Oregon Hemp-CBD Litigation: Another Tale on the Importance of Due Diligence Before Contracting

Most of the hemp litigation we’ve written about has concerned a hemp purchaser suing a hemp farmer. This week concerns a $2.5 million lawsuit recently filed in Oregon wherein a hemp farmer sued a CBD processor.

The plaintiff, JNV Farms, alleges that in the fall of 2018 it entered into a manufacturing agreement with one of the defendants, C&N Ag LLC (“C&N”), by which JNV Farms was to provide industrial hemp to C&N who was to process the hemp into CBD Isolate and market and sell the finished product. The complaint alleges that profits were to be split 50/50.

According to the complaint, JNV Farms provided the defendants 13,800 lbs of biomass in December 2018. The defendants represented they were testing and preparing to process the material. After JNV Farms made repeated inquiries, defendants became less communicative then eventually refused to respond at all, and refused to meet with JNV Farms or permit inspection of the hemp or finished product.

JNV Farms claimed the defendants (i) neglected or refused to complete the work contemplated by the contract, (ii) failed to return the industrial hemp, (iii) failed and refused to compensate JNV Farms for the hemp, and (iv) failed to provide JNV Farms any of the CBD Isolate or the share of revenue from its sale. JNV Farms alleged claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and fraud.

Finally – and not insignificantly – the complaint seeks to pierce the corporate veil and to hold the two owners of C&N, defendants Mock and Eastburn, personally responsible for the liabilities of C&N. This claim, perhaps more than the others, may strike fear into the defendants. As every business owner knows (or should know) a key purpose of incorporation is to shield company assets from being used to satisfy company obligations. The goal of a veil-piercing claim is to reach past the corporate shield and into the pockets of owners or investors.

Piercing the corporate veil is difficult. As it should be. But the complaint appears to allege facts sufficient to withstand a motion to dismiss. Notably the complaint alleges that when Mock and Eastburn negotiated the contract, and as of the date it was executed, that C&N was not yet in existence because no paperwork had yet been filed with the Oregon Secretary of State. This fact, if true, is not necessarily dispositive. (Indeed, if there was no corporation there is no need to pierce the corporate veil). But no one entering million-dollar contracts (Mock and Eastburn) ought to do so without having completed the necessary steps to form an entity. On the flip side, JNV Farms likely could have done a better job protecting its investment and the lawsuit may, as it often does, come down to whether the defendants have any recoverable assets. Time will tell.

For more on the recent wave of Oregon hemp litigation, check out the following:

Cannabis Patents: Will the Illegality Doctrine Ruin Everything?

Could a court refuse to enforce cannabis patents?

Recently, William J. McNichol, Jr., Adjunct Professor at Rutgers University School of Law, wrote an article regarding the enforcement of cannabis patents that should definitely be discussed. As we’ve noted starting last summer, we expect to see an increasing number of patent infringement cases. We’ve also been providing updates on the very first patent infringement case here and here.

Professor McNichol predicts that “the [US]PTO’s willingness to grant cannabis patents is unlikely to be matched by a willingness of the Federal Courts to enforce cannabis patents.” This is because of a centuries-old principle called the Illegality Doctrine (or, Illegality Rule) – the illegality of the use, possession, and distribution of cannabis products will create an undefeatable barrier to the enforcement of most cannabis patents.

So, what is the Illegality Doctrine?  It can be summed up by Lord Mansfield’s dicta in Holman v. Johnson (a case from 1775!): “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.” The doctrine is based on the public policy that a person shouldn’t be able to benefit from his/her own wrongdoing, and the courts shouldn’t enforce claims that harm the integrity of the legal system. An even older English decision that’s instructive is the “Highwayman’s Case,” where two “highwaymen” committed a string of robberies and ended up in Court because one claimed that he had been cheated out of his share of the monies robbed. The Court refused to consider the lawsuit entirely, turned both men over to the sheriff, and fined their lawyers for bring a suit “both scandalous and impertinent” (talk about a bad outcome).

