron: Impact on Cannabis Industry

Last month, the United States Supreme Court issued its decision and opinion in Loper Bright Enterprises v. Raimondo, significantly overruling the nearly 40-year-old precedent set by Chevron. The Chevron decision required federal courts to defer to a government agency’s interpretation of an ambiguous statute unless that interpretation was “arbitrary, capricious, or manifestly contrary” to the statute. This meant that if an agency such as the DEA published a bulletin or letter interpreting an ambiguous law, courts were generally bound to follow this interpretation due to the agency’s presumed expertise.

The Shift in Legal Interpretation

Loper Bright Enterprises has fundamentally changed this legal landscape. Now courts, rather than government agencies, are considered the best equipped to interpret ambiguous statutes. This shift means that a government agency’s interpretation of an ambiguous statute is now merely persuasive and not binding on the courts. This can be likened to a Pennsylvania court interpreting a Pennsylvania law and considering, but not being bound by, a Delaware state court’s interpretation of a similar corporate law. Just as Pennsylvania courts can choose to defer to, distinguish from, or disregard Delaware court decisions, federal courts now have the same discretion regarding agency interpretations of ambiguous statutes.

Impact on the Cannabis Industry

This change has significant implications for the cannabis industry. The Drug Enforcement Administration (DEA) enforces federal drug laws and has issued numerous letters and bulletins determining the legality of various cannabis substances. For example, the DEA issued opinions that seemingly argued that Delta-8 THC products and THCA products were not allowed under the 2018 Farm Bill. I have generally disagreed with these interpretations, believing that the DEA incorrectly cited statutes related to hemp at harvest rather than downstream products.

With Loper Bright Enterprises, these DEA letters will lose their authoritative value. Courts are no longer bound to follow DEA interpretations and can more readily consider arguments opposing the DEA’s stance. This development is critical for the cannabis industry, as it opens the door for courts to reinterpret federal drug laws and potentially challenge the DEA’s restrictive interpretations of the 2018 Farm Bill.

The Importance of This Shift

The overruling of Chevron by Loper Bright Enterprises marks a pivotal change in administrative law, particularly impacting the cannabis industry. This shift of interpretive authority from government agencies to the courts means there is now greater potential for legal challenges to restrictive interpretations of cannabis laws. This change enhances the ability of cannabis businesses and advocates to contest adverse decisions and interpretations by the DEA and other agencies, potentially leading to more favorable outcomes for the industry.

©2024 Norris McLaughlin P.A., All Rights Reserved
For more on Cannabis, visit the NLR Biotech Food Drug section

It Ain’t Over ‘til It’s Over: IRS Reminds Taxpayers That Section 280E Applies to Marijuana Companies Until Rescheduling Becomes Law

This is a tax blog. Stay with me – it’s short.

While marijuana advocates celebrate the potential rescheduling of marijuana from Schedule I to Schedule III, the taxman has made clear that marijuana remains a Schedule I substance subject to Section 280E of the Internal Revenue Code. For those who aren’t cannabis tax specialists, 280E provides that:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Marijuana is a Schedule I controlled substance and is subject to the limitations of the Internal Revenue Code. As we previously reported, the Justice Department recently published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana to Schedule III under the Controlled Substances Act. That change would remove marijuana from the purview of 280E.

Predictably, a number of cannabis operators couldn’t help themselves and began filing amended returns seeking to avail themselves of what they apparently felt was a change in the law. The response from the IRS is clear:

Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.

The reasoning is simple – marijuana is a Schedule I substance until it is not. While there is currently in place a process that could lead to the rescheduling of marijuana, it has not actually been rescheduled.

Cannabis operators can dream of a time when they will not be subject to the ravages of 280E, but for now that remains just out of grasp, albeit tantalizingly close.

As usual, stay tuned to Budding Trends. We’ll be monitoring all the impacts of rescheduling, including tax implications like this one.

Listen to this post

© 2024 Bradley Arant Boult Cummings LLP
For more on Cannabis, visit the NLR Biotech Food Drug section.

DOJ Confirms Moving Marijuana to Schedule III; Sidesteps Anticipated Impact on State Cannabis Markets

On May 16, 2024, the Department of Justice (DOJ) initiated the formal rulemaking process to move marijuana to Schedule III of the Controlled Substances Act. The DOJ’s notice of proposed rulemaking unfortunately sidesteps the hard questions about the impact of rescheduling on the existing state adult-use and medical cannabis markets.

