HEMP CBD FULL SPECTRUM HEMP FDA
… FULL SPECTRUM  HEMP?

In a recent post regarding the labeling requirements surrounding dietary supplements containing industrial hemp-derived CBD (“Hemp-CBD”), we alluded to a recent movement in the industry to rename Hemp-CBD products “full spectrum hemp.” We now take a closer look at the reasons behind this shift in nomenclature.

Part of the impetus behind this movement might be linked to a 2001 court decision pertaining to the status of lovastatin, a compound found in red yeast rice.

Although red yeast rice had been used for healing purposes for thousands of years, the isolated compound was approved by the FDA as a drug in the treatment of cholesterol. Despite the FDA approval, companies continued to sell and market lovastatin as a dietary supplement. One of these companies was Pharmanex. The FDA challenged the sale and marketing of Pharmanex’s product, Cholestin, and ultimately prevailed when Pharmanex challenged the FDA’s position in federal court.

The court held that the lovastatin found in Cholestin was not in its natural form (i.e., as naturally occurring in red yeast rice) because its manufacturer deliberately selected and used a method to produce specific levels of lovastatin that were greater than those naturally present in red yeast rice. In addition, the court determined that Cholestin was a drug because it was specifically marketed as the isolated lovastatin compound.

There may be some parallels between the case of red yeast rice and Hemp-CBD. Indeed, like red yeast rice, hemp and hemp extracts have been consumed for hundreds of years as food and for their medicinal value. Similar to red yeast rice, hemp contains hundreds of compounds, including CBD. And like lovastatin, CBD was recently approved by the FDA via a drug known as Epidiolex—although it is important to note that the CBD approved by the FDA as a drug is derived from the cannabis plant, not industrial hemp grown under an eligible state program, pursuant to the 2014 or 2018 Farm Bill.

Accordingly, if a Hemp-CBD product were to meet the standard laid forth by the court for red yeast rice (i.e., unadulterated full-spectrum hemp marketed as full spectrum hemp, not CBD), its manufacturer may be able to use the nomenclature “full spectrum hemp,” which might mitigate the risk of FDA enforcement action against Hemp-CBD products.

However, given the varieties of hemp strains, and the fact that each contain various levels of naturally occurring compounds, it might be challenging to specifically assess what constitutes “naturally occurring” levels of CBD. Nonetheless, “full spectrum” is generally understood to mean that all the natural constituents of the hemp plant are in product at the same percentages as they would be found in nature. Because advertising cannot be false or misleading, the nature of each product would be dispositive—i.e., whether or not the natural constituents are there in natural percentages—in determining whether those products might fall outside the scope of FDA scrutiny.

Accordingly, before manufacturers of Hemp-CBD products consider renaming their product “full spectrum hemp” they should consult with experienced attorneys to review their manufacturing process and determine whether switching from “CBD” to “full spectrum hemp” in labeling and marketing would be allowed and beneficial.

HR 420 marijuana blumenauer

On Wednesday, January 9, 2018, Representative Earl Blumenauer (D-Or) introduced the aptly designated H.R. 420, or the Regulate Marijuana like Alcohol Act. The bill is still so new that it’s not yet up on Congress’ site, but the apparent text for the bill can be found online.

H.R. 420, if passed in its current form, would remove marijuana from the Controlled Substances Act’s scheduling. The law wouldn’t allow complete legalization without regulation. It still makes clear that bringing cannabis into a jurisdiction would be unlawful where it would violate the laws of that jurisdiction. Instead of full-scale legalization, the bill would require the Secretary of the Treasury to establish a permitting scheme which could, like state law, involve different permits for each different kind of cannabis activity. It’s not yet totally clear how this would play out for permit holders in states with current regimes, i.e., whether they would have to get federal permits and/or what criteria they’d be held to.

Interestingly, these federal permits appear to last indefinitely until suspended and can be transferred if the transferee makes a timely request. There are of course disqualifying convictions, but those appear to be relatively narrow and exclude federal or state offenses if the underlying conduct was lawful in the state where the conviction was rendered. The bill also makes clear that applicants couldn’t get permits that would violate state law (this is an interesting flip where federal law bows to state law) or if an applicant wasn’t likely to commence operations within a reasonable period or maintain them in accordance with federal law.