The Court’s refusal to hear cases founded in illegality is well established and known today and, given the U.S. Supreme Court’s holding in Gonzales v. Raich, 545 U.S. 1 (2005) that the distribution and sale of cannabis products remain actionable crimes under federal law (even in pro-cannabis states), any plaintiff in a patent infringement action would be asking a federal court to protect its illegal enterprise from the unlawful competition posed by another illegal enterprise.  Professor McNichol concludes:

“The likely refusal of the Federal Courts to entertain Cannabis patent infringement actions reflects a principle generally applicable to the Cannabis industry and having far reaching consequences that are beyond the scope of this paper. The Illegality Rule will likely operate to close the Federal Courts to all manner of business disputes. Some of these, such as bankruptcy, are like patent infringement actions in that they can be entertained only in Federal Court. Other business matters, such as licensing disputes and complex contract disputes involving diverse parties, are typically and most conveniently handled by Federal Courts. In bringing patent infringement actions, the Cannabis industry draws attention to the Illegality Rule and so hastens its application, which may operate broadly to the Cannabis industry’s detriment.”

One reason of many why the UCANN case is one to watch, is to see if the Illegality Doctrine will be raised by the Court. Judge Martinez hasn’t raised the issue yet, and for all intents and purposes, has treated the UCANN case as any other patent infringement case. If it does come up and sets a precedent that cannabis patents will not be enforced in the federal courts, Professor McNichol is probably right in that it will likely not only effect intellectual property cases, but also other commercial disputes involving cannabis. We’ll continue to keep you posted on how the UCANN case develops and whether Judge Martinez begins to hint that he’s giving the Illegality Doctrine some real consideration.

California Cannabis Legislation: SB 475 Would (Finally) Allow Licensees to Exchange Trade Samples

An issue our clients have encountered in a variety of transactions, including basic product purchase transactions and intellectual property licensing transactions, is that the California rules governing commercial cannabis licensees currently do not allow the exchange of free samples between licensees. We are unaware of an industry in which the wholesale purchaser of a large quantity of product, or the licensor of intellectual property for use on such product, wouldn’t want to ensure the quality of that product. But in California, the regulations don’t always make sense and the regulatory learning curve has been steep.

Senate Bill 475, which is set for hearing today, June 25th, is one of many pieces of pending legislation that would provide clarity to licensees regarding what they can and can’t do with cannabis samples. Currently, licensees are prohibited from giving away any amount of cannabis or cannabis product as part of a business promotion or other commercial activity.

SB 475 would “allow a licensee to designate cannabis or a cannabis product as a trade sample at any time while the cannabis or cannabis product is in the possession of the licensee and would impose specific requirements on the licensee making the designation. The bill would prohibit the sale or donation of cannabis or a cannabis product that is designated a trade sample, but would allow those trade samples to be given for no consideration to an employee of the licensee that designated the trade sample or to another licensee.”

Cannabis trade samples must, upon designating cannabis or cannabis product as a trade sample, record the associated quantity, product type, and unique identifiers of the product into the track and trace program. The cannabis must be labeled, “TRADE SAMPLE. NOT FOR RESALE OR DONATION,” and may only be transported between licensees by an employee of a licensee. Trade samples may not be sold or donated by any licensee.

In addition, samples of cannabis or cannabis products designated as trade samples may be given for no consideration to an employee of a licensee that designated the trade sample or to another licensee, subject to the following requirements:

  1. A trade sample shall only be given for the purposes of conducting research and development, education, or targeted advertising to licensees about new or existing cannabis or cannabis products.
  2. A licensee shall maintain records of cannabis or cannabis products designated as trade samples that are given to employees.
  3. An employee of the licensee shall not possess or transport trade samples in amounts exceeding the following:
    1. Twenty-eight and one-half grams of nonconcentrated cannabis.
    2. Eight grams of concentrated cannabis, including concentrated cannabis contained in cannabis products.
    3. Six immature cannabis plants.

