We write and speak often about hemp litigation and the importance of a good hemp supply contract. That’s because a common thread in many of the cases winding through the courts is the lack of a contract that clearly defines the expectations and obligations of the hemp grower and purchaser. Here are a few of those articles:
To be sure, a good hemp supply agreement does not mean there will not be litigation. But it can reduce the odds of litigation and hemp clarify claims for breach of contract. A case recently filed in Marion County, Oregon, New Earth BioSciences, LLC v. Terra Ridge Farms, LLC et al., 20CV22732, (“New Earth”) attaches the hemp supply agreement and, unlike many of the cases discussed in prior posts, the agreement is a pretty good one. (Email me if you’d like a copy of the Complaint).
So let’s take a look at some of the elements of the Hemp Supply Agreement (“HSA”) in New Earth. The stated purpose of the HSA is to define the relationship between Terra Ridge Farms (the grower, sourcer, transporter and seller of raw industrial hemp) and New Earth BioSciences (the purchase and extractor).
One of the issues we often see in hemp supply agreements is the failure to clearly define the terms used in the agreement. What may seem obvious and clear to the contracting parties at the outset of the business relationship can become fraught with ambiguity and subject to competing interpretations if and when things go south.
The HSA in New Earth attempts to avoid these problems by defining a variety of terms. For example, it defines “Dry Biomass” as “Organic plant matter from the Industrial Hemp plant that has been harvested and dried to a moisture content of 10% – 12%.” The inclusion of a specific range of acceptable moisture content of dried biomass is certainly important to the purchaser, who may reject deliveries of biomass that do not meet the standard. This definition also provides clear guidance to the hemp grower on the standards it must meet – standards the grower can use should it enter into agreements with third-party drying services.
The HSA defines “Per Point” as the percentage of total CBD content per pound of dry Biomass. Although the meaning of “per point” may seem obvious to anyone in the hemp industry, by plainly spelling out what it means and that it will be used for pricing and determining the value of the Industrial Hemp crop, the parties have removed ambiguity.
The HSA also specifies that the hemp biomass will be tested by an accredited third-party lab to determine the concentration of CBD and THC cannabinoids in the Biomass. Another provision provides how the parties will select a representative sample and that the sample would be sent to a laboratory to which both parties agreed. As we have often explained, these kinds of provisions are critical to any hemp supply agreement.
Compliance with Laws and Delivery Schedule
Another set of provisions in the HSA concern representations by the grower that it has secured licenses to lawfully handle hemp and detailed provisions concerning the timing of deliveries, monthly targets, delivery notices, and quality benchmarks. These are critical terms in any hemp supply agreement. Here, these provisions lie at the heart of New Earth’s lawsuit.
The HSA includes specific benchmarks for the harvesting, delivery, quality, and transportation of the biomass. For example, here is the provision on quality benchmarks:
Section 4. 2 Quality Benchmarks. TRF shall deliver Biomass Lots (as defined in the Appendix) that achieve the following quality measurements:
high CBD potency on a dry-weight basis
moisture content no greater than (10-12%)
stored in bins/containers/totes/agribags with identification tags
all agribag storage shall be in standard footprint bags, which shall not exceed 4.5’x4.5′ in footprint
harvested hemp shall be dried on a priority basis and not bailed prior to drying, all Biomass if machine dried, shall have drying initiated within 24 hours of each harvest lot and the drying will be continuous until complete, if Biomass is hung dried the activity must be conducted in an appropriate facility and will be hung within 24 hours of the harvest of each harvest lot
storage of dried hemp material will be in a protected area so as to limit any degradation of the material due to environmental factors, and
shucked, machine harvested, or milled to a specification to be defined by NEB. NEB reserves the right to reject any Biomass that has been deteriorated by mold, or rot. Quality measurement details for transactions are listed in the Appendix – Transaction Details.
The importance of these kind of provisions cannot be understated.
Purchase Price, Payment, Liens, Default
A surprising number of hemp supply agreements that we see fail to adequately set out the most important part of the contract—how and when money changes hands. Here the HSA contains detailed specifications on the purchase price, which is tied to the CBD content of the hemp and the per point basis, and provides that payment is due upon delivery. And for the benefit of the purchaser, the HSA includes a warranty by the hemp grower that any biomass sold is and will remain free of all liens, encumbrances or security interests of any kind. These sort of provisions should be carefully negotiated by the parties’ attorneys.
“What If Things Go Bad” Provisions
Too often, contracts between hemp growers and purchasers fail to include provisions that address breakdowns in the commercial relationship. Here the HSA defines events of default, remedies on default, when the parties may terminate the agreement, and a force majeure clause. These kind of provisions – along with choice of law, venue, and other provisions should be negotiated between the parties to avoid headaches later.
Hemp supply contracts, like any other commercial relationship, should be carefully negotiated. The devil is in the details. Although a good contract does not eliminate the possibility of litigation, it can make a world of difference if a dispute arises. Our experienced team of Hemp/CBD attorneys stand ready to help.
For the last 10 years, Harris Bricken attorneys have counseled countless domestic and international businesses and entrepreneurs on rapidly evolving laws and regulations in the cannabis, hemp, and cannabidiol (CBD) industries. As the legal and regulatory frameworks of those industries begin to solidify, new opportunities are emerging for the commercialization and research of new drug therapies and alternative medicine—everything from ketamine infusion clinics to psilocybin decriminalization. Our client roster has expanded rapidly in these areas over the past year or two as a result.
On Thursday, July 9th at 12pm PT, Harris Bricken attorneys will address the future of legalization and regulation of new drug therapies and alternative medicine, including efforts to decriminalize and regulate psychedelics, federal and state controlled substances laws and regulations, Drug Enforcement Administration regulation, corporate practice of medicine issues and medical ventures, intellectual property strategies, and much more.
