Join the World Law Group for an upcoming webinar on vaping and the legal issues related to the current controversy in the U.S. and anticipated developments in Europe—all WLG members, lawyers and clients are welcome to join us on November 19, 2019, from 8 – 9 a.m. PST,.

The webinar will focus on legal issues, including:

  • Vaporizing and what it is;
  • What we know about vaporizing health implications for tobacco and cannabis;
  • Differences between tobacco and cannabis with respect to vaping;
  • How different U.S. states are banning vaping;
  • What we have seen in insurance policies;
  • Risk mitigation for cannabis and tobacco companies; and
  • Other issues such as the impact on valuation of cannabis companies

Lane Powell will be represented by attorneys Josh Ashby and Pilar French as key speakers in the online event.

Register today!

Last week, federal Judge Marsha Pechman sent an ominous signal regarding the enforceability of cannabis contracts by issuing an Order to Show Cause, in which the parties have to show why the court should not dismiss the case. If the parties cannot show cause under the Order, the case will be dismissed based on the contract at issue’s unenforceability – a decision that should send a shiver down every cannabis business. This dismissal would not be precedential, but it would send a strong signal about how federal courts will treat contracts concerning cannabis.

The case, Left Coast Ventures, Inc. v. Bill’s Nursery, Inc. (case no. 2:19-cv-01297), revolves around defendant Bill’s Nursery, Inc. (“Bill’s Nursery”) alleged breach of an option agreement whereby plaintiff Left Coast Ventures (“Left Coast”) allegedly had an option to purchase Bill’s Nursery. Left Coast claims that Bill’s Nursery reneged on the agreement and filed suit.

The lawsuit was originally filed in Washington state court but was removed to federal court based on diversity jurisdiction.

The Order to Show Cause states that the contract at issue may be unenforceable under the federal Controlled Substances Act (“CSA”) because it concerns cannabis businesses, and cannabis remains an illegal substance under the CSA. Generally, the longstanding Erie doctrine provides that federal courts follow state substantive law, so contract issues are dictated by state law. Judge Pechman distinguished from that and stated,

Although Washington law governs the breach of contract claim, “where it is alleged that an agreement violates a federal statute, courts look to federal law.” Polk v. Gontmakher, No. 2:18-CV-01434-RAJ, 2019 WL 4058970, at *2 (W.D. Wash. Aug. 28, 2019) (citing Kelly v. Kosuga, 358 U.S. 516, 519 (1959) (“the effect of illegality under a federal statute is a matter of federal law”).

Judge Pechman cited directly to Polk v. Gontmakher, another cannabis contract case that was dismissed earlier this year on similar grounds. It would be a strong signal for a second case to be dismissed on unenforceability in a few months, and both here in Western Washington, which has had state-legal cannabis for seven years now.

It is not necessarily surprising that a federal judge would have this opinion, but what is notable is that we are getting these opinions in 2019, many years after cannabis was legalized. This certainly was not the first time contract enforceability between cannabis companies has come up.

If federal courts are willing to find whole contracts unenforceable due to the illegality of cannabis, then it is difficult to imagine how much weight specific provisions within those contracts would have. That said, it is still a good idea to include provisions in contracts acknowledging the federal illegality of cannabis, including a covenant that the parties agree not to raise the argument of enforceability in litigation. Most of these contracts are still litigated in state courts where they will still be held enforceable, and the risk of federal court does not negate the good sense of having a well-drafted agreement.

As we discussed last week, the United States Department of Agriculture (“USDA”) released their interim final rules for hemp manufacturing, and those rules were published in the Federal Register on Thursday, October 31. Hemp growers should note the rules on testing within the 0.3% limit that dictate whether the produced crop is classified as marijuana or hemp. These rules provide for potentially onerous situations for growers, though they are not unexpected.

Pre-Harvest Testing

Within 15 days prior to the anticipated harvest date, a designated person (from a governmental or law enforcement agency) must collect samples of the crop. While this requirement is simple enough, it could end up having important ramifications if the state agency doing the sampling takes longer than 15 days. We are familiar with multiple experiences of Washington growers having to wait many weeks for the Washington State Department of Agriculture (“WSDA”) to take samples. The USDA itself notes that sampling beyond the planned harvest date could result in tests higher in delta-9 tetrahydrocannabinol (“THC”) than they otherwise would. This occurs because cannabis plants convert cannabinoids to delta-9 THC as they approach maturity and harvest. This could mean the difference between whether an entire crop is destroyed or not, so the stakes are high.

