The passage of the 2018 Farm Bill signaled a bright future for the U.S. hemp industry, authorizing individual states and the U.S. Secretary of Agriculture to formulate regulatory plans permitting commercial hemp production. Secretary of Agriculture, Sonny Perdue, recently testified that the U.S. Department of Agriculture (“USDA”) is working to finalize regulations in time for the 2020 growing season, with plans to consider proposed state regulations shortly thereafter. The USDA’s timeline creates a big, unanswered question — what protections, if any, does the 2018 Farm Bill provide for hemp produced under existing state programs created under the 2014 Farm Bill?

This is not an insignificant question. As the dispute over a truckload of hemp seized by Idaho authorities hurtles towards the Ninth Circuit Court of Appeals this week, one of the key issues is whether the interstate commerce protections in the 2018 Farm Bill apply to 2014 Farm Bill hemp. In this post, we outline a favorable industry position: that hemp produced in compliance with a state pilot program under the 2014 Farm Bill has interstate commerce protections provided in the 2018 Farm Bill.

The dispute in Idaho centers on the scope of Section 10114 of the 2018 Farm Bill. Section 10114 states, in part, “No State…shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State.” Subtitle G added Sections 297A through 297E to the Agricultural Marketing Act of 1946. 297C directs the USDA to establish a federal regulatory plan for hemp, under which hemp can be produced in states without their own regulatory framework. 297B describes the method by which states “desiring to have primary regulatory authority over the production of hemp” may do so, by having a regulatory plan approved by the USDA. 297B also allows the production of hemp in states without an approved plan “if the production of hemp is in accordance with Section 297C of this title or other Federal laws” (emphasis added).

Therefore, hemp may be produced “in accordance with subtitle G” in one of three pathways: 1) under a federal regulatory plan promulgated by the USDA, 2) under a plan created by a state and approved by the USDA, and 3) “in accordance with…other Federal law.” In denying a request for a preliminary injunction to release the Idaho hemp, the U.S. District Court of Idaho reasoned that no plan under 297B or 297C has been issued or approved under the 2018 Farm Bill. This holding recognizes only the first two regulatory pathways, and disregarded the third. The two recognized pathways are not the exclusive legal paths for hemp production in accordance with subtitle G.

Subtitle G, added to the Agricultural Marketing Act of 1946 by Section 10113 of the 2018 Farm Bill, expressly allows the production of hemp in states without an approved plan “if the production of hemp is in accordance with…other Federal laws.” One such federal law is 7 U.S.C. § 5940, enacted in 2014 as part of the 2014 Farm Bill. 7 U.S.C. § 5940 authorizes the production of hemp in states that have a “pilot program to study the growth, cultivation, or marketing of industrial hemp.” Oregon has such a program, authorized by ORS 571.300 et seq. The Oregon Department of Agriculture has made rules governing the production of hemp in Oregon (see OAR 603-048-0010 et seq.). Therefore, hemp produced by an ODA-licensed hemp grower, who is issued a license pursuant to the authority granted to the ODA by 7 U.S.C. § 5940 and ORS 571, is produced “in accordance…with Federal law,” and thus “in accordance with subtitle G,” and is protected in interstate commerce under Section 10114.

Finally, the 2018 Farm Bill specifically incorporates existing Federal law governing the production of hemp under 7 U.S.C. § 5940. Section 7605(b) of the 2018 Farm Bill repeals 7 U.S.C. § 5940 “1 year after the date on which the Secretary establishes a plan under section 297C.” In other words, existing state pilot programs are incorporated into the new Federal hemp regulatory regime, and function as the method by which states can legally produce hemp “in accordance with…Federal law” until one year after the USDA approves plans under 297B and 297C.

Encouragingly, recent case law offers some support for interstate commercial sales of 2014 Farm Bill hemp. Relying on the 2014 Farm Bill and subsequent language in Consolidated Appropriations Act of 2018, an administrative law judge ruled that hemp-derived CBD was mailable and that Congress had “clarified its intention to allow interstate transportation” of hemp grown in accordance with the 2014 Farm Bill.

We are watching closely for developments in the Ninth Circuit as the Big Sky case is appealed and will provide updates here. In the meantime, If you have questions about the production and transportation of 2014 Farm Bill hemp, our cannabis team can assist.

On March 7, Rep. Ed Perlmutter (D-CO) introduced into the 116th Congress H.R. 1595, the Secure and Fair Enforcement (SAFE) Banking Act of 2019. The Act will, in spite of the federal Controlled Substances Act’s scheduling of marijuana, prohibit the federal banking regulators from taking actions against banks that are providing services to cannabis businesses that are operating legally under state or Indian tribal law or to businesses that provide goods or services to such legally-operating cannabis businesses.