Last week, the Financial Crimes Enforcement Network (FinCEN), issued new guidance (the “FinCEN Guidance”) for financial institutions working with hemp-related businesses. The FinCEN Guidance centers on due diligence requirements as related to the Bank Secrecy Act (BSA). This guidance follows closely on the new National Credit Union Administration (NCUA) guidance for federally-chartered credit unions, which was issued on June 20 (see our take here).
The FinCEN Guidance is not the Network’s first bite at the apple. Last December, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, FinCEN and the Office of the Comptroller of the Currency, in consultation with the Conference of State Bank Supervisors, issued a three-page hemp banking statement. The purpose of that statement was to to help financial institutions deal with BSA and anti-money laundering (AML) compliance in light of the fact that hemp is no longer a Schedule I controlled substance under federal law. The FinCEN Guidance clarifies and expands upon the 2019 statement.
Under the 2019 hemp banking statement, the biggest win for financial institutions was probably the fact that no special or enhanced Suspicious Activity Report (“SAR”) filings are required for customers “. . . because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.” Essentially, banking regulators are saying that financial institutions should treat “hemp-related businesses” like any other business when it comes SAR filings (unlike state-licensed cannabis businesses, which have their own special SAR filing system under the 2014 guidelines). Further, the 2019 hemp banking statement sets forth that “When deciding to serve hemp-related businesses, banks must comply with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.” No surprises there.
Interestingly, the 2019 hemp banking statement, much like the recent NCUA guidance, did not address the legalities around financial institutions trying to bank hemp-CBD businesses. That’s probably purposeful given the Food and Drug Administration’s (“FDA”) current enforcement position around hemp-CBD and violations of the Food, Drug, and Cosmetic Act. Readers of this blog know that the 2018 Farm Bill does not take away the FDA’s ability to regulate hemp products, including hemp-CBD. The FinCEN Guidance follows suit on this issue. The FinCEN Guidance essentially defines “hemp-related business” to only mean “businesses or individuals that grow hemp, and processors and manufacturers who purchase hemp directly from such growers.” This means that the viability and legality of banking hemp-CBD businesses under federal law really remains murky at best.
So, what does the FinCEN Guidance say? Per FinCEN, “This guidance explains how financial institutions can conduct due diligence for hemp-related businesses, and identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements.” Here are the main highlights to which financial institutions should pay attention when considering serving hemp-related businesses:
For hemp growers, financial institutions should “confirm the hemp grower’s compliance with state, tribal government, or the USDA licensing requirements, as applicable, by either obtaining (1) a written attestation by the hemp grower that they are validly licensed, or (2) a copy of such license”;
Based on the level of risk posed by a hemp grower, a financial institution can seek additional information like crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government, or USDA;
Financial institutions already have to monitor their customers for compliance with BSA and AML. This is no different for hemp-related businesses in that a financial institution is going to need to come up to speed (and fast) on the specific ins and outs of a given hemp-related business in order to fully assess the customer risk profile and to enable effective compliance monitoring. This ultimately means that the financial institution will need to invest in a deep understanding of the 2018 Farm Bill and specific state laws around hemp production, processing, licensing, and registration in the specific states in which their customers operate;
There is still no special SAR filing system for these businesses. However, with just standard SAR practice, the 2020 hemp banking guidelines state that, when determining whether to file a SAR, the following conduct should pose red flags for a financial institution: a. A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal;b. A customer appears to be using a state-licensed hemp business as a front or pretext to launder money derived from other criminal activity or derived from marijuana-related activity that may not be permitted under applicable law; c. A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity; d. The customer is unable or unwilling to certify or provide sufficient information to demonstrate that it is duly licensed and operating consistent with applicable law, or the financial institution becomes aware that the customer continues to operate (i) after a license revocation, or (ii) inconsistently with applicable law.”; and
If a financial institution is serving a customer that commingles its hemp-related and state-licensed-cannabis related proceeds and accounts (which is a horrible idea for multiple legal and business-related reasons), the financial institution must apply the 2014 FinCEN guidelines.
All in all, the new FinCEN Guidance is more comprehensive than the 2019 inter-agency hemp banking statement. For financial institutions, complying with these directives should be straightforward compared to the 2014 FinCEN guidelines for marijuana-related businesses. That doesn’t mean it’s going to be easy to bank hemp-related businesses, however. Hemp will always be subject to a broad overlay of state and federal regulations, which financial institutions must know and monitor. At least now they have some guidelines.
Cannabis laws give landlords a unique amount of control and bargaining power over tenants. This usually translates to above-market rent and one-sided lease agreements. Fighting with landlords is no fun, especially for cannabis tenants who cannot simply relocate to a new property and must deal with their lessor for the life of a license. In this post, I’ll examine some important concepts for cannabis tenants.
1. Getting Along with the Landlord
This isn’t really even a legal concept, but it’s a critical one. Before getting tied up into a multi-year contract that a tenant essentially can’t back out of if it wants to remain in business, it’s a good idea to know who a tenant is dealing with. Chances are, the tenant will be required to go to the landlord for approval frequently during the life of the lease. It’s a good idea to understand who the landlord is before signing. If it’s a challenge to negotiate basic lease provisions at the outset, it’ll probably be a challenge to get those new premises modifications approved–or to do anything else.
2. Landlord Control
It’s common for leases to prohibit assignment or subletting without the landlord’s consent. Many leases go a step further and define a change of control of the tenant as an assignment requiring the landlord’s consent. For example, a lease may say that if there is a change of ownership of 25% or more of the equity of the tenant, the landlord needs to approve it first.