Acceptable Hemp THC Level

The interim rules provide for some interesting tolerances on the 0.3% delta-9 THC limit, and explicitly states that product could test slightly over that limit but still qualify as hemp. The relevant rule states, “The method used for sampling from the flower material of the cannabis plant must be sufficient at a confidence level of 95 percent that no more than one percent (1%) of the plants in the lot would exceed the acceptable hemp THC level.” “Acceptable hemp THC level” means,

Acceptable hemp THC level. When a laboratory tests a sample, it must report the delta-9 tetrahydrocannabinol content concentration level on a dry weight basis and the measurement of uncertainty. The acceptable hemp THC level for the purpose of compliance with the requirements of State, Tribal, or USDA hemp plans is when the application of the measurement of uncertainty to the reported delta-9 tetrahydrocannabinol content concentration level on a dry weight basis produces a distribution or range that includes 0.3% or less.

The rule then provides an example for how this could occur. When cannabis is tested, there is a margin of error of the precision of the result. This margin of error, or “confidence level,” must be reported in addition to the actual result. For example, if a sample is tested as being 0.33% delta-9 THC, but the confidence level was 95% (meaning a 5% margin of error), that means that the sample could actually contain anywhere between 0.28% and 0.38% delta-9 THC. Therefore, because the sample could be under the 0.3% limit, it qualifies as hemp.

That same sample could fail if the test had only a 2% margin of error, because the sample then could contain only between 0.31% and 0.35% delta-9 THC.

Confidence Level

As you can imagine, this creates an interesting moral hazard on the testing laboratories, who could then be incentivized to provide as imprecise results as possible in order to appease their customers. That is why the rule requires a 95% confidence level, or no more than a 5% margin of error. Even with that margin, testing labs will still likely be incentivized to stay at that margin of error rather than trying to minimize the margin, as one might expect a scientist would hope for.

Decarboxylation

The rules state that the testing method must include a validated testing methodology that uses postdecarboxlyation “or other similarly reliable methods.” The rule states that other methods that are currently acceptable include gas or liquid chromatography. Postdecarboxlyation is the value determined that determines the delta-9 THC content in a sample after decarboxylation, which is defined in the rules as “the removal or elimination of carboxyl group from a molecule or organic compound.” In laymen’s terms, the sample is burned or heated to convert the non-intoxicating cannabinoid THCA to the intoxicating delta-9 THC cannabinoid.

Test Failures

The stakes for growers are quite high because if the samples test above 0.3% delta-9 THC, then legally they are marijuana and not hemp. Marijuana is still a Schedule I narcotic under the Controlled Substances Act and thus regulated extremely tightly. This means that the entire lot will have to be destroyed. And it doesn’t stop there: the party destroying the product must be licensed by the Drug Enforcement Agency to handle Schedule I drugs. The sample applies for the testing laboratories, because if a sample fails the test, these laboratories will then be in possession of Schedule I drugs. The rules currently don’t provide for any mechanism to cure defective lots, such as removing delta-9 THC through post-harvest extraction. It is possible that, after receiving comments from stakeholders, the USDA will provide for such mechanisms.

On October 29th the United States Department of Agriculture (“USDA”) released draft rules for hemp manufacturing and the state regulatory programs that oversee the industry with a press release. These rules will become effective when published in the Federal Register on Thursday, upon which a 60-day public comment period shall begin. At 161 pages long, the draft rules cover testing protocols, where hemp can be grown, how product should be disposed of, licensing procedures, and other requirements such as providing GPS coordinates. The USDA released sampling and testing procedures concurrently with the draft rules.

USDA Secretary Sonny Perdue said in a tweet, “At USDA, we are always excited when there are new economic opportunities for our farmers, and we hope the ability to grow hemp will pave the way for new products and markets.” The industry has waited for these rules ever since the passage of the 2018 Farm Bill that legalized hemp nearly a year ago, and the rules finally provide specifics on how the USDA and states will regulate hemp.