One other interesting component of the bill is that it would transfer jurisdiction from the Attorney General over marijuana to the re-named Bureau of Alcohol, Tobacco, Marijuana, Firearms, and Explosives. The bill would also give the Food and Drug Administration the same authority over marijuana that it has over alcohol. The bill would also give the Treasury Secretary the authority to regulate certain elements of marijuana advertising to ensure that it was not false or misleading.

Ultimately, the bill leaves more unsaid than said, and if it is ever passes, it will be up to the regulators to figure out the mechanics. It’s not certain that this bill will go anywhere, especially in such a tumultuous and chaotic time. However, the approach of regulating marijuana more or less like alcohol, similar to what many states are already doing and with an element of federal oversight, is a compelling idea. Stay tuned to the Canna Law Blog for more details and updates.

oregon marijuana OLCC violation
Make it happen!

I’ve been suspicious the last few months that the Oregon Liquor Control Commission (OLCC) is starting to set a zero tolerance policy for marijuana rule violations. Unfortunately, the extrinsic evidence seems to be proving my suspicions.

As I’ve previously written, the OLCC settlement policies seemed to shift last September. In a first for the commission, they rejected a settlement proposal that would have allowed a licensee to keep its license and pay a fine. That particular licensee, Black Market Distribution, LLC, either needs to fight for its license at a hearing or surrender its license. The OLCC has not issued a final order related to Black Market Distribution yet and the company still have its license according to the approved license list. Only time will tell if Black Market Distribution is able to keep their license in light of the alleged violations.

As I wrote in November, if the OLCCs continued actions are any indication, Black Market Distribution may have little chance of keeping their license. In December, the OLCC seemed to continue down a path of refusing to settle cases unless the Licensee agrees to sell the business or surrender the license.

  • The OLCC alleged licensee Positive Vibrations committed four Category IV violations relating to advertising rules. The OLCC proposed a 34-day suspension or a civil penalty of $5,610. However, the OLCC and Positive Vibrations were able to reach a settlement agreement requiring Positive Vibrations to accept responsibility for the Category IV violations and either serve a 26 day suspension or pay a civil penalty of $4,290.00.
  • In the only other settlement agreement from December, the OLCC alleged licensee Greenway Ventures committed 10 violations, including two Category I violations. Even a single Category I violation is sufficient to revoke a license. Based on the violations, the OLCC proposed license cancellation. Greenway and the OLCC entered a settlement agreement that required Greenway to sell the business or surrender its license by March 30, 2019. Greenway must also accept a Letter of Reprimand for the violations that will become a permanent part of its file and may be considered in future applications. Further, the Greenway  had to forfeit 21 totes of marijuana to the OLCC for destruction.

Not only have we seen the OLCC entering into stricter and more stringent settlement agreements, but our office has seen a significant influx of charging documents issued by the OLCC. These usually come about after anonymous complaints are made to the OLCC regarding potential rule violations of the licensee. After an anonymous complaint is received by the OLCC, the OLCC assigns the complaint an investigator. The investigator then conducts inquiries and visits the licensed premises. The investigator will not only investigate the allegations of the complaint, but will also look into other practices of the licensee. This can often result in multiple rule violations.

So, what’s the takeaway? As we’ve said in the past (and will continue to say), the only way to avoid OLCC charging document exposure is to ensure compliance with the rules. How do you do that? The best way is to create a compliance position for your license, and designate or hire a compliance person. This might not be cheap but it will probably save you in the long run. That person’s job will be to keep up to date on OLCC rules (which are still being updated frequently), and to ensure that every aspect of the license is in compliance with those rules. Alternatively, split up the job among several experts. If you have someone running your Instagram account, for example, make it their job to ensure that every Instagram post and every marketing item that stems from the license complies with the rules. Have someone become an expert in CTS, tagging, and manifest. Etc. The bottom line is, make sure you have someone or a team of someones that know the rules inside and out, and isn’t shy about speaking up when practices are lax. If you and the compliance expert cannot figure something out, hire an attorney to review your practices. At the end of the day, it’s better to pay up front to ensure rule compliance rather than to pay the OLCC in penalty fees or lose your license altogether.

fda cbd food
Not OK per FDA.