Summary of Content

The 92-page notice of proposed rulemaking primarily summarizes and comments on last year’s recommendations by the Department of Health and Human Services to reschedule marijuana, as well as related legal concerns such as compliance with international treaty obligation. The DOJ emphasizes that if marijuana is transferred to Schedule III, “the manufacture, distribution, dispensing, and possession of marijuana would also remain subject to applicable criminal prohibitions under the CSA [Controlled Substances Act],” and that marijuana would remain subject to applicable provisions of the Food Drug and Cosmetic Act.

With respect to the critical question of impact on the cannabis markets, however, the DOJ is silent and merely states that it is “seeking comment on the practical consequences of rescheduling marijuana.”

By way of explanation, the DOJ offers:

“DOJ recognizes this action may have unique economic impacts. As stated above, marijuana is subject to a number of State laws that have allowed a multibillion dollar industry to develop. DOJ acknowledges that there may be large impacts related to Federal taxes and research and development investment for the pharmaceutical industry, among other things. DOJ is specifically soliciting comments on the economic impact of this proposed rule. DOJ will revise this section at the final rules stage if warranted after consideration of any comments received.” (Emphasis added.)

Robust Public Comments Expected

For an industry that has been eagerly awaiting to hear how the DOJ will approach rules that address the interplay between existing state cannabis laws and the complex web of federal laws around Schedule III drugs, the DOJ’s notice is disappointing and may not bode well for a smooth rulemaking process. DOJ will accept public comments for 60 days once the notice of proposed rulemaking has been published in the Federal Register. We can expect robust commentary from cannabis businesses, state regulators, trade organizations and ancillary industries.

Regardless of the outcome of the final rulemaking, it seems apparent that clarity through congressional action is needed more than ever.

FTC Moves to Strike Most Noncompetes: Considerations for Cannabis Companies

As Bradley previously reported, the Federal Trade Commission at the beginning of last year issued a notice of proposed rulemaking to effectively ban employee noncompete provisions as an unfair method of competition in violation of Section 5 of the FTC Act. Following a 16-month administrative process that drew more than 26,000 public comments, the FTC on April 23, 2024, issued its final rule that will, according to the FTC, “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”

Key Features of the Final Rule

Key features of the final rule include:

  • Defining “noncompete clauses” as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from (a) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (b) operating a business in the United States after the conclusion of the employment that includes the term or condition.
  • Treating existing noncompetes differently depending on the category of worker.
    • For “senior executives,” existing noncompetes may remain in force. The term “senior executive” refers to workers earning more than $151,164 who are in a “policy-making position.” As so defined, the FTC estimates that senior executives represent less than 0.75% of all workers.
    • For all other categories of workers, existing noncompetes will be unenforceable following the effective date (i.e., 120 days following its publication on the Federal Register).
  • Banning new noncompetes for all workers following the effective date.
  • Requiring employers to provide “clear and conspicuous notice” to workers who are not senior executives and are subject to existing noncompetes that such provisions are no longer enforceable. The FTC included model language in the final rule that satisfies the notice requirements.
  • Excluding banks but not bank affiliates. Because the FTC does not have regulatory authority over banks, it does not apply to banks. The rule does apply to bank affiliates however as those entities are within FTC jurisdiction.
  • Excluding nonprofit entities. The final rule does not apply to nonprofit entities, such as nonprofit hospitals, as they fall outside of the jurisdiction of the FTC Act. The FTC notes, however, that not all entities that claim tax-exempt status in their tax filings are automatically outside of the scope of the final rule. Rather, the FTC applies a two-part test to determine whether the purported nonprofit is within the scope of the FTC Act, focusing on the source of the entity’s income and the destination of the income.
  • Excluding noncompetes in the sale of business context. The final rule generally does not apply to business owners upon the “bona fide” sale of a business. The final rule expanded the sale of business exception found in the proposed rule.
  • The final rule does not apply where a cause of action related to a noncompete accrued prior to the effective date of the final rule.

What Does the New Rule Mean for the Cannabis Industry in Particular?

The FTC contends that the final rule will benefit the U.S. economy by, among other things, increasing worker earnings, reducing healthcare costs, spurring new business formation, and enhancing innovation. But what will it mean for the U.S. cannabis industry specifically?