More information on USDA hemp rulemaking can be found here.

While we haven’t yet reviewed the entire document, some interesting points in the draft rules include:

  • Samples shall be collected within 15 days of the anticipated harvest. The rules point out that delaying could affect the concentration of delta-9 tetrahydrocannabinol (“THC”). It will be interesting to see whether states will actually comply with this, and whether there will be repercussions for states or licensees if not. We know that the Washington State Department of Agriculture (“WSDA”) requests 30 days’ notice before they test a crop, but has struggled to make timing commitments, leaving licensees with delayed testing and delayed harvests.
  • The rules provide that sampling must “be sufficient at a confidence level of 95 percent that no more than one percent (1%) of the plants in the lot would exceed the acceptable hemp THC level.”
  • “Acceptable hemp THC level” means that the rules allow for a certain amount of uncertainty in the testing, such that a crop may fall under the 0.3% limit and still qualify as hemp even if it tests above 0.3%. The rules state, “For example, if the reported [THC] content concentration level on a dry weight basis is 0.35% and the measurement of uncertainty is +/- 0.06%, the measured [THC] content concentration level on a dry weight basis for this sample ranges from 0.29% to 0.41%.”
  • The USDA is considering establishing hemp laboratory approval processes.
  • If tested plants exceed the 0.3% acceptable limit, then legally it is marijuana and not hemp. As a result, it is a Schedule I drug and it must be collected for destruction by a person authorized under the Controlled Substances Act to handle marijuana.
  • The rules direct states to provide procedures for determining negligence in hemp production, and specifically state that plants grown that tested 0.5% THC or below will not constitute an act of negligence.

The above are simply a few highlights and are by no means comprehensive. Expect some deeper dives into the rules in the coming days and weeks. As always, if you are a hemp company with questions regarding these rules or hemp laws in general, please contact us.

On September 25, the U.S. House of Representatives passed H.R. 1595, also known as the SAFE Banking Act of 2019, which aims “to increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses,” as stated in its purpose. The bill was subsequently referred to the Senate, where it was referred to the Senate Banking Committee to await its fate.

The bill would provide safe harbor to financial institutions that provide services to a “cannabis-related legitimate business,” which is defined essentially as a company that produces, sells, and distributes (etc.) cannabis “pursuant to a law established by a State or a political subdivision of a State.” The Financial Institutions Examination Council is required to develop uniform guidance and examination procedures for financial institutions within 180 days of the bill’s enactment.

Interestingly, the bill also includes language on hemp and cannabidiol (“CBD”), which was legalized in late-2018, but still faces significant issues with banks for its close association with cannabis. The bill states, “The Congress finds that… despite the legalization of hemp, some hemp businesses (including producers, manufacturers, and retailers) continue to have difficulty gaining access to banking products and services[,] and businesses involved in the sale of hemp-derived cannabidiol (“CBD”) products are particularly affected, due to confusion about their legal status.” The bill directs federal banking regulators to issue guidance to financial institutions within 90 days of the bill’s enactment to “confirm the legality of hemp” and to provide best practices for financial institutions to follow when serving hemp and CBD companies. It is likely that this was done to appease Senate Majority Leader Mitch McConnell, a known advocate for hemp (but not cannabis).

It is difficult to speculate on the fate of the bill’s sister bill in the Senate, S. 1200, but it currently has 33 co-sponsors, including five Republicans.

Banking remains one of the largest issues for cannabis companies across the country. The cannabis industry still transacts almost entirely in cash and there are very few state-charted banks and credit unions who will serve it, resulting in exorbitant fees just to have these accounts. Because non-hemp cannabis is still federally illegal and because of the inherent difficulty in determining the legal status of hemp, national banks will not knowingly provide services to these companies. In addition to the high fees the companies must pay to the few institutions that will take them, companies also face a massive shortage in lending and capital, and when they can find it, they often face onerous interest rates and terms. If this bill were to pass Congress and be signed by the President, who has not indicated any opposition, this could be a massive boon to the cannabis industry.