On January 3rd, according to the owner of a smoke shop in Yuma, Arizona, officials from the Food and Drug Administration (FDA) seized a variety of CBD products from the store’s shelves. The officials took fewer than fifty items and told the owner to anticipate follow-up paperwork within seven to ten business days.

According to the owner’s account, FDA officials had stopped by the shop a few days earlier and asked what products were edible and intended for humans. When those officials returned, they informed the owner that CBD cannot be sold for human consumption.

This squares with what we have written about extensively, and also with what FDA Commissioner Scott Gotlieb has stated:

[I]t’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations before they were marketed as foods or dietary supplements. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.”

Gottlieb also made clear that things like claiming CBD or cannabis products cure diseases prior to undergoing FDA approval are not lawful, and that the FDA will not hesitate to warn consumers and initiate enforcement actions against CBD companies. The enforcement against the Yuma store seems to indicate that those enforcement actions have begun in earnest.

There seems to be a good amount of misunderstanding about how the passage of the Agriculture Improvement Act of 2018 (or the “2018 Farm Bill”) affects the legality of selling industrial hemp-derived CBD products. But to reiterate, nothing in the 2018 Farm Bill alters the FDA’s position on CBD pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Here are some additional highlights from that statement:

  • The FDA will continue to enforce the law, including the FDCA, in an effort to protect patients, the public, and to promote the agency’s goals of promoting public health;
  • Products containing cannabis or cannabis-derived compounds, including CBD, will be subject to the same regulations and requirements as other non-cannabis FDA-regulated products;
  • Hemp or hemp-derived CBD products that are “marketed with a claim of therapeutic benefit, or with any other disease claim” must be approved by the FDA before being introduced into interstate commerce;
  • Hemp or hemp-derived CBD products marketed “for use in the diagnosis, cure, mitigation, treatment, or prevention of diseases” are considered drugs and must be approved by the FDA before they are marketed for sale in the United States; and
  • It is “unlawful under the FDCA to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.”

It remains to be seen whether the FDA will introduce new regulations pertaining to the sale of hemp-derived CBD products intended for human consumption. For now, the agency has indicated that its position on CBD products is clear. We’ll be watching closely to see if this enforcement action constitutes a ramp-up of enforcement against CBD companies nationwide.

As we’ve stated time and time again, the cannabis industry is rampant with risks and scams, and can be an ethical minefield for attorneys to navigate. Legalized cannabis is a multi-billion dollar industry, however, and legitimate businesses need good and ethical attorneys to provide legal advice.

This is complicated, because due to federal laws, an attorney providing legal advice to a cannabis business in compliance with state and local laws could technically be aiding and abetting violations of the federal Controlled Substances Act.

Earlier this month, I gave a presentation to California attorneys regarding ethical representation of cannabis businesses and how to navigate the complicated tension between state and federal laws. I was joined by municipal lawyer Ruben Duran, partner with Best Best & Krieger, who advises public agencies.

This post will focus on the ongoing tension between state and federal laws. My next post will discuss the application of California’s new Rules of Professional Conduct, and the third post in this series will touch on on attorney-client privilege concerns and real life ethical scenarios.

Tension Between State and Federal Laws

MAUCRSA, codified at Business and Professions Code section 26000 et. seq., provides a comprehensive system to control and regulate commercial cannabis activity in California. Civil Code section 1550.5(b), which took effect January 1, 2018, provides that commercial activity conducted in compliance with local and state laws is the lawful object of a contract, not contrary to good morals, and not against public policy. This is important for practicing and prospective attorneys because good moral character is a prerequisite for admission to the bar.

Under federal law, however, commercial cannabis activity is unlawful pursuant to the Controlled Substances Act. An attempt to violate or a conspiracy to commit a violation of the Controlled Substances Act is subject to the same penalties as the underlying offense. Accordingly, there is potential for attorneys to be roped in to a criminal action if they are considered a co-conspirator.