As we’ve written about before, there’s a significant amount of proprietary information that may give players in the cannabis space a competitive edge – e.g., customer lists, grow processes, or unique cannabinoid extracts, plants, and products. Because marijuana is still a Schedule I substance under the Controlled Substance Act, however, there are open questions about whether an entity engaged in marijuana-related commercial activity can avail itself of federal law protections, such as U.S. patent and trademark laws. If an entity cannot avail itself of those federal law protections, the ability to turn to state contract law becomes even more important to protect its investments. That’s where noncompetes could come in — going a long way to protect an individual from taking and utilizing a company’s or individual’s investments. The FTC final rule largely would put an end to the ability to use noncompete protections, save for the exceptions outlined above. That may be an even bigger blow to the cannabis industry as compared to other industries who can readily utilize federal law protections. On the other hand, the cannabis industry is largely transient and collaborative, and many cannabis companies and individuals in the industry may be willing to take the good with the bad when it comes to the absence of noncompete rules.

What’s Next?

First, the final rule is not yet in effect. It will go into effect 120 days after its publication in the Federal Register.

Second, we expect there will be significant legal challenges and efforts to halt the implementation of the rule.

The final rule was issued following a 3-2 vote by the commissioners, with the two newly appointed Republican commissioners – Melissa Holyoak and Andrew Ferguson – voting against the rule. In their prepared remarks, the dissenting commissioners questioned the FTC’s legal authority to take such sweeping action.

The final rule has already prompted a legal challenge. Shortly after the FTC’s public meeting approving the final rule, the U.S. Chamber of Commerce released a statement indicating its intent to “sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.” True to its word, the Chamber filed yesterday a Complaint for Declaratory Judgment and Injunctive Relief in U.S. District Court for the Eastern District of Texas (Chamber of Commerce of the United States of America v. Federal Trade Commission, Case No. 6:24-cv-00148 (E.D.Tex. filed April 24, 2024)). The lawsuit mounts a number of legal challenges to the final rule.

© 2024 Bradley Arant Boult Cummings LLP
For more on FTC Noncompete Ban, visit the NLR Labor & Employment section.

Will Hemp Save the World, Before the Government Kills It?

There is a great line in the wonderful film Charlie Wilson’s War, where Charlie Wilson (played remarkably by the inimitable Tom Hanks) describes the successful, if relatively covert, involvement of the United States government in the Soviet-Afghan War: “These things happened. They were glorious and they changed the world… and then we f***d up the endgame.”

With the next Farm Bill somewhere on the horizon, I believe we are approaching a similar moment for the future of hemp. I believe the future of hemp is glorious and that it can change the world. What will we do to the endgame?

This is an analysis about the current state of hemp and whether that industry will revolutionize the world before the government relegates it back to the ash heap of history. It just so happens to dovetail with my personal experience representing clients in connection with the hemp business.

In the Beginning…

Back in the “stone age” (circa 2017) when I decided I wanted to be a cannabis lawyer, I began with a focus on hemp. [As a brief aside, telling people in Alabama you practice cannabis law in 2017 must have been what Noah felt like when he was telling people it was about to start raining.]

The 2014 Farm Bill, which for the first time legalized “industrial hemp” as distinct from marijuana under the Controlled Substances Act and allowed state agricultural departments and universities to license the production of hemp, cracked the door for a nascent and limited hemp market, and it was a remarkable time to advise new hemp operators and investors about how to maximize this opportunity within the contours of the law.

At the same time, I was regularly receiving calls from existing clients, colleagues within the firm, and strangers about how their non-cannabis companies should conduct themselves when approached by hemp companies who wanted to do business with them. The latter category included banks, insurance companies, real estate companies, and myriad companies who had questions about how their employees’ use of hemp interplayed with the companies’ existing drug testing policies. Most of the time the companies were reluctant to have anything to do with hemp, but the conversations were interesting, and it was clear that most companies realized the landscape was changing. It was the Wild West, and I was having a ball.

Rocket Fuel

Enter the 2018 Farm Bill and the explosion of the hemp industry. The 2018 Farm Bill dropped the word “industrial” and defined “hemp” as:

the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.

In addition to removing the limitations from the 2014 Farm Bill licensing, the 2018 Farm Bill also moved oversight authority from the Department of Justice and DEA to the USDA and FDA.