The Washington State Liquor and Cannabis Board (“WSLCB”) often moves slow with rulemaking (we’re still waiting on rules for SB 5318, which was signed into law in May and went into effect in July), but occasionally they move fast. As I reported last week, on October 9 the Washington State Department of Health (“DOH”) voted to adopt rules that banned flavored vapor products, which included a rather porous definition of what was being banned.

As I alluded to in my previous post, the definition of “characterizing flavor,” which is central to the definition of “flavored vapor product,” could be reasonably interpreted differently. It could be interpreted as allowing marijuana/hemp-derived compounds (namely, terpenes) while prohibiting compounds derived from other sources, such as fruit or other plants. We at Lane Powell interpreted the rule to emphasize the importance of the taste or aroma of the compound, and whether or not it was a taste or aroma distinguishable from tobacco or marijuana (remember, this rule applies to both tobacco and marijuana). So we believed that the rule did not expressly prohibit non-marijuana/hemp derived terpenes if they provided a taste or aroma of marijuana, though we acknowledged the rule wasn’t explicitly clear on that.

The WSLCB’s Broader Take

Unfortunately, the WSLCB has a markedly different interpretation of ours, and provided further guidance to stakeholders via multiple emails in the evening of October 11. In one of their emails, they directed stakeholders to this webpage on the WSLCB’s website where they provided guidelines that, while their enforceability is questionable, at least provided more clarification than the DOH rule itself. The WSLCB states the following:

Not-Allowed and Allowed Under Emergency Rule
Per the State Board of Health’s emergency rule amending 246-60 WAC and the definition of “characterizing flavor” contained therein:

Not Allowed Allowed
Synthetic terpenes and terpenoids or other synthetic flavoring compounds Terpenes and terpenoid derived directly and solely from marijuana, as defined in RCW 69.50.101(y), or hemp plants that have been grown and tested as required by state law
Botanically-derived terpenes, terpenoids or other botanically-derived flavoring compounds, except if directly derived and solely from marijuana plants tagged within the I-502 system or hemp plants
Any other compounds that impart a “characterizing flavor” that is not specifically excluded

Any licensees wondering about the vagueness of the DOH rules should take the WSLCB’s interpretation into account, and be aware that selling marijuana products with botanically-derived terpenes risk enforcement action from the WSLCB. Licensees should also be aware of the importance of the rulemaking process, a process that the WSLCB has subverted in this case, and that this could weigh heavily if a licensee chose to appeal an enforcement action against them.

Improper Rulemaking Procedures

Like all government agencies, the WSLCB cannot reinterpret or change rules on a whim without proper procedure. The Administrative Procedure Act (“APA”) requires agencies to follow certain procedures, such as providing the public with notice and comment periods, and submitting rules to the Code Reviser’s Office. None of these procedures were followed by the WSLCB’s posting of the above information, so the information is technically not a rule.

It is also important to note here that the WSLCB has authority to enforce its own rules, but it generally should not be enforcing rules of other agencies. For example, if a licensee is delinquent in paying its taxes, the WSLCB can (and does) cooperate with the Department of Revenue to see that those taxes are collected, but the WSLCB does not use its limited resources to have its enforcement officers act as tax collectors. And while the WSLCB may deny issuance or renewal of a license due to unpaid taxes, that’s because they have an administrative rule that explicitly provides for that (see WAC 314-55-050(12)).

This is not the first time that the WSLCB has issued what amounts to rules without following proper rulemaking procedures, nor is it likely the last. For example, the WSLCB periodically issues newsletters highlighting current issues and rules concerning marijuana licensees, often including reinterpretations of rules, not just mere restatements. These newsletters are issued without following notice and comment requirements of the APA, but licensees generally must follow them as if they were rules because, again, to not do so puts them at risk of enforcement action.

This lack of procedure is worth raising on appeal of an enforcement action. But just to get there would require a months-long process at a minimum, often spending tens of thousands of dollars in legal fees. Thus, leading licensees face the uncomfortable decision of whether to follow this guidance despite not being an actual rule. As a practical path-of-least-resistance, we believe following the WSLCB’s guidance is sensible, despite the principal of the matter and lack of proper rulemaking.