Any investment into a marijuana business puts an individual at risk of criminal prosecution, and those assets, investments, and profits are subject to forfeiture.
Financial transactions that involve proceeds generated by marijuana business can form the basis for federal prosecution under money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act. (18 U.S.C. §§ 1956, 1957.)

For the last several years, a rider to the appropriations bill that funds the Department of Justice (commonly referred to as the Rohrabacher-Blumenauer Amendment or Rohrabacher-Farr Amendment) has provided some degree of protection to certain categories of marijuana businesses. In the case of US v McIntosh, a Ninth Circuit panel held that the rider prohibits the Department of Justice from spending funds to prosecute people engaged in conduct permitted by state medical marijuana laws who fully complied with such laws. The panel wrote that individuals who do not strictly comply with all state law conditions regarding the use, distribution, possession, and cultivation of medical marijuana have engaged in conduct that is unauthorized, and that prosecuting such individuals would not violate the rider. Note that the rider says nothing about adult use/recreational marijuana or manufactured marijuana.

In addition to the potential criminal risks, there are many other ways the federal government is working against the cannabis industry. There are potential immigration consequences (for example, see the recent lifetime entry ban of Canadian investors), bank accounts and credit card accounts may be shut down, TSA pre-check privileges may be revoked, among other perils. On the bright side, national legalization of cannabis in the United States has been a talking point for many congressional representatives lately, and it seems like legalization may be a priority for incoming legislators. We won’t hold our breaths, but federal policy will be something to watch in 2019.

Stay tuned for the next post in this series regarding the application of California’s new Rules of Professional Conduct to attorneys working in the cannabis industry.

california marijuana cannabis licensingIn California, under the Medicinal and Adult-Use Cannabis and Regulation Safety Act (MAUCRSA), temporary licenses began issuing to cannabis businesses on January 1, 2018. Since then, the state agencies in charge of MAUCRSA’s implementation (the Bureau of Cannabis Control (BCC), the California Department of Public Health (CDPH), and the California Department of Food and Agriculture (CDFA)) have worked pretty much round the clock on adopting permanent regulations. In case you forgot, the agencies dropped their initial proposed permanent rules this past summer, tweaked those, and then released another round of revised proposed permanent regulations last month (which are now in the hands of the Office of Administrative Law (OAL) for an overall review). That last round of proposed permanent rules (see herehere, and here) is very likely to become effective (pending OAL’s review) in early January. Right now, all licensees are still operating under the emergency rules that came out in fall of 2017. And pretty much everyone is racing to get their temporary licenses, which will NOT be available after December 31.

Despite the fact that the state has made great progress towards permanent rules, many questions and ambiguities around licensing and operational conduct remain. In fact, some of the grayer areas of the emergency regulations have been expanded by the proposed permanent rules for better or worse. In turn, with 2019 just around the corner, here’s my list of the top 10 unknowns that still remain for California cannabis:

    1.    IP licensing and white labeling restrictions.

In case you’ve been living under a rock, one of the most shocking proposed permanent rules to come from the BCC is section 5032(b) (which, yes, affects all licensees). Essentially, section 5032 (b), as originally written, basically prohibited all IP licensing and white labeling agreements between cannabis licensees and non-licensees. That rule stated that:

(a) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following: (1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer; (2) Manufacturing cannabis goods according to the specifications of a non-licensee; (3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; (4) Distributing cannabis goods for a non-licensee.

For more detail on that original rule, see our write-up here. During public comment on 5032, there was a good amount of dissent (including our own) in that it’s pretty obvious if such a rule went through a lot of branded product currently on the shelves would have to be tossed. In addition, California would be the only state in the cannabis union to adopt such a strict rule. When the BCC then released the revised proposed rules, 5032(b) was pared down to read as follows:

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act.

As you can see, the IP licensing and white labeling examples were deleted, but the rule still makes clear that licensees can’t undertake commercial cannabis activity (i.e., manufacturing, labeling, processing, etc.) “on behalf of, at the request of, or pursuant to a contract” with a non-licensee. Just removing former examples (1)-(4) may have no impact whatsoever here, and it’s certainly confused the situation as a result. And while the BCC’s own comments to 5032 (in its Final Statement of Reasons) indicate that it takes no issue with non-licensee to licensee IP licensing and white labeling relationships, a plain reading of the rule indicates otherwise.

