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December 11, 2018 Feature

The Hemp Revolution Will Not be Televised... Yet

By Lisa L. Pittman

While cannabis legalization is sweeping the nation and the spotlight, either through medical programs in 33 states and the District of Columbia, adult use programs in 10 states and the District of Columbia, or decriminalization measures undertaken in many metropolitan cities, hemp is the emerging giant of this new industry, which all burgeons from the same cannabis plant. In contrast to cannabis, which is tightly regulated from a law enforcement perspective because of its status on Schedule 1 of the U.S. Controlled Substances Act (CSA), hemp, which derives from the nonflowering portions of the cannabis plant containing low tetrahydrocannabinol (< 0.3% THC, the compound in the plant causing euphoria), is subject to much less regulation. Currently, enormous market potential and public awareness of the benefits of cannabidiol (CBD, the compound in the plant possessing a plethora of therapeutic benefits) are increasing exponentially, particularly among those discovering its capabilities to reduce inflammation, pain, and anxiety. See, e.g., Alex Williams, Why Is CBD Everywhere?, New York Times, Oct. 27, 2018.

Despite the increasing popularity of CBD, hemp, and hemp-derived CBDs, legal status currently is extremely limited, due to their inclusion in the definition of “marihuana” under the CSA. Technically, neither cannabis nor hemp-derived CBD extracts are legal to ship across state lines or are permitted in some states, and, as noted, their possession and use are in violation of federal law. So, why do we see hemp-derived and infused CBD products, from creams to tinctures to edibles and beverages, in mainstream commercial outlets and online?

A Short History of Hemp

Before 1937, industrial hemp was legal and was used most often for clothing, paper, rope, and lamp oil. But in 1937, Congress passed the Marihuana Tax Act, which made all species of the Cannabis sativa L. plant illegal, including hemp. While the purported purpose was to eliminate the use of cannabis as a drug, some theorists posit that the real intent of the Act was to eliminate the competition hemp posed to paper and steel manufacturers by referring to cannabis as “marijuana” as a scare tactic in relation to its use as a drug. Fast forward to 2014, and under the Agricultural Improvement Act, known as the “Farm Bill,” hemp finally was permitted to be grown again, but only if in conjunction with a state’s industrial hemp program, or with a license by a public university for a research pilot program. However, to the misconception of many, in neither of these instances were hemp or the products made from hemp allowed to cross those states’ lines.

In just a few short years, licensed (and unlicensed) hemp producers began to multiply in states such as Colorado, Oregon, Kentucky, and South Carolina. Extracts derived from hemp plants can be infused into a variety of products to produce therapeutic effects sometimes rivaling or surpassing pharmaceutical counterparts, with none of the side effects of pharmaceutical drugs. As the public experiments and becomes more aware, businesses have been aggressively pursuing market share by peddling their own versions of hemp and CBD products for humans and pets across all types of marketing platforms . . . yet, all the while, the products are still federally illegal. The FDA sends out warning letters to companies making unsubstantiated claims about what CBD can treat or cure. Product seizures are made, usually by local law enforcement, but hemp-derived CBD is a low enforcement priority of the Drug Enforcement Authority (DEA), whose resources to thwart state-compliant hemp are limited by the Farm Bill, and currently are more focused on the opioid epidemic, the movement of cannabis across state lines, and cartel activity.

Industrial hemp plants can be used to produce thousands of products, including textiles, paper, paints, clothing, plastics, cosmetics, foodstuffs, insulation, animal feed, fiberglass, replacement for wood products, bio-fuel, and detergents. Over 30 countries around the world have some sort of industrial hemp industry in place, and in fact, the United States has been importing some of these materials because the CSA forbids their growth and production domestically. For example, both BMW and Mercedes use hemp fiber for their seats made in the United States.

Hemp Distinguished from Marijuana

After several lawsuits challenging the status of the hemp plant within the definition of “marihuana” under the CSA, the DEA issued a “Clarification of the New Drug Code (7350) for Marihuana Extract” in May. The DEA clarified that certain materials or products are excluded from the definition of marijuana, to wit: exempt plant materials such as stalks, fibers, oil and cake from seeds, and sterilized seed may be sold and otherwise distributed throughout the United States—and even may be imported into the United States and exported—as long as the laws of the country from which the products are imported or exported are in favor of such commerce. These plant materials and products made from them are arguably okay for interstate sale under current law. The DEA’s 2016 Statement of Principles on Industrial Hemp indicates that industrial hemp products may be sold in and among states with agricultural pilot programs but also directs that industrial hemp plants and seeds may not be transported across state lines. As a result, it appears that hemp-based products may be sold between states, as long as both states have enacted laws allowing the sale of hemp, but the interstate transportation of the actual hemp plants and their seeds is federally illegal, regardless of the hemp laws of the states. Confused yet?

Other Conundrums Related to Hemp

Adding to the confusion, state law enforcement agents intervene and frequently are unclear about the legality of the substance they may discover in a customer’s or distributor’s vehicle or even on the shelves of a health food store. Many clients I advise are navigating these ever-shifting and difficult-to-interpret conflicting state and federal laws because raw or finished hemp products are very lucrative. Moreover, they may be sourced from one state, but manufactured in another, and perhaps sold out of a third—just like many other businesses. And their labeling must comply with FDA requirements as much as possible.