Other Important Guidance

In a separate email, the WSLCB directed cannabis licensees to do the following:

  1. Cease Sales of Flavored Vapor Products. The LCB directs all tobacco retailers and vapor licensees to immediately cease sales and/or gifting of flavored vapor products.
  2. Signage. Print and prominently post this warning sign in retail locations. A Spanish version will be available soon.
  3. Cooperate with the ongoing epidemiological investigation. Local, state and federal health agencies are looking into which products have been involved with Washington cases of lung injury. We ask for your cooperation if you are contacted by someone from a state or federal epidemiology team and/or a representative from your local health jurisdiction.

We will be keeping a close eye on this issue and will update matters as they come.

On October 11, the Oregon Liquor Control Commission (“OLCC”) filed emergency rules banning the sale of flavored vaping products in Oregon for the six-month period beginning on October 15, 2019. The rules follow an October 4 executive order from Governor Kate Brown, which directed the agencies to adopt emergency rules banning the sale of “all flavored vaping products.” The Oregon Health authority has filed similar rules covering nicotine vaping products. Oregon’s ban closely follows a similar ban in Washington this week. New York and Michigan have also moved to ban flavored vaping products, and Massachusetts banned all vaping products last month.

The emergency rules add OAR 845-025-2805 to the Oregon Administrative Rules covering cannabis. Beginning on October 15, 2019, the OLCC will prohibit processors from making, and retailers from selling, cannabinoid vaping products that contains a “flavor” or a “non-marijuana terpene.” “Flavor” is defined as any “artificial or naturally-occurring substance that contains a taste or smell, other than the taste or smell of cannabis, that is distinguishable by an ordinary consumer either prior to or during the inhalation of the product, including, but not limited to, any taste or smell relating to chocolate, cocoa, menthol, mint, wintergreen, vanilla, honey, nut, fruit, any candy, dessert, alcoholic or non-alcoholic beverage, herb, spice or concept flavor.” “Non-marijuana terpene” means “a terpene or terpenoid derived from a source other than marijuana.”

Violations of OAR 845-025-2805 are Category I violations, which can be grounds for immediate suspension or cancellation of a license. The OLCC indicated in a press conference that they may do a soft rollout of sanctions against violators, including warning letters or fine, but this is not reflected in the rule text.

How the agencies will enforce this ban is unclear – terpenes that occur naturally in marijuana are also found in other botanicals. The use of non-marijuana terpenes, which are cheaper and do not require an OLCC license to produce, is common in the industry. Determining the source of a particular terpene in a vaping product presents an acute challenge for state labs that are already struggling to tell the difference between marijuana and hemp.

The OLCC will consider any “public statement or claim, whether express or implied, made or disseminated by the licensee or licensees responsible for the manufacture of a cannabinoid vapor product, or by any person authorized or permitted by the manufacturer to make or disseminate public statements concerning such products, that a product has or produces a taste or smell other than a taste or smell of cannabis” (emphasis added) to be presumptive evidence of the use of a flavor or non-marijuana terpene. Note that the underlined text in the preceding sentence likely include employees and contractors hired to do social media or other advertising. Licensees need to keep a close watch on advertising on a go-forward basis, and should also be diligent about scrubbing past posts or ads that make such claims.

The emergency rules do contemplate a process whereby the OLCC can approve requests by processors to add non-marijuana terpenes to vapor products, “so long as every component of the terpene compound is naturally found in cannabis.” The rules mandate that the OLCC will establish form and manner to submit such requests on or before November 15, 2019. The language indicates that a licensee, rather than an unlicensed manufacturer of non-marijuana terpenes, must drive the approval of a particular additive. It is not clear from the rule whether the approval of a particular additive would be limited to its use by the licensee for which it was approved, or if approval for use would allow any licensee to then use the approved additive.

The OLCC has posted a compliance bulletin that answers some of the practical questions around the implementation of the ban. Lane Powell’s cannabis team is closely monitoring this situation as it develops. Please contact us with questions about how the ban affects Oregon businesses.

UPDATE: Please see this post for an important update to this issue.

The Washington Department of Health (“DOH”) held a public meeting on October 9 where they discussed Governor Jay Inslee’s recent executive order requesting that the DOH adopt emergency rules banning flavored vapor products, including flavored cannabis vapor products, and voted to adopt an emergency rule banning the products. The new rules use a defined term for “characteristic flavor,” which is used to distinguish permissible vapor products from impermissible ones. These rules will significantly affect the cannabis industry, but it is important to note that the rule does not amount to an outright ban of all cannabis vapor products.