    2.    Ownership issues. 

The BCC struck again in the proposed rules revising “owner” disclosure standards to be much stricter at section 5003. Now, in addition to anyone with 20% or more in equity, the board of directors, the CEO, and anyone or any entity that exercises any direction, control, or management over the licensee, is also an owner. Any individual or entity merely entitled to profit share at or more than 20% is also an owner. This calls into question though how the BCC plans to treat things like cashless options and warrants that have no immediate entitlement to ownership in or profit sharing with the licensee. And what about husbands and wives (which are in community property marriages in California) since there’s no spousal disclosure requirement and they’re technically one person under existing law? The BCC has been silent on all of the foregoing and I have no doubt that these new revised rules may actually incentive people to be even more “creative” in order to avoid owner (and financial interest holder) status.

    3.   Financial Interest Holder woes.

Identifying financial interest holders (FIHs) is more complicated than owners because the FIH definition now encompasses a variety of folks and entities. I recently spoke to the OC Register about how now even lawyers who take a share of the profits of a cannabis business (in exchange for legal services) will now have to be disclosed as FIHs under the new rules. The BCC also made clear that it’s going to sort through more convoluted corporate structures around FIHs to get to the humans providing the capital to or profit sharing with cannabis businesses. At section 5004 of the proposed rules, the BCC now mandates that:

“When an entity has a financial interest in a commercial cannabis business, then all individuals who are owners of that entity shall be considered financial interest holders of the commercial cannabis business. For example, this includes all entities in a multi-layer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons that have control of a trust, and managing members or non-member managers of the entity. Each entity disclosed as having a financial interest must disclose the identities of persons holding financial interests until only individuals remain.”

Of course, we have no way of really knowing how far the BCC will go here in vetting the individuals behind these structures, though I’m sure more than a few publicly traded companies are suffering severe heartburn at reading this new rule.

    4.    Packaging and labeling compliance in 2019. 

Under CDPH proposed permanent regulations, manufacturers will not have to implement child resistant packaging (CRP) for their cannabis products until 2020. In the interim, retailers will fill the gap by using CRP exit bags. And while CRP is going away for manufacturers, there are a slew of revised and new packaging and labeling standards being implemented upon the rules becoming effective in the new year. The outstanding issue then is that CDPH created no affirmative grace period for manufactured product that’s out there right now and compliant with the emergency regulations, but that doesn’t meet the new packaging and labeling regulations. (A great example is that manufacturers of certain products now have to put the universal symbol not only on outer packaging but also on the product container itself if that outer packaging is “separable” from the product container.) What’s for sure is that retailers cannot possess or sell finished product that doesn’t adhere to the new packaging and labeling rules. So, what exactly will happen to existing, non-compliant product in 2019? That remains a mystery.

    5.    Provisional licensing. 

Provisional licensing is the new temp licensing. (See here for more on the temp license race to secure provisionals for 2019.) Even though a provisional license is the new hot ticket in town, the BCC and CDPH have given no insight into how a licensee actually secures this license. I surmise that the issuance of provisionals will be automatic (similar to how the state was just renewing temp licenses automatically if a temporary licensee was in clear and earnest pursuit of its annual license). CDFA is the only agency that’s produced a fact sheet on the topic, but no agency has publicly announced the exact logistics around provisional licensing yet.

    6.    Social equity programs. 

For every city that’s done a social equity program, it’s been a challenge out of the gate to do it correctly and sustainably. Los Angeles is just getting started with its program while certain other California cities are trying but are producing meager results at best. While the state finally decided to financially back local social equity programs, it’s clear that the state and the cities need to study this particular social experiment for some time before a gold standard will actually emerge. In turn, the success of these programs is definitely a large unknown.

    7.    Banking.

Banking in California is the number question I get on a weekly basis at this point: namely, when the hell is it going to commence? I’m a firm believer that unless and until our permanent regulations are finalized and are proven to work relative to barriers to entry and vetting owners and FIHs, we will not see private sector banking in California. Our licensing and enforcement systems are still too loose/inchoate to satisfy the 2014 FinCEN guidelines, and no public bank is going to materialize here either for various complicated and practical legal reasons (be sure to watch out for banking fraudsters, too). And while California cannabis companies will likely continue to use management companies to help them alleviate some of the inability to access banking, it’s certainly not a long-term solution and it’s downright illegal when that relationship isn’t legitimate or at an arm’s length anyway.