The Act goes further than the version introduced in the last (the 115th) Congress and would protect ancillary businesses like real estate owners, accountants and other vendors from money laundering and other federal laws for taking funds from such legally-operating cannabis businesses.

Importantly, the Act would also prohibit any criminal, civil or administrative forfeiture in connection with legal collateral rights that depository institutions have in connection with loans that they make to legally-operating cannabis businesses or related ancillary businesses.

The sponsors of the legislation and virtually all state legal marijuana businesses believe strongly that the current inability of most legally-operating cannabis businesses to obtain banking services, which has led to many cash-only transactions, poses both a dangerous public safety risk as well as a greater risk for unreported income and the loss of federal and state tax revenues.

A version of H.R. 1595 was discussed at a Congressional hearing on February 13, and although the bill was referred to the House’s Committee on Financial Services on March 7, so far no action on it has been taken.

Our current view of H.R. 1595 is that the bill is fairly likely to pass the Committee and the House, but is much less certain to be adopted by the Senate.

This week the Washington state House and Senate passed versions of a new hemp bill drafted in response to federal changes in hemp law. Our Cannabis Team is happy to have participated in drafting language that was incorporated directly into the bill related to requirements for seed sourcing, elimination of a four-mile buffer zone between cannabis and hemp production sites, and CBD. The vote to approve the revised bill was nearly unanimous (95 yeas, zero nays and three excused) and is expected to be signed immediately upon receipt by the Governor. Learn more about the bill here.

We look forward to working with the Washington State Department of Agriculture on adopting the regulations and in developing its new licensing and regulatory program, following the Governor signing the bill into law.

As any farmer knows, planting season waits for no one. Washington state lawmakers are showing they understand this as well.

While other states have moved more aggressively to encourage commercial hemp, Washington’s total hemp crop in 2018 was less than 150 acres, all grown by the Confederated Colville tribes northwest of Spokane. Lawmakers in Olympia are determined that 2019 will be better — Hector Castro, Director of Communications for the Washington State Department of Agriculture recently stated, “It makes sense to assist farmers to get seeds in the ground this season.”

Legislative changes have been proposed to harmonize Washington’s hemp laws with the federal government’s 2018 Farm Bill. A legislative fix is necessary for hemp-derived CBD sales and for out-of-state hemp export.

The Washington State Department of Agriculture is also stepping up to the hemp table and considering two rulemaking changes that would benefit the industry. If successful, these rule changes would allow hemp to be grown within four miles of marijuana cultivation, and  remove the requirement that hemp farmers get permission from the DEA before importing hemp seeds.

One open issue is how to pay for the hemp-licensing program that is compliant with the 2018 Farm Bill. The program is predicted to cost just over $200,000 annually. If that cost is passed on to farmers instead of being funded by the state budget, the current $300/year hemp license fee could increase dramatically, and undercut the momentum that Olympia is trying to build.

While the 2018 Farm Bill removed hemp from the Drug Enforcement Administration’s regulatory oversight, the Food and Drug Administration (FDA) continues to oversee foods, drugs or cosmetics that contain hemp or hemp products, the most popular of which is currently CBD. Meanwhile, states, farmers and other interested parties are clamoring for guidance on hemp commercialization, driven by the steadily increasing demand for CBD products among consumers who believe the hemp derivative is an effective treatment for a wide range of ailments.

FDA Commissioner Dr. Scott Gottlieb recently promised that hearings will begin in April to gather public comments before issuing new CBD regulations. Until then, the FDA will continue to evaluate CBD as a pharmaceutical substance that is unlawful in food and dietary supplements. Gottlieb recognizes the need for “an appropriately efficient and predictable regulatory framework for regulating CBD products,” but warned that it’s not a “straightforward process.”

Some observers predict that creating an appropriate framework may be a multi-year process that could require Congress to take an active role. As more states legalize hemp, however, bipartisan Congressional action becomes more likely.

Update: Hours after this blog was posted, Dr. Gottlieb announced that he will be resigning as FDA Commissioner. His departure adds yet another question mark into this uncertain situation, and may result in further delays in the FDA’s development of new CBD regulations. 

The U.S. Department of Agriculture (USDA), which was given federal regulatory authority over hemp by the 2018 Farm Bill, announced last week that it won’t be finalizing its hemp rules in time for the 2019 growing season, and instead is targeting the 2020 season. But many states are driving hard to develop their own regulatory plans in time for their farmers to plant this year.

Those states’ efforts were given a boost by the American Hemp Campaign (AHC), who released its model hemp production plan around the same time the USDA made its announcement. The AHC’s model plan is designed to help state officials develop their own regulations more quickly by providing basic policy considerations and a framework for regulating cultivation.

Time is of the essence, as many states have March deadlines for hemp growers to submit license requests, and Mother Nature’s own unappealable deadline for planting gets inexorably closer.