Under SB 475, cannabis or cannabis products can be consumed by the licensee or an employee of the licensee. The bill also clarifies that cannabis or cannabis products may not be given to retail customers, and that all products designated as trade samples are subject to required quality assurance and testing regulations.

If passed, SB 475 will correct what we perceive to be a serious defect in the regulations and will make doing business in the industry just a little bit easier.

Foreign Direct Investment (FDI) from China in U.S. Cannabis Businesses

If you think your Chinese investor will be able to get your cannabis venture the promised investment funds any time soon, you are in for a long slog. Most companies do not care who provides their investment capital (as long as the investors are content being passive investors), and Chinese households have typically been lauded as excellent savers, much more so than we in the U.S., leaving money available to invest at home and abroad. Recently I spoke with a client in the California cannabis industry who had invested several million dollars into an integrated cannabis operation (cultivation, processing/manufacturing, and distribution). In conducting due diligence about his investment, I was interested to see that he was the only person involved in the business who was non-Chinese. He wanted to get his investment dollars out to put into a new venture, and he said, “The other owners tell me that they have friends in China who can put in enough money into the company that they can buy me out. But they are having trouble getting their money out of China right now. Do you think they will be able to get their money from China to the U.S. in the next few weeks?”

I chuckled in spite of myself and said, “That is not going to happen that soon, and it may not be possible to accomplish even in a few months.” China’s government has a tight grip on its money (technically renminbi (人民币) means “the people’s money”, but the people can’t be bothered to look after their own money, right?). Even when times are good, China controls foreign currency leaving the country, especially U.S. dollars. But times are not good in China, despite recent reassurances from Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission. How do we know times are not good in China? There are a lot of smart people in the world who track where money flows and how that movement (or lack thereof) impacts our qualities of life. They are called macro (big picture) economists. These economists have noticed that (a) although China is encouraging foreign investment in its banking and insurance sectors, promising ownership of up to 100% by foreign investors, so far no one is biting, and (b) foreign lending institutions are loathe to provide capital to Chinese banks and industries, seeing economic risks in China everywhere they look.

Chinese would-be investors in U.S. ventures, including hot market cannabis enterprises, are finding it exceedingly difficult to get money out of China, even their allotted USD $50,000 in foreign currency that each Chinese national is supposed to be permitted to purchase and transfer out of China, according to China’s State Administration of Foreign Exchange. But in practice, such applications are being more closely scrutinized by China’s ever-present bureaucratic machine, and even China’s elites like the former central bank adviser, Yu Yongding, are being denied access to foreign currency. That means your prospective Chinese investor or business partner (or customer who owes you money for your raw inputs, such as U.S. timber) will not be able to get you those U.S. dollars you have been waiting for any time soon, no matter how well connected they are.

Why is China holding onto U.S. dollars? We’ve discussed this (and all things related, on our firm’s China Law Blog) but China needs to maintain its foreign exchange reserves (largely held in dollars) for several reasons. One of the primary reasons is so that China can continue to fund its global export machine that does business in U.S. dollars with the rest of the world. Chinese exporters buy their raw inputs in U.S. dollars, so China’s central bank needs to keep foreign exchange reserves on hand to facilitate those transactions. A second reason is that to the extent China can keep U.S. dollars out of circulation, China can artificially keep its currency value low, which makes its exports more affordable to the U.S. and the rest of the world. China holds more than $3 trillion in of its assets in a foreign currency, which equals approximately $2,142 per capita in China’s 1.4 billion population (in comparison, the U.S.’ $126 billion in foreign exchange reserves equals approximately $385 per capita in the U.S.’ 327 million population). China’s currency restrictions are not new. These restrictions are an integral part of China’s economic policies under which China wants to keep its yuan valuation at least seven times higher than the U.S. dollar. China can also use its foreign currency holdings to buy up yuan when others are trying to dump it, to keep the yuan from freefalling in foreign exchange markets due to concerns like a trade war or ongoing economic restrictions or sanctions.