From the landlord’s perspective, these approval rights make sense; a landlord obviously wants to vet incoming owners to make sure that they’ll be able to still pay rent. But from the tenant’s perspective, these provisions can sometimes lead to micro-management by a landlord, especially if the approval threshold is low or the landlord has unfettered discretion as to how and when to give approval or condition it on payment of additional money.
Many cannabis businesses require investment capital, and this often means some kind of change in ownership during the life of the license. If too broad, landlords’ change of control provisions can be tough for a tenant to deal with.
3. Premises Modifications
Sort of like changes of control, most physical changes to the leased premises require some kind of landlord pre-approval or at least notice. This makes sense when thinking about changing fundamental parts of a building by throwing up or taking down new walls. But if these provisions are not well defined, they can lead to headaches. For example, would installing heavy machinery require approval? What about an HVAC system? If this is not clearly delineated, there can be disputes.
Another common concern is who owns the modifications to the premises. At the conclusion of a lease, a tenant may not be able to take out everything it put into the premises. Most leases will spell out who owns modifications, and be specific as to what kinds of modifications tenants can or (in some cases) must remove. Given that virtually all premises need to be modified to comply with cannabis regulations, this is important to consider prior to entering a lease.
4. Rent and Regulatory Compliance
In addition to fixed rent, landlords may demand some cut of cannabis tenant income. While this may be doable under state law, it raises two important concerns.
First, landlords who share in rent increase their exposure for federal criminal violations. While the federal government has taken a hands-off approach to enforcement against state-licensed operators, that could change in the future. And if there is ever a change in enforcement priorities, landlords who share in the profits of a cannabis business could face more exposure. This exposure could affect other provisions in the lease as well.
Second, landlords who share in the profits will probably need to be disclosed to state, and in some cases, local authorities. In California, any form of profit-sharing renders a landlord a “financial interest holder” requiring disclosure to the state. If profit-sharing hits certain thresholds, the landlord can be considered an “owner”, and much more significant disclosures would be required. It is critical to understand this second point at the outset. What tenant would want to be in a position where, after entering into a lease and applying for a license, a landlord suddenly got cold feet and refused to comply with requests to disclose it to the state? This would likely not end well for anyone.
Cannabis landlords often require leases to be “guaranteed” by third parties. A guaranty is basically a third party’s agreement to pay rent and any other financial obligations of the tenant if the tenant defaults under the lease. If the landlord demands a personal guaranty by the owner of a cannabis business, this can be significant as it can lead to serious personal liability for the guarantor if the a cannabis tenant can’t make its payments. This risk is even more pronounced for cannabis companies. It takes cannabis businesses a significant amount of time (without income) to become operational, and the loss of licenses will also lead to losses of income.
6. Property Diligence
Most leases include representations and warranties about the property being leased. Nevertheless, it goes without saying that verifying that the representations are accurate (by inspections and otherwise) is key. If a tenant enters into a lease without inspecting property, they may waive their right to make claims later (this would not apply if the landlord deliberately misrepresented something).
Since cannabis permits and licenses are tied to specific properties, it’s important to most tenants to lock the landlord into the lease as much as possible. Broad termination rights can be bad for tenants for obvious reasons. It’s always a good idea to study grounds for termination closely. Two things come up frequently that bear consideration.
First is a landlord’s ability to terminate based on breach (this usually comes up for non-payment of rent). Some leases will allow the tenant a period to cure any breach, but we’ve seen a lot with very short cure periods that may not always be possible to meet.
Second is termination for violation of law. Cannabis leases violate federal law by default. If a lease is terminable for violation of any law, then it will possibly be terminable from day 1. There are of course good arguments that a landlord waived its right to terminate or was not terminating in good faith if this is the justification for termination, but why get in that position in the first place?
8. Dispute Resolution
This is absolutely critical. As an attorney who used to exclusively litigate business disputes, and who has seen firsthand the effects of poorly drafted dispute resolution provisions, I cannot express enough how important it is to focus on these clauses. This is especially so for cannabis contracts, and even more so for cannabis leases.
Any time a cannabis dispute ends up in federal court, there is a chance that the court could refuse to uphold a contract on the grounds that it violates federal law (this is called the federal illegality defense, and even thought it’s been chipped away over the years, it is still very much alive). This risk is immense for cannabis tenants; if a court refuses to uphold a lease, or worse, holds that it is void, the tenant can lose its licensed premises and therefore its license.
These are just a number of questions that potential cannabis tenants should ask themselves when considering a lease. The actual factors will likely change significantly from lease to lease and jurisdiction to jurisdiction. It’s a good idea to work with counsel to determine what lease provisions are best in for a specific tenant and jurisdiction.
The big takeaway here should be that drafting and negotiating cannabis leases is tough and that left unchecked, cannabis landlords can wield a great amount of power over tenants. Please stay tuned to the Canna Law Blog for more developments on cannabis leasing law, and in the meantime check out the posts linked below.
When legal cannabis entered the US economy, tech startups, pot shops, and numerous brands flooded the space. Yet despite this explosive growth, Black and Brown entrepreneurs within the cannabis sector have been edged out since day one.
We have seen throughout history that the Black community experiences harsh discrimination at every level of the judicial system.According to the Drug Policy Alliance, communities of color are “more likely to be stopped, searched, arrested, convicted, harshly sentenced, and saddled with a lifelong criminal record. This is particularly the case for drug law violations.”
Sure, cannabis legalization has brought about new opportunities for many — and many legal states have set up expungement protocols for individuals with previous cannabis charges. But that doesn’t mean our entire capitalist system is now free of racism within the cannabis space. That doesn’t mean that Black and Brown entrepreneurs no longer face discrimination and impassable walls when trying to build up cannabis businesses.
