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The Farm Bill’s Impact on Hemp and CBD – and How Some States are Reacting

While the legal landscape continues to evolve in the cannabis industry, making entry into the space a potentially risky proposition,  the passage of the Agriculture Improvement Act of 2018 (the “Farm Bill”) can be a real game changer in attracting mainstream companies to the industry.

According to the Farm Bill, hemp is now exempt from the Federal Controlled Substance Act (“CSA”), theoretically making all hemp-derived cannabidiol (CBD) products, and all commercially available products derived from hemp, legal in all 50 states

But don’t open your CBD cookie shop just yet.  As profound as this piece of legislation may sound, there are other regulators looming in the foreground that can severely limit these new rights.  Shortly after the Farm Bill’s passage, both the New York State Department of Agriculture and the New York City Department of Health (DOH) banned all CBD in food and beverages.  Without its own laws regulating CBD in food or consumables, New York took direction from the Food and Drug Administration (FDA), which finds it “unlawful under the FD&C Act to introduce food containing added CBD or THC [delta-9-tetrahydrocannabinol] into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived” (emphasis added).  Enforcement by FDA, however, has been sparse, and according to a DOH email sent in late February to New York restaurateurs, DOH inspectors will delay embargoing and imposing fines for CBD enhanced foods and beverages until July 1, 2019, and will not necessarily issue violations until October 1, 2019.  The DOH emphasized in its email that the delayed enforcement should give the FDA time to “educate” those in the food service business.

Similarly in Maine, much to the dismay of local business owners, the Department of Health and Human Services insisted that edibles and other CBD infused products be immediately banned several weeks ago, having not been federally approved as harmless food additives.  The Farm Bill sparked many questions within the state about its impact on Maine’s rapidly growing hemp and CBD industry, and upon review, some state lawyers concluded that CBD could not be used in mass-marketed foods until Maine’s experimental hemp program achieved federal approval.  Days after the Farm Bill went into effect, environmental health inspectors began informing businesses that they had to remove from their shelves all foods, tinctures and capsules that contained the non-psychoactive chemical compound found in the cannabis plant.

The California Department of Public Health (“CDPH”), which proactively issued FAQs, took the position that: “[A]lthough California currently allows the manufacturing and sales of cannabis products (including edibles), the use of industrial hemp as the source of CBD to be added to food products is prohibited.  Until the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.”  Under California law, “food” is defined as “[a]ny article used or intended for use for food, drink, confection, condiment, or chewing gum by man or other animal” and “[a]ny article used or intended for use as a component of any article designated” in the foregoing definition.  What this means is that the CDPH views anything that could be deemed a food or beverage that is intended for human or animal consumption and that contains CBD is unlawful.

FDA currently prohibits CBD in foods, beverages and dietary supplements because CBD is an active ingredient in an FDA-approved drug and has been the subject of substantial clinical investigations before being marketed as foods or supplements.  See Federal Food, Drug, and Cosmetic Act (FDCA) § 301(ll).  In June of 2018, FDA approved for the first time a CBD-containing drug, Epidiolex, a treatment for certain rare and severe forms of epilepsy.

FDA has sent a handful of Warning Letters to companies marketing CBD-containing products with medical claims.  Despite the lack of aggressive enforcement by FDA, several states are erring on the side of caution before lifting their CBD food-additive bans.

So, while the Farm Bill will undoubtedly spark interest and generate activity in CBD related ventures, it is a gross misconception to suggest that hemp-derived CBD products are now 100% legal.

What, then, can we take away from the Farm Bill and what can we expect to see in the near future?  Here are some important things to note:

  • As a direct result of the Farm Bill, hemp-derived CBD officially has been removed from the list of Schedule I controlled substances, which theoretically opens up legal interstate commerce for hemp and hemp-derived CBD. Individuals and entities selling CBD-infused food or beverage products are now, according to the Farm Bill, permitted to ship across state lines but risk enforcement by FDA.
  • CBD (or, cannabidiol) is the non-psychoactive component in cannabis. CBD can come from the marijuana plant or from the hemp plant.  Unfortunately there is only one “fool-proof way” to distinguish between the two, according to the United Stated Department of Agriculture (USDA), and that involves a chemical analysis of the THC.  Generally speaking, the plants are otherwise very similar in appearance.
  • Hemp production is now permissible in all U.S. territories and on Indian Tribal land (which was not included under the 2014 Farm Bill). Note, however, that many hemp shipments in recent weeks have been seized and held by state and local authorities, particularly in Oklahoma and Idaho.  Although ultimately the persons transporting the hemp were released from custody, those shipments have still not been released.
  • The states are responsible for developing their own hemp programs, and all states and tribes are required to submit their plans to the USDA for approval in accordance with the Farm Bill. To date, no plans compliant with the new bill have been approved by USDA, and the USDA has not yet released its plan and guidance.  USDA released a statement that they intend, or rather hope to provide, more guidance by April 2019.
  • With the substantial national interest in the hemp industry, and with the rapid growth of hemp-based products, an infrastructure will likely be needed to manage the greater demand for hemp-derived products. Hemp grown in this country will very possibly be used as a source for emerging industries.  Legalization also should promote innovative and novel cultivation and growing techniques and methods.
  • The USDA is responsible for overseeing all hemp production, and has been instructed to codify rules as “expeditiously as practicable.”
  • Licensed producers that unintentionally violate the THC legal limitation of 0.3% will not be deemed guilty of a drug crime anymore, and they will be granted a grace period to cure the violation or “correct’ the “hot” hemp by submitting a plan and following through on that plan.
  • The Farm Bill also has removed barriers to obtain IP protection (trademarks and patents) under federal law.

Stay tuned for updates as we see them…

And for further detail on the Farm Bill, click here for the full text.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Andrea Cataneo, Sheppard Mullin, corporate attorney
Partner

Andrea Cataneo is a partner in the Corporate Practice Group in the firm's New York office.

Areas of Practice

Ms. Cataneo focuses on structuring secured and unsecured private equity financing transactions for microcap companies, and taking companies public via self-registration statements and reverse merger transactions. Additionally, through her extensive relationships in the investment banking community, Ms. Cataneo offers her clients targeted sources of capital. She also represents publicly-held companies with their 1934 Act reporting...

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