In the Wake of an Outbreak

This flurry of government activity comes in the wake of an outbreak of illnesses and deaths across the United States related to vaporizing, and numerous other states have issued bans of their own. DOH’s stated reason for adopting the emergency rules is concern for public health and protecting youth:

The State Board of Health’s Health Impact Review of HB 1932 found strong evidence that prohibiting the sale of flavored vapor products will likely decrease initiation and use of vapor products among adolescents and young adults. Reducing the initiation and use of vapor products by youth and young adults will reduce the exposure of our most vulnerable population to the current outbreak of severe lung disease associated with the use of vapor products.

The cause of the outbreak has yet to be determined. While reducing youth use of vapor products is a legitimate goal, the ban is questionable if the recent illnesses are in fact found to be a result of substances other than flavoring, or the ban does not reduce overall consumption rates. The DOH emergency rules cite the 2018 Washington State Healthy Youth Survey which showed an increase in teen use of tobacco vapor products. However, that same survey showed that use of cannabis overall did not increase post-legalization, and in some instances actually decreased.

“Characterizing Flavor” Defined

The DOH emergency rules defines flavored vapor product as “any vapor product that imparts a characterizing flavor,” which in turn is defined as:

‘Characterizing flavor’ means a distinguishable taste or aroma, or both, other than the taste or aroma of tobacco or marijuana or a taste or aroma derived from compounds or derivatives such as terpenes or terpenoids derived directly and solely from marijuana, as defined in RCW 69.50.101(y), or hemp plants that have been grown and tested as required by state law, imparted by a vapor product. Characterizing flavors include, but are not limited to, tastes or aromas relating to any fruit, chocolate, vanilla, honey, candy, cocoa, dessert, alcoholic beverage, menthol, mint, wintergreen, herb, or spice. A vapor product does not have a characterizing flavor solely because of the use of additives or flavorings or the provision of ingredient information. It is the presence of a distinguishable taste or aroma, or both, that constitutes a characterizing flavor.

It is important to recognize that “characterizing flavor” does not include the natural taste or aroma of cannabis or hemp, or of terpenes or terpenoids derived from cannabis hemp. Thus, cannabis vapor products containing taste or aroma profiles derived from cannabis or hemp should be permissible. It is noteworthy that this ban only pertains to those compounds with a “distinguishable taste or aroma,” so compounds that do not have such qualities likely could still be added after this rule.

Terpenes: Derived from Where? The Rule’s Ambiguity

Though it is not obvious, cannabis producers regularly add terpenes to their products to enhance the natural flavors and aromas of the plant. Some of these terpenes are derived from cannabis, some from hemp, and some from other sources.

For the uninitiated, terpenes are organic compounds produced in many different plants (even some insects) that often emit a strong odor. Limonene, for example, is a terpene that is naturally produced by cannabis and is found in popular strains for its citrus flavor (see: Lemon Haze). But it’s also naturally produced by lemons and oranges, and you can often find it in your lemon-scented essential oils or dish soap.

Some may interpret the rule’s definition carving out a taste or aroma derived from marijuana or hemp to mean that tastes or aromas from other sources and added to a vape product result in a prohibited flavored vape product. However, it can—and arguably should–also be interpreted that key to the definition of “characterizing flavor” is that it is a distinguishable taste or aroma other than tobacco or marijuana, implying that non-marijuana/hemp derived compounds that provide the taste or aroma of marijuana could be allowable. Further, it could be argued that the carve-out for tastes and aromas from marijuana or hemp permits tastes and aromas other than tobacco or cannabis.

The last two sentences in the definition of “characterizing flavor” support the interpretation that vape products may include non-marijuana and hemp additives. Those sentences provide that a vapor product does not have a characterizing flavor “solely because of the use of additives or flavorings or the provision of ingredient information. It is the presence of a distinguishable taste or aroma, or both, that constitutes a characterizing flavor.” This supports a position that additives or flavorings may be added provided they do not otherwise result in a characterizing flavor.