Amid the ongoing protests against police brutality against Black people after the murder of George Floyd, Brianna Taylor, and countless others by police officers, the importance of purchasing from Black and POC-owned businesses have swept over media and technology companies across many industries, including cannabis.
But supporting and donating to Black and POC-owned businesses shouldn’t be limited to a burst of protests and calls for justice. It should be a regular occurrence. In the entirety of its history, America has disenfranchised Black people and POC. Thankfully, databases of Black and POC-owned businesses exist in order to help consumers in lifting up the Black community by speaking with their dollars. When you help one, you help all.
It’s crucial to note that these Black and POC-oriented databases haven’t come out of thin air — they’ve long been needed and crucial in cannabis’ ongoing discussion of social equity in the industry, and they’re often created by people of color themselves. Cannaclusive is an organization that saw the need for a database that highlights Black, Asian, Latinx, Woman, LGBTQIA, Indian, Pacific Islander, Indigenous, Veteran, and Disability-owned cannabis businesses and has worked with Almost Consulting for more than two years to create one called the InclusiveBase.
Below, we speak to Cannaclusive’s co-founder Mary Pryor and cannabis consultant Kieryn Wang of Almost Consulting about the importance of supporting Black and POC-owned businesses today and every day, and how utilizing inclusive databases can help you determine where to express your support.
Mary Pryor: the co-founder of Cannaclusive, Pryor is also Executive Director of Blacks In Tech, Director of Outreach and Partnerships of Black Techies, Founder & Principal of Urban Socialista, and an SXSW Social Innovator Award Winner (2014).
Kieryn Wang: founder and owner of Almost Consulting. Wang leads women-owned cannabis brands through the diverse marketing practices of modern cannabis. She also created InclusiveBase in partnership with Cannaclusive.
On the importance of support and alignment
WM: In your words, why is it important for consumers to actively support black and POC-owned businesses — especially now?
Pryor: I think three things are important. Due to systems that we are now being made ever so aware of, in terms of economic disparity, the wealth gap, and a lot of the barriers that are perpetuated due to white supremacy and racism, there has been a big, empty and far-fetched goal line in terms of economic wealth and access and equity in the world — especially between those who are Black and Brown and white people. And that’s due to a few factors: there’s slavery, there’s institutionalized racism, there’s segregation, discrimination.
There are a lot of things that are part of the lifetimes of people who are older — and that are not part of our lifetime as younger individuals — that have pre-set a lot of the current access people have if you are termed “minority” in this country.
On top of the fact that propaganda and the racial motivation behind the prohibition of cannabis — due to racialized stereotypes and the reefer madness movement — plus the War on Drugs caused the breaking up of a lot of different homes and destruction of communities. There are a lot of things that have been institutionalized in the system of how we operate in this country economically that is made to target and push aside Black and Brown people from access to capital on top of everything else.
So firstly, when you’re talking about supporting a Black-owned business, it doesn’t make it weaker, it doesn’t make it better, it doesn’t make it any “less than” or “more than.” It’s a business. But in cannabis, you have less than 5% ownership of Black and Brown people in the space. It’s 81% controlled by white men, and the numbers for women — which were in the 30s percentage range in 2015 — are now in the mid-20s percentage range in terms of ownership. Minorities, in general are faced with a huge gap of access to capital, which makes it hard to open a business in the space.
The startup costs are very high for plant-touching businesses, so supporting Black and Brown-owned businesses is just a way of saying that you understand, that you know there is a lot of work that goes into being able to access action items to start these businesses.
Supporting a business just because it’s Black or Brown-owned can be for anybody. It doesn’t need to be just a Black thing, it’s not just a white thing, it’s being able to acknowledge and be intentional with knowing that your support is going further than a store. It’s being intentional and mindful and being an educated consumer on why you’re supporting businesses that definitely deserve to be supported.
Secondly, businesses in this space — in terms of working with integrity — are hard to find. More so than we talk about. I find that a lot of the indigenous roots of the plant have been best served and best kept by those who understand the cultural significance. When you are a person of color, whether you’re Asian, Indian, Pakistani, Middle Eastern, being mindful of having a cultural relationship to something that you’re utilizing usually has a bit more importance.
When it comes to the cool factor of what it is to be a person of color, a lot of things have been appropriated and misdirected and re-aligned to serve people that are non-Black or POC In general. I think businesses that understand culture and retaining that just have a better way of making it more seamless and more understood by the consumer.
Third, I think that in this time, being intentional behind why you’re supporting something matters. Whether you say it privately or publicly, there’s no need to be reactive and there’s no need to be performative — it’s easier to just adopt ways of understanding that this world has been made to go after. It’s showing us that it definitely attacks and treats people differently based on the color of your skin. And while you or I may never see that change in our lifetime — or our children may never see that in their lifetimes — it’s important to understand that taking the power of that and flipping it, that there is more equity and understanding in the space, is something that everybody can do. Whether it’s through advocating for equality for people to have access to capital that are Black and Brown, whether it’s supporting a business, whether it’s being very vocal about understanding that within a company you can hire Black and Brown people because we’re human beings and we should have these jobs.
Leaning far to one side and pretending that there’s not a whole other culture around you really just impacts your understanding of being able to operate and access all facets of the population when it comes to the business and consumer.
Wang: When you’re shopping from a small business — specifically POC and Black-owned — you’re helping support the next rent check, you’re helping put kids through school, you’re helping put the next meal on the table. I’m not saying that you’re not doing that with corporations, but you’re doing it more directly this way.
I saw a tweet one time, it said: “Thank you so much to whoever just put an order in on my store — I have groceries for tomorrow now!” That’s the kind of impact that you’re making.