    8.    Fee slotting agreements and anti-competitive tactics. 

On a regular basis now, I’m seeing retailers introduce to my cultivation and manufacturing clients a variety of fee slotting agreements so that my clients can secure known shelf-space in order to remain competitive. This month, I questioned whether such contracts were valid under MAUCRSA where anti-competitive behavior is strictly barred. Only time will tell whether regulators will address these agreements and their impact on the marketplace.

    9.    Tech platforms and delivery. 

The BCC seems to have developed an appetite for wading into increased regulation regarding retailers and delivery tech platforms. Pursuant to section 5415.1 of the proposed permanent BCC regulations, we now have a more robust code of conduct between retailers and tech platforms when it comes to delivery. Now that the BCC has finally opened the door to invading this relationship regarding contractual limitations and restrictions on advertising and marketing for licensees via tech platforms, it begs the question as to whether California is going to go further down the road of trying to essentially regulate tech platforms or not. Given the fact that California is one of the few states that’s embraced delivery, it’s a very important area for development, both legally and for public policy.

    10.    Corporate versus cottage debate rages on. 

Every single state that’s undertaken recreational cannabis has to battle between corporate and cottage interests. And every single state is different in how it’s handled the issue. In the proposed permanent regulations, it’s hard to tell which way California is leaning since those rules still contain some fairly big business friendly propositions (such as still being able to secure countless small cultivation license types, local law permitting, in order to aggregate big acreage) as well as some rules that cut against “Big Marijuana,” like having to disclose shareholders in a publicly traded company as FIHs unless they hold 5% or less of the equity. In 2019, I think we can fully expect the debate between small and large business interests to carry on, but where California lands remains unknown. That’s going to probably continue for quite some time as it works out the kinks spurred by the proposed regulations.

fourth circuit marijuana illegal search
Nice work by the court!

The Fourth Circuit Court of Appeals ruled last week that finding marijuana stems in a trash bag does not permit the police to search the house for evidence of a crime. From a legal standpoint this case has interesting implications on when, where, and what police can search. From a more practical perspective, it shows the courts, along with the majority of America, are accepting that marijuana is not a dangerous substance.

The case, United State v. Tyrone Lyles, saw Mr. Lyles accused of possessing firearms as a convicted felon. The police of Prince George County (in Maryland, right outside of Washington, D.C.) were investigating Mr. Lyles in an unrelated case. They searched four trash bags on a curb near his house and found three marijuana stems. Based on the marijuana stems, the police obtained a search warrant for Mr. Lyle’s house. In the application for the search warrant the police stated they had found the marijuana stems, rolling papers and based on this believed that there were “controlled dangerous substances, Marijuana, and handguns being stored, used and/or sold” at Mr. Lyles home.

Based on this information, the police were granted a broad warrant and allowed to search Mr. Lyles home in total. The police, during the search, found four handguns, ammunition, marijuana, and drug paraphernalia, in Mr. Lyle’s house. Mr. Lyle asked that the evidence found in his home be suppressed because there was not sufficient evidence to search his home based on the discovery of three marijuana stems in his trash.

The Fourth Circuit agreed. The court, in its decision, first reiterated the fact that police have the right to search trash that that has been left at the curb and that evidence found in trash can be used to support a warrant to search other premises. The Fourth Circuit recognized, that while the police can search trash, that there is limitations to what can be presumed from the discovery of the evidence in the trash. Focusing on the facts from Mr. Lyles’s case, the Fourth Circuit determined there was simply too little marijuana found in the trash to presume that Mr. Lyle had more marijuana in his home. The Fourth Circuit agreed with Mr. Lyles that the tiny quantity of discarded residue gave no indication of how long ago marijuana may have been consumed in Mr. Lyle’s home.