In a unanimous decision this month, the Supreme Court limited the scope of civil asset forfeiture, the controversial legal process whereby law enforcement officers can seize property they suspect was involved in illegal activities. In this post, we will discuss how the recent decision in Timbs v. Indiana affects a long-time cannabis industry boogeyman.

Civil asset forfeiture is something of a legal oddity – the government brings a civil action against the property itself, leading to such interesting case names as United States v. Article Consisting of 50,000 Cardboard Boxes More or Less, Each Containing One Pair of Clacker Balls, 413 F. Supp. 1281 (D. Wisc. 1976). The “civil” part of the action means that the government’s burden of proof is substantially lower than in a criminal action, such that assets can be legally forfeited even in the absence of a criminal conviction.

Forfeited assets typically get sold, auctioned or destroyed with net proceeds retained by the seizing authority. With the advent of the War on Drugs in the 1980s, changes to federal law allowed local law enforcement to take a cut of seized drug trafficking assets. While the principal that criminals shouldn’t be allowed to keep the fruits of their crimes is generally defensible, recent years have brought increased attention to the practice and allegations of abuse by law enforcement.

Civil asset forfeiture (CAF) casts a shadow over cannabis businesses. The practice places not only cash proceeds at risk, but also any property “used to commit, or to facilitate the commission” of a crime. This may include leased real property and vehicles, even if the owner of the property in question was not involved in the commission of the underlying crime. Notable targets include the landlord of Oakland’s Harborside dispensary, who ultimately prevailed after several years of litigation.

The issue considered by the Supreme Court in Timbs is whether there are limitations to the amount of assets that a state is allowed to seize. Timbs sold a small amount of heroin to an undercover cop. He was charged and convicted, and his crimes carried a monetary fine of up to $10,000. The state of Indiana brought a civil action to seize Timbs’ Range Rover, which he’d used to transport drugs, but which had been purchased with nearly $50,000 in legitimate funds from an inheritance. Nearly 30 years ago, the Supreme Court held that the magnitude of federal civil asset seizures are limited by the 8th Amendment’s restrictions on excessive fines. In Timbs, the Supreme Court held that these restrictions also apply to states.

So what’s changed post-Timbs? Likely, not much. The Supreme Court has repeatedly affirmed that the practice of civil asset forfeiture is constitutional. Timbs simply means that the amount of the seizure can’t be unreasonably large compared to the underlying crime. The Timbs ruling may not be much help, say, to the owners of a truck carrying hemp that was recently seized in Idaho. Under Idaho law, “trafficking in marijuana” carries a maximum fine of $50,000. This leaves a lot of leeway for Idaho authorities to constitutionally seize property used to facilitate what Idaho contends to be a crime.

Absent statutory reforms of asset forfeiture laws or the decriminalization of cannabis, asset forfeiture will continue to be a risk for cannabis business operators. Our attorneys regularly advise clients on forfeiture risks and help them develop strategies to minimize it. Our Cannabis and Investigations, Compliance & White Collar teams can assist if you or someone you know has property at risk.

Concerning news out of Idaho, where the U.S. District Court in Idaho delivered some bad news to the owners of the contents of a tractor trailer recently seized by the Idaho State  Police. The trailer contained nearly 7,000 pounds of Cannabis sativa en route from Oregon to Colorado. Seizures of outbound Oregon marijuana are an unfortunate status quo these days — overproduction and cratered prices in Oregon have led to regulatory lamentation over black-market sales across state lines.

This seizure is different, however, as Big Sky Scientific LLC (“Big Sky”), the Colorado-based owner of the plants, sued Idaho law enforcement for the release of the shipment. Big Sky claims that the plants are hemp, that hemp is now legal since the passage of the Agricultural Improvement Act of 2018 (“2018 Farm Bill”), and that the 2018 Farm Bill protects the interstate commerce of hemp. The case highlights important questions about what the 2018 Farm Bill does and doesn’t do with respect to hemp, and Magistrate Judge Ronald Bush provided some worrying initial answers to these questions last week when he denied Big Sky’s motion for an injunction to have the shipment released.

The crux of the dispute isn’t over whether the plants are or aren’t “hemp,” but rather whether or not the 2018 Farm Bill preempts Idaho law, which prohibits cannabis and makes no exception for hemp. Big Sky points to Section 10114(b) of the 2018 Farm Bill that states, “[n]o State…shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State.” Big Sky contends that Section 10114(b) prevents Idaho from prohibiting the transport of hemp.

Idaho law enforcement, however, contends that Section 10114(b)’s prohibition applies only to hemp that is “produced in accordance with subtitle G of the Agricultural Marketing Act of 1946.” The 2018 Farm Bill authorizes states and the U.S. Department of Agriculture to create plans regulating the production of hemp, but no such plans have been approved yet. Therefore, Idaho argues, the seized hemp was not “produced in accordance with subtitle G,” and is not protected by 10114(b).