To bring this discussion full circle, if your would-be cannabis business investors are Chinese or have money in Chinese bank accounts that they are having “a little trouble” getting to your U.S. bank account, do not make any near-term plans that rely on their promised dollars, especially if the promised amount is more than $50,000. Chinese currency leaving for foreign markets is a form of capital flight to which China is keenly attuned and to which it will take great measures, both overt (currency manipulation) and covert (denying individual foreign exchange transactions in Chinese banks, even when those transactions are in sync with Chinese law).

Also, if your international investor has already applied or wants to apply for a fast-track EB-5 visa path to U.S. citizenship, their investing your marijuana venture (regardless of current state legality) is a huge red flag that will derail their application process and impact their ability (if they are or become a green card holder) to become a naturalized citizen because they will have been involved with a controlled substance under U.S. federal law. If the potential investor’s immigration attorney is not aware of that minor detail, then you can do your investor a favor and let them know. For a primer on foreign investment in U.S. cannabis businesses, read this. It is reasons like this, the intersection of our firm’s international practice and our cannabis practice, that make my daily law practice so interesting, intellectually rigorous, and fun.

Hemp-CBD Across State Lines: Alaska

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.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. Last week was Alabama. This week we turn to Alaska.

In April 2018, Alaska enacted Senate Bill 6 (SB 6), “An Act Relating to the Regulation and Production of Industrial Hemp.” SB 6 was passed before the 2018 Farm Bill, in compliance with the 2014 Farm Bill. Under SB 6, “industrial hemp” is defined as “all parts and varieties of the plant Cannabis sativa L. containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 defines “cannabidiol” oil as the “viscous liquid concentrate of cannabidiol extracted from the plant (genus) Cannabis containing not more than 0.3 percent delta-9-tetrahydrocannabinol.” SB 6 does not address the processing of industrial hemp into Hemp-CBD products

The Alaska Department of Natural Resources (“DNR”), which is a part of the Alaska Division of Agriculture, has regulatory authority over industrial hemp. According to the Alaska Journal, Alaska’s hemp program has been off to a slow start as DNR took time to work with law enforcement to come up with a regulatory plan for hemp.

On May 31, 2019, DNR issued proposed industrial hemp rules.  These rules are extremely detailed and are not yet final. This post will summarize some of the highlights including cultivation, processing, sales, and hemp-derived products. The proposed rules also provide a detailed outline of industrial hemp transportation and testing, including procedures for quarantining and destroying non-compliant hemp and hemp products.

Under proposed rules, DNR will issue three “classes of industrial hemp registration for participation in the [Alaska Industrial Hemp Pilot Program],” for growers, processors and retailers.

Grower registration. A registered grower may grow, store, and transport industrial hemp. A grower may also sell raw industrial hemp to another grower or to a processor or sell industrial hemp “to persons who are not required to be registered by this chapter, including consumers in the state, if the hemp will not be further processed[.]”  A grower cannot sell industrial hemp that has been processed unless it holds a processor registration as well. Growers must retain records of the source of all industrial hemp seeds and propagules. Industrial hemp cultivation is only allowed in a registered “grow area,” which cannot be a residence and cannot be within 3,230 feet of a marijuana grow. Growers must submit planting report to DNR 30 days after planting or replanting hemp seeds and propagules. Pesticides are only to be applied by an Alaska Department of Environmental Conservation certified applicator. Growers cannot harvest hemp until it has been tested by DNR unless DNR gives express permission allowing a post-harvest test. In either scenario, industrial hemp must be tested before a grower may sell it.