The 2018 Farm Bill was a tectonic shift, and we recognized the new regime’s potential almost immediately, predicting the following:

  • Increased “smart” money and research. Because hemp has been a Schedule I substance along with marijuana for decades, many sophisticated sources of funding have abstained from financing the industry. This placed hemp at a competitive disadvantage to other commodities and prevented hemp from reaching its full potential. Now that hemp can be manufactured and sold without substantial legal risks, look for the money to flow toward this underserved sector. Publicly traded companies, private equity firms, venture capitalists and other investment groups will all take significant stakes in both the manufacturing and selling of hemp and hemp-derived products. In addition to traditional commercial development efforts, much of this cash is likely to be spent to hire top researchers to develop proprietary strands of hemp to meet a range of product applications and to take steps to protect the resulting intellectual property.
  • Explosion of hemp and hemp-derived products. Fueled in large part by this injection of financing from sophisticated investors, there is likely to be an explosion in the ways that hemp is used. Hemp already has hundreds — if not thousands — of known uses, and that number should grow substantially once the industry is exposed to the market forces that come with smart money and increased research. The biggest winner may be the hemp-derived CBD business. Hemp-derived CBD is a compound believed to have significant therapeutic benefits without an appreciable psychoactive component. The Washington Post has reported that “dozens of studies have found evidence that [CBD] can treat epilepsy as well as a range of other illnesses, including anxiety, schizophrenia, heart disease, and cancer.” One industry analysis predicts that the hemp-CBD market alone could hit $22 billion by 2022. The health and wellness sector should see particular hemp-related activity and growth in the coming years.
  • Increased ancillary services provided to hemp-related businesses. Because hemp has been included within the definition of marijuana under federal law for decades, most banks, law firms and other service providers have avoided providing services to hemp businesses to avoid the risk of charges of money laundering or conspiring to violate state and federal drug laws. The absence of such service providers has fostered a great deal of uncertainty in an area where certainty and clarity have been sorely needed. With hemp’s new legal status, look for professional service providers to enter the market in 2019 and beyond. Of course, entities looking to provide services to hemp-related businesses should take adequate precautions to ensure those businesses are only producing federally legal hemp.
  • Consolidation and integration. An interesting phenomenon in “legal” marijuana states has been the rapid consolidation and integration of marijuana growers, processors and dispensaries. Some states have mandated vertical integration (e.g., the growers are the sellers) through regulation. And a number of large cannabis companies have acquired grow operations or multi-unit dispensaries rather than establish a cannabis presence in a state from scratch. The hemp industry is likely to follow a similar path, both through government regulation and because larger companies are likely to seek to obtain sufficient quantities of hemp through consolidation and vertical integration. Accordingly, attorneys and investors should anticipate significant merger and acquisition activity in the coming years.
  • Federal regulations and state regimes. The 2018 Farm Bill does not create an entirely unregulated playing field for hemp. Over the coming months, the U.S. Department of Agriculture and Food and Drug Administration will issue regulations implementing the 2018 Farm Bill. State governments will also unveil plans governing the testing, labeling and marketing of hemp-related products, as well as the licensing and monitoring of hemp-related businesses.

I’m proud to say that we were pretty much on the money with these projections, and countless studies and data confirm that hemp can be a viable product with countless form factors that help shape the global economy.

That is when I realized that I might be able to make a career as a cannabis lawyer.

The Good with the Bad

Of course, the development of the hemp industry has not been without controversy – in fact it may be the controversy that has spurred much of the development.

I would be lying to you if I told you that every hemp or hemp-derived product was designed with the best of intentions or contained appropriate mechanisms to ensure consumer safety. There are certainly hemp-derived products on the market that have not been subjected to sufficient product development and testing, and that are being marketed in ways that rightfully should concern policymakers and the public. Novel, psychoactive cannabinoids that fall within the bounds of the terms, if perhaps not the spirit, of the Farm Bill fill the shelves of stores around the country with little to no mechanisms for enforcement. That should change, and Americans should have confidence that the products made available to them are safe and effective.

In response to this proliferation, a number of states have enacted rules and regulations restricting the production and sale of certain hemp-derived cannabinoids. A number of those rules – for example, age and purity restrictions for psychoactive cannabinoids – seem well-intentioned, and we expect to see more of those unless and until the federal government takes further action.

On occasion, however, it appears that the motivations of policymakers may be less pure. It is no secret amongst those in the cannabis industry that marijuana licensees in states that have legalized marijuana are no fans of the unregulated hemp-derived psychoactive industry. After all, marijuana companies are subject to astronomical taxes and endure regulatory costs that make turning a profit far more difficult than if they were able to offer a product that offered a somewhat similar “high” without the institutional overhead and headwinds. Florida may be the clearest and most recent example. With adult-use marijuana widely expected to become law in Florida soon, the state legislature recently passed a law largely prohibiting delta-8 and delta-10.

On the other hand, it would be wrong, even lazy, to suggest that the development of hemp-based products has been without substantial benefits to society as a whole. Entrepreneurs are developing hemp-based substitutes for any number of the most common products used around the globe, meaning that the addressable market for hemp is everyone on earth and beyond.