Some cannabis stores have already stopped selling any vapor products that include any non-marijuana/hemp-derived compounds. We anticipate further guidance on these issues. The key takeaways from the current rules are as follows:

  • Marijuana/hemp-derived compounds are allowable, regardless of what taste or aroma they result in;
  • Non-marijuana/hemp-derived compounds that provide the taste or aroma of cannabis could be allowable, though the rule isn’t explicitly clear; and
  • Non-marijuana/hemp-derived compounds that result in a non-cannabis taste or aroma (such as a fruit, chocolate, honey, etc.) are likely not allowable.

The WSLCB Responds

Hours after the DOH vote on October 9, the Washington State Liquor and Cannabis Board (“WSLCB”) emailed stakeholders notifying that, effective midnight, flavored vapor products could no longer be sold to retail stores by processors or to the general public. The WSLCB also (1) required retail stores to prominently post this warning sign in their stores, (2) reminded licensees of packaging and labeling rules, (3) required licensees to disclose to the WSLCB all compounds used in the production and processing of vapor products, and (4) required licensee to cooperate with the ongoing epidemiological investigation.

Cannabis producers and processors will be grappling with these new rules, and can expect more follow-up regulations from the WSLCB. It remains unclear how these rules will be enforced, and what the penalties for non-compliance will be. Regardless, companies would be well advised to be aware of the new rules.

On September 17, Senate Majority Leader Mitch McConnell proposed language that directs the U.S. Food and Drug Administration (“FDA”) to issue policies on regulating and enforcing regulations on the use hemp-derived cannabidiol (“CBD”) in products. This language would be inserted into a congressional spending report and would direct the FDA to provide a report to congress within 90 days, stating the FDA’s “progress” towards analyzing data to determine its policy of enforcement discretion. Secondly, the language would direct the FDA to issue a policy on that enforcement discretion concerning “certain products containing CBD meeting the definition of hemp[.]” Though this has been reported as clearing a path for CBD products, that is not necessarily the case.

The FDA’s Current Position on CBD

When the Farm Bill passed late last year, then-FDA Commissioner Scott Gottlieb issued a press release stating that it is unlawful to sell food or dietary supplements containing hemp-derived CBD, mainly because it is an active ingredient in the FDA-approved drug Epidiolex. This position was reiterated earlier this year and remains the agency’s current position. The FDA did have a public hearing on May 31, 2019, to discuss these products, and there have been rumors of the FDA may loosen this position in the future. But until that occurs, companies selling these products do so at risk of enforcement action from the federal government (and from local and state government), particularly if they do so while making medical claims about the products.

The Proposed Language

The proposed language does not specify which products the FDA will issue a policy on; it merely uses the term “products.” Presumably the FDA will have to issue a policy for both food and dietary supplements. Currently, the FDA is not scrutinizing cosmetics that contain hemp-derived CBD. What’s most important to note in this language is that it directs the FDA to determine a “policy of enforcement discretion,” which is quite vague. The FDA could simply implement its current policy of prohibiting food and dietary supplements containing hemp-derived CBD.

The language also states,

FDA is encouraged to consider existing and ongoing medical research related to CBD that is being undertaken pursuant to an Investigation New Drug (IND) application in the development of a regulatory pathway for CBD in products under the jurisdiction of FDA and to ensure that any future regulatory activity does not discourage the development of new drugs.

Existing and ongoing medical research is generally showing CBD to be potentially beneficial for a number of different diseases. But that doesn’t mean that it can, or should, be used in food or dietary supplement. The language just doesn’t seem narrow enough to direct the FDA one way or the other.

But this proposed language should be taken in the context of other congressional pressure on the FDA. Last week, two representatives (from both political parties) circulated a letter to the House urging their colleagues to demand the FDA establish regulations that would allow the use of hemp-derived CBD in food and dietary supplements. The letter points out that though CBD is currently classified as a drug (Epidiolex), it has the authority to classify lower doses of CBD in food and dietary supplements as allowable.

This is on top of a budget amendment approved in June setting aside funds for the FDA to set a “safe level for conventional foods and dietary supplements containing cannabidiol (CBD).” While this amendment still needs to be approved by the whole House and by the Senate, the FDA may take these signs and move to regulate CBD products in a less strict manner than its current position.