The interstate prohibitions present the conundrums, along with the overarching federal illegality of most cannabis and hemp products on the market. For example, cannabis and hemp social media channels have been taken down by Facebook and YouTube because of the products’ federal illegality, even if the channels are doing nothing more than providing information or education. In January, the IRS amended its rules to disallow recognition of nonprofit status for cannabis advocacy groups. And, under IRC 280(e), cannabis businesses cannot take ordinary business deductions, although the application of the provision to legal state hemp businesses is more complicated. FDIC-insured banks will not touch a cannabis- or hemp-related business account, even in states where hemp is legal; a business must find a state-chartered bank or credit union to service its accounts, and its employees are subject to bank account closures if their paychecks reflect a cannabis or hemp entity. Yet, despite these obstacles, farmers, investors, manufacturers, wholesalers, retailers, and the public are willing to risk pushing the envelopes for acceptance of hemp-derived CBD products. While the hemp revolution has been bubbling under the radar thus far, it is becoming more ubiquitous, and the push for its legalization separate from cannabis is emerging on a bipartisan basis.

2018 Farm Bill Stalls

The times are changing. On June 13, the Senate Agriculture Committee passed the Agriculture Improvement Act of 2018, known as the “2018 Farm Bill.” The Hemp Farming Act, introduced by Senate Majority Leader Mitch McConnell and included in the Senate’s updated version of the 2018 Farm Bill, would remove industrial hemp from the CSA and legalize growing industrial hemp as an agricultural crop nationwide, subject to state approvals. The bill also would specifically authorize hemp CBD extractions to cross state lines, allow hemp farmers to get crop insurance and access to federal water rights, and even protect from prosecution those hemp farmers who grow plants with slightly elevated THC content. This legislation would be a gamechanger for the industry, but no resolution on the proposed legislation was reached before Congress recessed at the end of September, mostly due to conflict over a provision in the House version of the bill pertaining to food stamps—the hemp aspect was not controversial. Thus, technically the 2014 Farm Bill expired, but some of its provisions continue to govern due to appropriations made under other programs. The hemp industry is proceeding under the assumption that the murky waters of the 2014 Farm Bill continue to apply and eagerly await action on the 2018 Farm Bill when Congress reconvenes. Congress is expected to make the 2018 Farm Bill a priority, while momentum continues to mount regarding the legitimacy and eventual legality of hemp-derived CBD products.

Epidiolex Rescheduled after FDA Approval

Finally, in a landmark move, the DEA rescheduled Epidiolex, a cannabis-derived CBD drug for the treatment of seizures that is manufactured by a pharmaceutical company based in the United Kingdom. Epidiolex recently was approved by the FDA, but no doctor could prescribe it because of its Schedule 1 status, which designates the drug as having “no currently accepted medical use.” Despite many case studies, particularly in Israel, demonstrating that cannabis possesses powerful curative properties for certain ailments, research in the United States has been prohibited because of the drug’s Schedule 1 status, leading to circular reasoning by the DEA in maintaining cannabis as a Schedule 1 drug alongside heroin and LSD. But in late September, the DEA rescheduled CBD drugs approved by the FDA to Schedule 5 under circumstances that applied only to Epidiolex. That does nothing to help all the manufacturers whose products have not undergone FDA approval, but it signals one of the first recognitions by the U.S. government that the cannabis plant possesses medicinal properties, and more are expected to come.

Adding to the complicated question of which laws govern hemp products intended for human consumption, the application for and approval of Epidiolex resulted in the consideration of CBD by federal agencies as a definitive “drug,” rather than the botanical dietary or health supplement category CBD inhabited before this approval. This categorization means that efforts now must be made on labeling not to make claims or to even state that the product contains “CBD.” Instead, “hemp oil” or “hemp extract” are used on labels in an attempt not to frustrate the FDA’s new authority to regulate CBD. Manufacturers are struggling to achieve the fine balance of ensuring that the consumer will realize a product contains hemp-derived CBD without raising red flags to the FDA, DEA, and other federal agencies and their state counterparts.

Hemp Movement on the Rise

From both an agricultural and medicinal standpoint, the hemp movement—largely unbeleaguered by the crushing compliance and taxing obligations of cannabis businesses—is on an exponential rise in the United States and internationally. A leading trade industry publication states that CBD was at least a $350 million industry last year, and some estimates suggest that by 2020, annual sales of CBD products could top $1 billion. Jenel Stelton Holtmeier, Chart: Opportunity in CBD-only stores limited, but strong growth expected for other channels, Hemp Industry Daily, Oct. 18, 2018. The magnitude and swiftness of these transactions, coupled with the uncertain nature of the laws, results in many situations and business lawsuits of all kinds between farmers, buyers, sellers, and brokers, as well as intellectual property battles and regulatory issues, along with the interplay of federal law and cross-state and cross-border investment.

Stay tuned; the evolution of law is taking place before our very eyes, in an area unthinkable only five years ago. Eventually, you will see an ad for a CBD product on television (or in a pop-up to your YouTube video). CBD products already may be available in your local convenience store or health food store. Walmart is selling CBD products in Canada, and they were briefly on the shelves of 7-Eleven and Target stores in the United States. CBD products definitely are available online, even from Amazon—but after reading this article, you may notice that your search term for CBD will yield results for “hemp” products as manufacturers forego or dance around the CBD moniker until the laws catch up to the market demand.

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By Lisa L. Pittman

Lisa L. Pittman is special counsel at Tannenbaum, Trost & Burk, LLC, in Denver, Colorado, where she represents a wide range of clients engaged in the legal cannabis and hemp industry across the United States and globally by applying knowledge gained from litigating a range of commercial disputes over 17 years in Texas and Colorado. She is a vice-chair of TIPS’s Business Litigation, Corporate Counsel and In-House Professionals, and Products Liability Committees, and is a member of the Cannabis Law and Policy Task Force’s Steering Committee. She may be reached at [email protected].