A younger version of me once wrote, in comparing the addressable market for marijuana to that of hemp:

Hemp, on the other hand, has the potential to dwarf marijuana in the global market. Unlike its sister plant, hemp has the capacity to replace products we use every day without us even realizing it. For example, hemp can provide a substitute for concrete, plastic, fuel, automotive parts, clothes, etc. These are products nearly all consumers need but they neither realize nor care what the products are made of, as long as they work. In that way, while the market for marijuana is limited to consumers looking to purchase marijuana, the market for hemp includes anyone who purchases products that can be manufactured by hemp. In part for these reasons, experts predict four to five times growth in the industrial hemp market in the next five years.

I stand by those words. I am convinced that hemp can change the world.

But I am equally convinced that local, state, and federal governments can, without the appropriate consideration for hemp’s benefits, relegate the plant back to its prohibition era status and deny the world its many benefits. The policy choices made by state governments, and perhaps most importantly by the federal government during the next Farm Bill, could fundamentally alter the future of hemp. Will it be a soon-forgotten shooting star that dazzled the world for a decade and then burned out, or will we look back at the past decade as the renaissance of one of civilization’s oldest and most versatile plants?

Conclusion

I’ll end where I began because Philip Seymour Hoffman’s work is revered by the Budding Trends community (and anyone with taste), and because the film’s ominous conclusion is a message for anyone who wants to see the hemp industry thrive in the years ahead.

As Hanks’ character celebrates the Afghan defeat of the Soviets, the hardened CIA analyst played by Hoffman offers this parable:

On his sixteenth birthday the boy gets a horse as a present. All of the people in the village say, “Oh, how wonderful!”

The Zen master says, “We’ll see.”

One day, the boy is riding and gets thrown off the horse and hurts his leg. He’s no longer able to walk, so all of the villagers say, “How terrible!”

The Zen master says, “We’ll see.”

Some time passes and the village goes to war. All of the other young men get sent off to fight, but this boy can’t fight because his leg is messed up. All of the villagers say, “How wonderful!”

The Zen master says, “We’ll see.”

The message behind this story is pretty clear. We’re prone to jump to conclusions about whether something is “good” or “bad.” We are especially quick to label something as “bad.” The reality is that things can be either good or bad, both good and bad, or neither. When it comes to whether Congress and the states will recognize hemp’s great potential, I guess we’ll see.

© 2024 Bradley Arant Boult Cummings LLP
For more on Hemp, visit the NLR Biotech, Food, Drug section.

Veep Urges DEA to Reschedule Marijuana “As Quickly as Possible”

In case you missed it, Fat Joe visited the White House late last week to discuss federal marijuana policy. 2024, man.

During a roundtable discussion with Mr. Joe (?), Kentucky Gov. Andy Beshear, and several individuals who have received pardons from President Joe Biden for prior federal marijuana convictions, Vice President Kamala Harris “urged the Drug Enforcement Administration to work as quickly as possible on its review of whether to reschedule marijuana as a less-dangerous drug.”

The vice president, in direct terms, stated that it was “absurd” and “patently unfair” to keep the drug in the same highly restrictive tier as heroin and fentanyl. “Nobody should have to go to jail for smoking weed,” Harris said, according to NPR, framing the issue of marijuana reform as a criminal justice issue that disproportionately hurts Black and Latino men.

As to timing, Harris reportedly said: “I cannot emphasize enough that they need to get to it as quickly as possible, and we need to have a resolution based on their findings and their assessment.”

The vice president’s remarks follow Biden’s urging of marijuana rescheduling during the recent State of the Union. Biden has previously granted pardons for federal crimes of marijuana use and possession and has encouraged governors to do the same for state law convictions.

We previously reported that in October 2022 Biden ordered Secretary of Health and Human Services Xavier Becerra “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.” Last August, we noted that the U.S. Department of Health and Human Services officially recommended to DEA that marijuana be moved from Schedule I to Schedule III under federal law.

Last Friday, Harris expressed urgency, concluding: “I’m sure DEA is working as quickly as possible and will continue to do so… And we look forward to the product of their work.”

On the one hand, you could be excused for believing this was simply an inconsequential meeting on a Friday during Spring Break without any chance for advancing the ball. I think, however, that it is meaningful to hear the sitting vice president unequivocally and in stark terms call for the prompt rescheduling of marijuana and make the case that it would be unfair not to do so. In that sense, the marijuana industry has come a long way.

© 2024 Bradley Arant Boult Cummings LLP
For more on Marijuana, visit the NLR Biotech, Food, Drug section.