Potential for Preemption?

When the FDA does issue final regulations on food and dietary supplements containing hemp-derived CBD, questions will remain as to whether those rules will trump state laws already passed on the subject. The Supremacy Clause of the U.S. Constitution states that when federal and state laws conflict, or where the federal government has clearly laid out a regulatory field for itself, conflicting state law will be invalidated. This will likely be an issue for CBD laws.

Take California for example, where AB 228 is currently winding its way through the legislature, and states that food containing CBD regulated by state law will not be considered adulterated. Many other states have similar laws already, including Colorado, Maine, New Mexico, and Wisconsin. Will these laws be preempted by FDA policy? They likely will, which will then set up yet another conflict between federal and state law and leave open the question of whether the states will have an appetite to openly defy the federal government (like states have done by legalizing cannabis), and whether the federal government will in turn have an appetite to enforce federal law.

Michigan’s Marijuana Regulatory Agency (MRA) issued its emergency administrative rules earlier this month, providing a framework for the state’s adult-use cannabis industry and detailing the license application process. The MRA stated in their July 3 press release that they plan to start accepting business applications on November 1.

Perhaps the most important rule that entrepreneurs should know: the MRA will only accept applications from businesses already licensed under Michigan’s medical cannabis laws for the first two years. This limitation was included in the ballot initiative that voters approved in November of 2018. So if one isn’t already licensed by the MRA, they may want to begin the application to become a licensed medical facility first. One can buy a preexisting licensed medical facility as well, though they will still have to obtain MRA approval for the purchase. The medical rules initially required that applicants be residents of Michigan, but this has since expired and applicants can now be out-of-state.

The MRA will accept applications for 12 different types of licenses under the adult-use rules, including retailers, secure transporters, safety compliance facilities, microbusinesses and growers. Grower licenses divided into Class A (up to 100 plants), Class B (up to 500 plants) and Class C (up to 2,000 plants).

The Application Process

The non-refundable application fee is $6,000. If a business isn’t already a licensee under the medical cannabis laws, they would have to complete that application process first, which would involve a separate $6,000 fee in addition to the adult-use application fee. The two are separate processes, but the new adult-use rules largely mirror the medical rules. Applicants should expect the application and approval processes to be very similar. Licensees will also have to pay annual licensure fees that are substantial compared to other states. The annual fees are separated into three tiers depending on the volume of a license’s sales compared to the market, so better performing businesses will pay higher fees than others will. Annual fees for retailers will range between $20,000 and $30,000. Annual feels for Class C growers will range between $30,000 and $50,000.

The application process is divided into two stages: pre-qualification and the license application. Pre-qualification includes criminal and financial background checks as well as an examination on the applicant’s feasibility. In order to proceed to the second stage, the applicant will need a compliant location and to provide the local ordinance of the municipality showing that cannabis businesses are allowed there. So applicants can begin the application process before they have found a location, but they will need a compliant location in order to obtain approval. If an applicant already has a location, they can begin both stages simultaneously, or nearly so.

Social Equity

One interesting facet of the rules is the requirement for businesses to detail plans to “promote and encourage participation in the marihuana industry by people from communities that have been disproportionately impacted by marihuana prohibition and enforcement and to positively impact those communities.”

The rules don’t go into further detail as to what a social-equity plan would look like. Social justice issues have often been included as reasons for legalizing cannabis, though actual measures have varied to encourage participation by “communities that have been disproportionately impacted by marihuana prohibition,” (which is essentially a careful approach to saying communities of color). Washington state has done very little, while cities like Oakland and Los Angeles have dedicated programs, though whether such programs have been a success remains unclear.

One roadblock that has already been removed for these communities is that the capitalization requirement for new applications have been removed. Medical cannabis applicants had to provide they had adequate capitalization (meaning, funding) to open their businesses, leaving many without access to capital out of the regulated industry. The new adult-use rules do away with this.

Resources

The MRA has provided a number of resources for license applicants. Businesses looking to apply for a Michigan medical cannabis license can apply here, though one may want to consult an attorney experienced in the space. The MRA has also provided an application instruction booklet.