Traditionally and historically in the cannabis industry (and every other industry), POC and Black-owned businesses get less opportunity for funding. They have less access. They also usually have fewer connections and resources in powerful places the way white folks do.
The industry is built on Black bodies, yet there are a lot of Black men and women still locked up for doing exactly the things that are “legal” for many people to be doing right now. I mean for goodness sake, cannabis is an essential business right now!
I completely recognize that and my role in being an Asian woman in cannabis. I have privilege as well, so I need to do my part, and I encourage all Asians to do our part in our communities and in the cannabis community to fight the injustices today.
On the work it takes to rise above
WM: What kind of work goes into creating these specific directories and databases, and who creates them?
Pryor: The methodology of being able to do a lot of research comes from having to do a couple of things. I mean, you go beyond just trying to find stock listings on MarketWatch or through any of those platforms. You have to go deeper, beyond just what someone says online or what someone says on Instagram. But in this case, looking at social responses to social matters is a bit more accessible to us. People use — especially with cannabis — Instagram and social media in a way that’s very unique and different than other brands.
Being responsive and noting how to respond during this time is something that everyone’s been looking at. A way for me to give honor to someone who inspired me was Cheryl Dorsey with what she created with The Plug, which is a part of the Plug Insights platform that she started a while ago. Support startups that are Black and Brown-founded and try to give them access to information in terms of how to play in this game, because in the tech and startup world, access to dollars for Black and Brown founders is extremely small. Now people are asking, “Why aren’t you opening up your purse? Why are you treating Black or Brown bodies differently? Why are you pushing us aside?” And now people are — given what’s happening in the world — realizing that they have to answer to that.
Access to capital, Black or Brown access, and social equity has not moved far across this country in various states. And even within states where people think they have it going well, it kind of isn’t or it’s shifting. It’s not coming up in ways that can truly help those who are most impacted due to the War on Drugs and those who actually want to be in the business.
I think that when we are looking at the methodology behind it, it takes a lot of research beyond all those items. Even if you have to go to someone’s website, email, or reach out. We’ve done everything from the surface level, but there’s so much more. You can do a deep dive and deep research via JSTOR [a digital library of academic journals, books, and sources] on whether someone has noted or said anything journalistically about supporting or being available to support those who want social equity.
You can look up previous programs that have existed maybe a year or two years ago or even within this year that have been created to bring on conversations to support Black-owned businesses. You can recall if an organization worked with a capital firm — MCBA [Minority Cannabis Business Association] worked with Merida Capital Partners last year to help five startup businesses that we’re Black and Brown and get going with donating over $50,000 to their business.
These are things that are out there in the world. So it does take that level of combing through previous press releases or current press releases — a lot of different items to go through that. But our methodology goes both surface level, and we’re making all those updates even as people share with us more updates. We see this as being a long-standing item that’s not gonna really go away.
And it’s needed — as soon as people realize they need to support a business, they were like, “oh, where are the Black-owned businesses?” And we’ve been sitting over here for almost two years and now everybody wants to find one. I’m glad everybody wants to find a business that’s Black-owned to support, but it shouldn’t have taken a COVID pandemic or horrible acts of police brutality. That’s something we as a country have to face; why did it take this much for people to start caring about Black-owned business?
Wang: Inclusivebase was created out of the need for a resource that highlights POC and Black-owned businesses. I published Inclusivebase in April 2019 and I started garnering community support. Mary reached out to me and said, “Hey, I’ve been doing this internally with my team for years,” for longer than I have, so she asked to join forces in order to amplify this resource to get more businesses represented.
Though there’s been an uptick as of late due to our current events, just two years ago this conversation wasn’t really happening. That’s why we decided to just do it ourselves.
Again, white people have had more money for marketing and more connections for funding — it all contributes to this lack of representation for Black-owned businesses.
And it does take work to vet these companies [on the database]. We get many submissions from, you know, clearly white-owned companies. We get that you want to be represented and want to be included, but this is a space for POC-owned businesses. Right now, we are really trying to build up and get more Black-owned businesses on there. It takes work to manage the submissions so that the company can grow the directory.
On using cannabis directories the right way
WM: What do people need to know about Black and POC-owned databases that they most likely don’t? How should they be used? How can they be misused?
Pryor: They could be misused in a way where you can have people infiltrate and try to break them. We’ve had people submit to the database that are white who have propped up one Black employee or one Black person that they have long written out of a contract to get on the list. We have to go back through and comb it and double-check it and say that’s not going to work. No one has the ability to change anything within the framework of it, but we want to figure out ways to make this way more accessible and way more accounted for daily.
Misusing a database like this only feels like you’re misusing it if you’re just saying “support this business” and you’re not making it a continued thing. This isn’t a one-trick-pony, this isn’t a one-time item. People should be talking about supporting businesses owned by minorities all the time. It shouldn’t just be when people are on the streets asking for justice and peace and Black and Brown people are getting shot at and killed.
So I only think you must use a list if you’re not serious about being intentional about making this a thing versus just a one-time item so that you look like you’re doing some type of performative support.
Wang: I mean, I think making sure to recognize and credit any work that has been done by Black and Asian women or the people of color who have done other databases. The goal is that we want more people to know about this, we want to be amplified and for tech companies to work with us in order to amplify the platform. The work has already been done for years now.
Because of current events and what’s going on in the world, we also want to make sure that people aren’t erasing the work that has already been done. Do your research first — especially for the companies that have the resources to do this type of research.
And, we’re not trying to be like, “Oh this is such hard work — we need everyone to know how hard it is,” but recognize this work that has already been done. We don’t want people capitalizing on this for just a moment in time.