So what does this mean? The police used marijuana as an excuse to search Mr. Lyle’s house for evidence of crimes related to marijuana, money laundering, and hand guns. The Fourth Circuit essentially said the police cannot presume that someone has committed crimes related to controlled substances or to other crimes when a small amount of the substance has been found in the trash. This is important because in other cases, the Fourth Circuit has determined that evidence of a controlled substance in someone’s trash is sufficient for a warrant to search that person’s house. Perhaps the distinction here is that such a small amount was found, or perhaps it is evidence that the federal courts are no longer considering marijuana a dangerous drug that is evidence of other crimes (what if they had found a small amount of heroin?).

It will be interesting to see if any of the other federal circuits follow the Fourth Circuit’s helpful precedent, or if prosecutors decide to appeal this decision to the Supreme Court.

CBD product recall litigationWe counsel our cannabis (and non-cannabis) clients extensively on product liability issues, and have warned them that the federal illegality of their products will not shield them from the same products liability risks faced by companies in other industries. We extend the same warnings to our cannabidiol (CBD) clients, who, if they are operating outside of a state-run cannabis licensing regime, are actually in a position of even greater risk. Lack of regulation in the CBD space is to the detriment of consumers, who often cannot be certain what ingredients the products they purchase actually contain, or whether those products are safe and free of contaminants.

It’s only a matter of time before harmed consumers start suing CBD companies alleging defective, dangerous, or mislabeled products (and Proposition 65 violations). Here are some posts we’ve written about product liability in the cannabis industry, which are highly relevant to CBD companies as well:

Recently, Vice published an alarming article about a new study that detected synthetic marijuana and a compound in cough syrup in one CBD company’s vape products. The article summarizes the findings of Michelle Peace, a toxicologist and vaping expert at Virginia Commonwealth University who evaluates how electronic cigarettes are being used for substances other than nicotine. Peace received a tip that a product supposedly containing only CBD had psychedelic effects for a consumer. Upon further testing, she discovered that out of nine products tested, four contained synthetic marijuana (5-fluoro MDMB-PINACA (5F-ADB)) and one contained dextromethorphan, an ingredient in cough syrup.

Unfortunately, these findings do not surprise us. We’ve long been wary of the proliferation of CBD products with very little regulation from federal or state governments. Some states have taken steps to combat these unregulated products. In July of this year, the California Department of Public Health’s Food and Drug Branch (CDPH) issued an FAQ on CBD in food products stating:

“[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.”

In California, CBD products derived from marijuana and produced by licensed cannabis manufacturers may be sold, but unregulated, industrial-hemp-derived products intended for consumption may not.

So, what should CBD companies be doing to protect themselves from consumer product liability claims? Of course, we recommend implementing robust testing protocols that are in line with those required by state agencies of cannabis manufacturers. The first step in protecting your company is ensuring that your products are safe. In the same vein, be sure that everything you state about your product is accurate.

And oftentimes, one of the best ways to mitigate against product liability claims is to institute a product recall, and having a product recall plan in place will facilitate this. In crafting that plan, below are some recommendations we’ve made before, which bear repeating:

  1. Create an overall recall strategy.
  2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for cannabis businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.
  3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is important to learn about product problems as early as possible.
  4. Develop a complaint receipt and evaluation method to ensure your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.
  5. Truly ponder what your product complaint investigation will entail. What facts should your recall committee be gathering when seeking to determine if a product complaint is valid or if a recall is warranted? What should your recall look like, as based on the facts and circumstances and the threat your product may pose to consumers and vendors?
  6. Create a distribution list so your product recall committee can quickly and easily identify all affected products and product lots for disposition and potential destruction. The distribution list should — at minimum — include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here. Our firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s failure to notify this one supermarket company and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.
  7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.
  8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. For this you absolutely need attorney help.
  9. Make sure to as quickly as possible (preferably in advance) alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.
  10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so you are not scrambling to try to figure out your possible options later, when you have no time to do so.
  11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to the foregoing, we also recommend regular compliance audits to ensure that your procedures are safe, legal and effective. It is only a matter of time before CBD product liability claims start to proliferate, and CBD companies should prepare for that reality now.

california cannabis litigation
We see litigation in the California industry’s future.