Judge Bush agreed with Idaho’s arguments, holding that in the absence of state or federal plans approved pursuant to the 2018 Farm Bill, the hemp at issue was not “produced in accordance with Subtitle G,” and therefore not afforded the interstate commerce protections of the 2018 Farm Bill. Further, the 2018 Farm Bill doesn’t preempt state laws prohibiting cannabis if the cannabis is not produced in accordance with Subtitle G.

This decision should be taken with a measured portion of concern. On the one hand, it is deeply unsettling for the burgeoning hemp industry. Conventional wisdom held that the 2018 Farm Bill would immediately usher in a new era for hemp, which would be legal, protected from state prohibitions by federal law, and freely tradeable. This decision throws cold water on such exuberance — if it stands (which, more below), interstate commerce in hemp will remain risky, especially in states like Idaho that have chosen to aggressively police it. On the other hand, the decision is only the first step in answering the questions raised above. An injunction of the kind sought by Big Sky is an “extraordinary remedy,” which courts are generally reluctant to wield. Big Sky has appealed the decision, and will have another chance to argue its case before the 9th Circuit Court of Appeals. The 9th Circuit covers a broad swath of the west coast, where hemp production is prevalent. Further, there is language in the 2018 Farm Bill to suggest that hemp produced under a license issued by a 2014 Farm Bill pilot program (Oregon has one of the most permissive) may be “produced in accordance with Subtitle G.”

In the interim, anyone transporting hemp across state lines should be very careful about which state lines they cross. The Idaho seizure is not an isolated incident — we’ve seen similar seizures recently in Wyoming, Oklahoma and elsewhere. If you have questions about the production and transportation of hemp, our cannabis team can assist.

Join the World Law Group for its upcoming webinar series on the legalization of cannabis around the world. Each of the four webinars will focus on specific jurisdictions or regions, including Europe, Israel, Canada, Latin America and the United States. Our very own Josh Ashby will serve as a moderator for the upcoming Israel update on February 26, and as a panelist for the U.S. update on April 3. Register via the links below.

Schedule

  • Europe Update | Wednesday, February 13 at 8 a.m. PST | Registration
  • Israel Update | Tuesday, February 26 at 7 a.m. PST | Registration
  • Canada & Latin America Update | Thursday, March 21 at 7 a.m. PST | Registration
  • U.S. Update | Wednesday, April 3 at 7:30 a.m. PST | Registration

“Audit,” already an unpleasant word in cannabis circles, got a little worse this week with the release of a stern assessment of Oregon’s cannabis program by the Oregon Secretary of State. The 42-page report, the first such review since Oregon voters legalized recreational marijuana in 2014, catalogues numerous gaps in Oregon’s regulatory oversight of cannabis. While offering qualified praise for the theoretical scope of Oregon’s adult-use regulations, the audit found that a lack of resources has led to spotty enforcement.

The audit is organized around four key findings:

  1. Oregon Liquor Control Commission (OLCC) staffing and inspections have not kept pace with the number of licenses;
  2. Oregon Health Authority (OHA) lacks the resources and statutory authority to conduct any meaningful level of oversight;
  3. Oregon does not require that cannabis be tested for heavy metals or microbiological contaminants, jeopardizing public health; and
  4. Oregon’s testing program does not do enough to ensure the accuracy of results and insulate labs from industry pressures away from best practices.

We’re still sifting through the findings, but initial review of the audit confirms what many already knew. There’s too much cannabis being produced by too many licensees — the audit estimates that Oregon can legally produce somewhere around five times more than the state consumes. Oversupply has pushed per-gram prices down over 50 percent since October 2016, incentivizing producers to divert cannabis outside of regulated channels and often across state lines.

Problems of oversupply and diversion are compounded by overmatched regulators. The OLCC’s ratio of inspectors to licensees (about 1:88) is among the lowest of adult-use states, while the OHA has six inspectors for over 7,000 grow sites (nearly 14,000, counting smaller home grows).

The audit also expresses concerns about consumer safety due to Oregon’s testing laboratories. Oregon requires testing for pesticides, but not heavy metals or microbiological contaminants. Testing requirements for medical marijuana, whose consumers are often particularly vulnerable to contaminants, are inconsistent. The testing that is required is performed by labs that lack consistent standards or compliance procedures, and that are subject to market pressures to provide favorable test results.

To their credit, the audited agencies agreed with the audit and its recommendations. Across the board, the issues raised by the audit are rooted in lack of resources, not lack of willingness. And while the audit is unsparing, this kind of tough love is necessary for the health of the industry as a whole. Consumer protection and robust oversight are crucial for a new industry, especially while pioneering states like Oregon try to avoid the ire of the federal government.

We will be spending more time with the audit results and discussing some of the specific implications for the future of cannabis Oregon here. Stay tuned!