So unless you’re prepared to continue to show up and show people what work you’re doing and hold yourself accountable as tech companies and media, then don’t pull off our work. The big thing is really just to make sure you’re shopping responsibly or connecting with the right people. Not only are cannabis shops on the database, there are lawyers, specialists — the variety of businesses blow me away.
On what’s in store for the future
WM: As time goes on, people tend to forget and move back to old habits. Will continued support be different this time?
Pryor: I think that I’m hopeful that this time is different. I’ve been in Ferguson and I’ve marched for something and about something since I was seven years old. I’m tired and I think that now, more and more people are tired. The exhaustion that I feel isn’t just me being tired because I’ve had a long day and I worked out at 5 a.m. It’s because I can feel the weight of everything when it comes to what my mother and what my grandmother, what my dad and what my grandfathers have tried to fight for so that I had a better life.
I did not envision race to still be this much of an item at this age. I wouldn’t have known that it would still be what I would be seeing versus what I remember from myself when I was 17 or 18 and being called a n***** in high school. I truly believe that you’re seeing more people speaking out across various industries because there is a collective tiredness.
In this unique time in history, we’re all in something together. That is undisputed. We’ve all had to sit at home and look at the wall and look at ourselves and train ourselves to not want to touch people. We’ve had to train ourselves to be freaked out over engaging with others and so, people got a lot of time, and we’ll still have a lot of time during re-opening.
I think people have more time to make honest, realistic needs addressed and put out solutions so that people can now consider actually moving on. I think that that’s one of the weirdest, awkwardest benefits of this whole entire thing — we all have a similar share of time to realize that things have to change. And when coming into this new world after lockdown, what has been normal is now unacceptable which it has been for a while.
People are now very much pressed to make sure that it sticks, and I think that we all can use this as an opportunity to grow better, be better and address these items that are definitely uncomfortable. But I can tell you as a black woman I’ve had to live with my discomfort, so I’m not shocked at anything that’s happening right now.
I just want us to grow and finally do something collectively, because it’s not just going to be Black people making change. It has to involve white people understanding the power of their privilege to make a difference as well.
On working with women in cannabis
WM: Kieryn, from your website, you advertise digital and marketing plans geared toward women in the industry. What’s been your experience following this path and being a consultant in the modern day of cannabis?
Wang: When I entered the industry back in late 2015 to early 2016, what I was seeing was a lot of people not addressing women in their marketing. Not addressing women when it comes to the ways that this plant can benefit you and how to incorporate it into your life.
Every single company that I’ve worked within the industry has some sort of directive to speak to women — to address them and their concerns. So with my consulting, my goal is to work with companies that are looking to create space specifically for women.
There are so many things that this plant can do — especially for women’s health — and I really want more women to find the products and the kind of information that can help them create a plan. But there is a learning curve. There’s a lot of shady snake oils out there which makes it really hard for the people doing honest work to get across to the people that are nervous about learning.
The big thing for me is creating physical spaces. I think a lot of people like sitting down and being taught how to roll a joint or being taught how to smoke out of a bong or feeling the plant in your hands. But now, obviously, you have to take it into the virtual space which is not something I love. That in-person education is so valuable, but fingers crossed we can get back to that soon in terms of helping people remove the uncertainty.
The Agriculture Improvement Act of 2018 (2018 Farm Bill) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (CSA) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (USDA) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA.
This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp. Our attorneys track these developments in real-time on behalf of multiple clients, and we provide a 50-state matrix showing how states regulate hemp and hemp products.
Over the last year, we have written about hemp and hemp-derived cannabidiol (Hemp CBD) policies in all 50 states, Guam, Puerto Rico, the US Virgin Islands, and on Tribal land. Links to each of these posts are available below. Obviously, nothing happens in a vacuum so, at this point, some of our posts are out of date as of this writing. These things change fast.
Now that we’ve covered the 50+ jurisdictions, we want to wrap up this series with some things we have learned throughout this series.
States are (mostly) consistent when it comes to hemp production
Both the 2014 Farm Bill and 2018 Farm Bill focused on the actual growing of hemp, not processing or handling hemp. As a result, there is not a ton of room for states to differ when it comes to the rules and regulations on growing hemp. This extends to testing hemp as well.
Under the 2018 Farm Bill, states are required to develop plans pursuant to the law itself and the USDA’s interim hemp rules. However, a contingency of states are deciding to opt out of the 2018 Farm Bill, sticking with programs developed under the 2014 Farm Bill. The 2014 Farm Bill’s hemp provisions expire on October 31, 2020, meaning that several states will no longer have the regulatory authority over hemp production. For more on this, check out the letter the North Carolina Department of Agriculture sent the USDA.
States Differ on Processing/Handling Rules
There is some consistency in how states regulate growing hemp. The same is not true when it comes to “secondary” activities such as processing or handling hemp. Remember that the 2018 and 2014 Farm Bills focus on growing hemp, not turning that raw hemp into commodities, such as fiber, hempcrete, or oil. Some states, like Oregon, issue licenses or permits for these activities. Others, like Washington, do not.
In states that do not issue handling or processing permits, these activities come with some risk. That’s because although hemp is not a controlled substance (like it’s very close cousin marijuana) it is heavily regulated. Possessing commercial quantities of hemp without any type of license can draw unwanted attention. Hemp looks and smells like marijuana after all. A government-issued license can come in handy.
On the other hand, there are many hemp processors in states that do not issue processor or handler licenses who are doing fine without a permit. It’s not as if hemp processing is necessarily unlawful in these states. One thing is true for processors in all states: keeping records is key! You want strong and substantial evidence if Johnny Law starts inquiring about that funky-smelling crop.