Because California’s cannabis regulatory scheme is still in relative infancy, 2018 has looked the same for most operators: applying for annual licenses and waiting (and then continuing to wait) for them to issue or fighting to get temporary license applications submitted before they can no longer be issued. But what happens in two or three years after hundreds or thousands of commercial cannabis licenses have been issued? A host of administrative and civil litigation, probably.

California’s cannabis regulators have immense power that’s not just going to disappear after they issue licenses. The Bureau of Cannabis Control, which regulates a number of different license types, arguably has more police power than the actual police. Section 5800 of the BCC’s readopted emergency regulations, for example, gives the BCC “full and immediate access”, without prior notice, to enter premises, inspect cannabis or vehicles, and copy books and records, and failure of a party to comply with a BCC investigation can be subject to discipline.

Not only do the agencies have broad investigative power, but the subject matter of what they can investigate—all the various regulations that companies have to comply with—is immense. The regulators are not going to sit around and assume that licensees are following the law, the regulations, or even their own operational plans submitted with their applications—they are almost certainly going to use their investigative power to root out non-compliant operators. This should come as no surprise as the BCC, for example, has already taken some action against allegedly unlicensed cannabis operators. Our cannabis lawyers in other states with older licensing schemes have already seen targeted agency investigations and enforcement actions.

There are really endless ways that the agencies may choose to investigate or enforce their regulations, but it’s safe to say that they will prioritize enforcement against unlicensed operators. They may also go after some other easy targets—selling to underage persons, violations of advertising or delivery regulations, track-and-trace non-compliance, and so on. Rest assured, too, that administrative rules will continue to evolve, and licensed businesses that do not keep up on compliance will also be vulnerable.

Not only are the next few years likely to see an increase in administrative actions, but they are also likely to see a swath of civil litigation between licensees and internally. With the development of so much new technology and other intellectual property, we expect to see a good deal of trade secret and other IP litigation. Prop 65 and other forms of false advertising litigation are likely to continue as well. And internally, members of cannabis companies may start to bring lawsuits against each other or their companies for a number of reasons—from simple things like alleged mismanagement of company assets to fraud in soliciting investors.

The future of the California cannabis industry isn’t entirely certain, but it’s likely going to involve a lot of time before arbitrators, judges and other dispute resolution officiants.

asset forfeiture fine cannabis marijuana

We have handled a number of excessive fines cases on behalf of clients who’ve had their property seized, or threatened to be seized by the government. For some background on this, see our blog posts here and here.

The United States Constitution provides that excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted. U.S. Const., Amdt. 8. The Excessive Fines Clause “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” Austin v. United States, 509 U.S. 602, 609-10 (1993). That constitutional protection applies in cannabis cases, just like everywhere else.

On Wednesday, the United States Supreme Court heard oral arguments in the case of Timbs v. Indiana regarding whether the Eighth Amendment’s Excessive Fines Clause is incorporated against the States under the Fourteenth Amendment. The case involves the forfeiture of petitioner’s land rover as punishment for selling heroin. The Indiana Court of Appeal held that the forfeiture of the land rover was grossly disproportionate to the gravity of the offense. The Indiana Supreme Court reversed and concluded that because states are not subject to the Excessive Fines Clause, the forfeiture was not unconstitutional.

The predicted outcome is that the United States Supreme Court will apply the Excessive Fines Clause against the states. The Timbs decision will have nationwide impacts for those accused of drug crimes and other offenses, and will be an important check on the government’s power to interfere with private property. That would be great news for the cannabis industry.

As stated in the petitioner’s opening brief:

“The right to be free from excessive fines is fundamental and applies to the States. The power to fine is—and has always been—a formidable one. And unlike every other form of punishment, fines and forfeitures are a source of revenue for the government, making them uniquely prone to abuse. The accompanying risk to life, liberty, and property is very real. “[I]n a free government,” after all, “almost all other rights would become utterly worthless, if the government possessed an uncontrollable power over the private fortune of every citizen.” 3 Joseph Story, Commentaries on the Constitution of the United States § 1784, 661 (1833).”

It’s a compelling argument, and you can read the full brief here.

We will be monitoring this case and will provide an update once the decision is published.