There are Various Schools of Thought on How to Regulate Finished Products, Including Hemp CBD
Once hemp has been harvested and processed into a finished product it’s time to go to the market. For industrial products, like hemp textiles and hempcrete, this is pretty straightforward. That’s because these products are not absorbed into the human body. Anything containing hemp that is ingested, smoked, or placed on the skin has a more complicated path to market because there is no real federal oversight of these products and there is no uniform state model for regulating them either.
The FDA regulates consumer products. It has determined that hemp-seed ingredients are generally safe for use in foods and approved Epidiolex, a CBD isolate used for the treatment of epilepsy. The FDA has also consistently said that other hemp derivates and Hemp CBD cannot be sold as drugs, foods, or dietary supplements. At the same time, FDA enforcement has been very limited, mainly consisting of sending warning letters to Hemp CBD distributors making medical or health claims about their products. This resistant tolerance of Hemp CBD at the federal level has left the states to decide how to treat Hemp CBD.
The states have not adopted a unified approach to regulate Hemp CBD. Some states align with the FDA’s position, banning Hemp CBD in food and dietary supplements. California is the most prominent example of this school of thought. Several other states have gone in the opposite direction, tightly regulating the manufacture and sale of Hemp CBD. Utah and Texas are good examples of this model as both states impose manufacturing and labeling requirements. Some states even require that retail stores obtain a license to sell Hemp CBD products.
Another complicating factor is the treatment of smokable hemp or Hemp CBD e-liquid (i.e., the liquid used in vape products). This is a hot button issue in many states. When it comes to smokable hemp, many politicians and law enforcement agencies are troubled by the fact that hemp is so close to marijuana. Some states, like Kentucky, ban the manufacture of hemp products that are akin to traditional tobacco products, like cigarettes. Most states do not explicitly address the legality of smokable hemp, making the sale of smokable hemp risky due to the lack of clarity. Very few states explicitly allow the sale of smokable hemp.
Hemp CBD e-liquid is also complicated because of the dangers associated with vapor products generally. This area of the law is still developing, with very few states explicitly tackling the issue of Hemp CBD e-liquid. That’s because so much of the focus has been on the tobacco vapor products or marijuana vapor products. Washington is one of the few states that has addressed the issue by banning the sale of e-liquid that contains cannabinoids unless sold within the state’s regulated marijuana marketplace.
Wrapping Up and Looking Ahead
This is the last installment in our “Hemp CBD Across State Lines” series but it certainly will not be the last time we write about Hemp CBD. Hemp is here to stay and so too is CBD (along with CBG, CBN and other “new cannabinoids“). Eventually, the FDA is going to provide some guidance to the industry and we think that the agency will model its policies on states with robust regulations already in place. Once that happens, we expect state law and policy become more unified, making interstate transport easier.
We hope that you have found this series informative and helpful. On behalf of the Canna Law Blog, thank you for reading and sharing these articles over the last year!
For previous coverage in this series, check out the links below:
In January, my colleague, Jesse Mondry, wrote about Snyder v. Green Roads of Florida, a case in which the U.S. District Court for the Southern District of Florida stayed a class action lawsuit against a cannabidiol (“CBD”) company until the Food and Drug Administration (“FDA”) forges a legal path for the manufacture, sale and marketing of these products. The Court placed this case on hold, invoking the “primary jurisdiction doctrine.”
The “primary jurisdiction doctrine” generally applies in cases where a plaintiff’s claim implicates the special competence of an administrative agency. This doctrine is a prudential doctrine that is reserved for a limited set of circumstances that require resolution of an issue of first impression or of a particularly complex issue that Congress has assigned to an administrative agency.
If you regularly read our blog or keep a pulse on the hemp and CBD industry, you know that the Agriculture Improvement Act of 2018 (better known as the “2018 Farm Bill”) expressly recognizes FDA authority to regulate products containing hemp-derived products– including hemp-derived CBD (“Hemp CBD”). Moreover, Congress has repeatedlyurged the FDA to complete the rulemaking process to solve the proliferation of CBD products, particularly foods and dietary supplements, in violation of the Food, Drug & Cosmetic Act (“FDCA”). Yet, 18 months following the passage of the 2018 Farm Bill, the FDA has yet to adopt formal regulations. Consequently, the industry has witnessed an uptick in CBD-related litigation, particularly false advertising consumer class action lawsuits.
In his January post, Jesse pondered whether other federal courts would find the Snyder order persuasive and whether they would stay other lawsuits against CBD companies pending issuance of FDA regulations. Five months later, the answer to this question is “tentatively yes”: some courts have followed suit; others have not. Two of these federal courts – one for the Central District of California and another for the Eastern District of California – directly cited to Snyder. These courts explained that although the FDA expressed its position about CBD products in its warning letters, these letters do not constitute final agency action and that the FDA has not formally established its position about the regulation of these products. Accordingly, those courts concluded that they would benefit greatly from the FDA’s pending rulemaking efforts, and thus, granted the motions to stay while the FDA adopts final rules.
These more recent orders reveal that federal courts are indeed inclined to give deference to the FDA’s primary jurisdiction over CBD products, which will likely delay other CBD-related lawsuits until the FDA forges a legal pathway for these products. In addition, these orders show that the lack of FDA regulations further exacerbates confusion regarding the legal status of these products and emphasize the need for a comprehensive, uniform regulatory framework.
Until the FDA starts to act in its role of regulator, CBD companies should obtain sound legal advice regarding the federal and state regulations of these products. These companies should also ensure strict compliance with the FDCA’s manufacturing and labeling requirements – with all categories of products regulated by the FDA – to mitigate the risks of litigation.
Almost exactly a year ago, I wrote about the uptick in cannabis business suing one another for trademark infringement (as opposed to non-cannabis companies suing cannabis companies, which happens a lot and which you can read about here, here, and here). The example at hand was the litigation between Harvest Dispensaries Cultivation & Production Facilities, LLC, based out of Arizona, and Harvest on Geary, Inc. / Harvest Off Mission, Inc., based here in San Francisco.
While that case ended up settling, the HARVEST mark has once again become a point of contention, this time in Arkansas. Harvest Cannabis Dispensary (I’ll refer to them as “Harvest of Arkansas”) is a small, family-owned cannabis business in the city of Conway, Arkansas. Harvest of Arkansas filed a lawsuit against Natural State Wellness Dispensary and Natural State Enterprises, which are affiliates of Arizona-based multi-state operator (“MSO”) Harvest Health. The two entities run a dispensary in Little Rock and a cultivation facility in Newport. In late May, Harvest of Arkansas announced that it had obtained a preliminary injunction against the Arizona company’s subsidiaries (the “NSW Entities”), preventing the NSW Entities from continued use of the name HARVEST in conjunction with their dispensary in Little Rock and the cultivation facility in Newport.
Harvest of Arkansas adopted the HARVEST mark in 2017 and opened its Conway facility well before the NSW Entities opened their facilities, giving Harvest of Arkansas superior state-law trademark rights in the HARVEST mark.
The NSW Entities were unsuccessful in arguing that they possessed trademark rights under federal law, which is unsurprising, given that we have written extensively about the limitations of federal trademark protection for cannabis businesses. But it is rare for a small local operator to be able to fight for its trademark rights against a much larger, multi-state operator. While the case may be unusual for that reason, it sheds light on the ongoing issues that cannabis businesses face in protecting their brands.
This challenge is particularly salient for MSOs, which are forced to rely on 1) federal trademark rights for ancillary goods and services that do not directly protect their cannabis goods and services, and 2) a patchwork portfolio of state trademark rights that must be meticulously maintained as the operator enters new markets. Most states have a “use in commerce” requirement for obtaining state trademark protection. In most cases, that means a “lawful use in commerce” requirement, which prevents MSOs from simply filing to protect their mark in all 50 states in lieu of obtaining a federal trademark. Cannabis businesses must apply for state trademark rights once their mark is already in use in that particular state’s commerce, which leaves the door open for other operators to establish earlier use of the mark.
This will inevitably be an ongoing challenge for MSO cannabis businesses that are seeking to build national brand recognition, and it’s yet another reason why it is so crucial that we develop a solution to the prohibition on obtaining federal trademark protection for cannabis. Allowing operators in different states to adopt and develop the same brand will inevitably lead to consumer confusion, which is no good for businesses, and no good for consumers either.
On June 29, the folks at “Yes On IP 34” announced that the Psilocybin Therapy Initiative will qualify for the ballot this November in Oregon. The campaign said it had collected over 164,000 signatures and that its recent submission of additional signatures would comfortably put the initiative above the requirements. This is exciting news!
You can read our previous coverage of IP 34 and psilocybin generally here:
So let’s broadly take a brief look at the Oregon Psilocybin Services Act (the “Act”). Section 1 is comprised of findings that serve to support the basis for the legislation. These include findings about the number of Oregonians coping with mental health conditions and the efficacy of psilocybin in treating these conditions.
The findings call for the Oregon Health Authority (“OHA”), during a two-year program development period, to:
(a) Examine, publish, and distribute to the public available medical, psychological, and scientific studies, research, and other information relating to the safety and efficacy of psilocybin in treating mental health conditions; and
(b) Adopt rules and regulations for the eventual implementation of a comprehensive regulatory framework that will allow persons 21 years of age and older in this state to be provided psilocybin services;
Section 2 sets forth the purposes of the Act. These include education, reducing mental illness, and developing a long-term strategic plan for ensuring the accessibility of psilocybin mental health services for persons over 21 years of age.
Section 3 explains what the Act does not do. Many of these are relevant to employers. For example, the Act does not:
Require a government medical assistance program or private health insurer to reimburse a person for costs associated with the use of psilocybin products;
Amend or affect state or federal law pertaining to employment matters;
Require a person to violate a federal law;
Exempt a person from a federal law or obstruct the enforcement of a federal law; or
Amend or affect state law, to the extent that a person does not manufacture, deliver, or possess psilocybin products in accordance with the provisions of sections 3 to 129 of the Act and rules adopted under sections 3 to 129 of the Act.
Section 6 establishes an Oregon Psilocybin Advisory Board for the purpose of advising and making recommendations to the OHA and includes detailed instructions for selecting the members of the board to ensure a wide variety of stakeholders with an emphasis on public health. Other provisions explain the duties of the Board and of the OHA.
Sections 10 through 13 concern the pre-license two-year development period and Sections 13 – 19 set out a process for the OHA to review and process license applications. Section 20 through 29 govern various aspects of who may acquire a license and include financial interest requirements, manufacturing license requirements, product manufacturers, and licenses to operate a “psilocybin service center”. Other provisions go into great detail on the operation of licensed service centers. These include a several step process for potential clients that include a preparation and administrative session and integration sessions.
The Act also directs the OHA to determine the qualifications, training, education and fitness of applicants for licenses to facilitate psilocybin services. Section 41, for instance, requires the OHA to adopt by rule minimum standards of education and approve courses for service facilitators. Not surprisingly, much of the Act is given over to providing the OHA with significant regulatory authority to investigate and discipline licensees and permit holders.
This is a very broad and general overview of the Act. I expect we will be digging into the details in the months to come and (fingers crossed) after Oregonians vote this measure into law. Until then, please join us next Thursday, July 9th, for our free Ketamine, Psilocybin and New Drug Therapies webinar where we will discuss IP 34 and more.