Processor registration. A registered processor may process industrial hemp in its raw form into any other form or product. Processors may purchase, store, and transport raw hemp. Processors may sell processed hemp or hemp products to retailers. Processors must comply with all applicable health and safety standards.  Processors may only create hemp-based extracts using the following methods:

  • Non-hydrocarbon extractions, including: cold or hot potable water filtration; isopropyl alcohol or isopropanol; ethyl alcohol or ethanol; carbon dioxide; dry ice; or dry shifting or sieve.
  • Hydrocarbon extractions, including: n-butane; isobutene; propane; or heptane.

Processors may only use solvents in the extraction process that are food grade or at least 99% pure. and Solvent-based extraction must be “completed in a commercial, professional grade, closed loop system capable of recovering the solvent used for extraction.”

Processed hemp products intended for human or animal consumption must be tested for cannabinoid concentration and profile, residual solvents, microbials, pesticides, and heavy metal concentrations. Testing must be performed by DNR or a testing facility authorized by DNR. Processors must retain records and prepare an annual report on the quantity of industrial hemp processed, identification of lot and batch numbers processed, disposition of all raw and processed industrial hemp, and records of all persons who received all raw or processed industrial hemp.

Retailer registration. A registered retailer may sell processed industrial hemp or industrial hemp products to consumers. In addition, retailers may import, store, and transport processed industrial hemp and industrial hemp products. Retailers must ensure that all products are labeled properly and must display a placard from DNR showing that it is a registered retailer. When applying for registration, a retailer applicant must provide a description of the type of store or operations of the retailer, a location or list of locations where industrial hemp will be offered for retail sale, and a list of products intended for sale. Like processors, retailers must keep records and submit annual reports to DNR.

Hemp Product Endorsement. In addition to registering growers, processors and retailers, DNR is also imposing regulations on all hemp products in Alaska. DNR must endorse “any hemp product processed beyond its raw form” that is intended for human or animal consumption before it is “transported in the state or offered with or without compensation to a consumer.” Retailers and processors can apply for an endorsement on an application provided by DNR.  Endorsement applicants must provide the following:

  1. A color copy of the product’s proposed label;
  2. A copy of the laboratory test results of each product or batch of product;
  3. A copy of the processor’s DNR registration under or a copy of the processor’s registration or license from other states or qualifying entities that have implemented an industrial hemp pilot under the 2014 Farm Bill;
  4. A copy of the terpene analysis if required under the proposed rules; and
  5. An endorsement fee.

No processed industrial hemp product intended for human or animal consumption may contain more than 50 milligrams of delta-9 THC per individual product. Such products must also include the following items on their label:

  1. The product name;
  2. A batch and lot number for the product;
  3. An expiration date;
  4. The total quantity of the product by weight or volume;
  5. The serving size or recommended dose;
  6. A list of all ingredients;
  7. A statement that the product has not been approved by the Food and Drug Administration or the Alaska Department of Environmental Conservation.
  8. The industrial hemp pilot program from which the hemp originated;
  9. The industrial hemp pilot program that authorized the processing or testing of the industrial hemp in the product; and
  10. If the product conducts any delta-9-THC, the statement “warning: contains THC”.

Bottom Line. At this time, it is unclear when the DNR will start issuing registrations or will start endorsing products.

The most striking thing about the new rules is the endorsement and registration required for the sale of hemp products intended for human consumption, which almost certainly includes Hemp-CBD. On June 20, 2019, the DNR updated a “Questions and Answers” page on its website which indicates the scope of this registration:

Q: Are big stores such as GNC, Natural Pantry, all the gas stations going to have to get retail
licenses?
A: Yes. Except for a grower or processor selling raw industrial hemp, all retail sales of hemp and hemp products will require retail registration.

This may preclude the online sale of consumable Hemp-CBD in Alaska as retailer applicants must list the locations where they will sell hemp products and display a placard from DNR in their stores. Online retailers who sell directly to consumers won’t be able to comply with these location-based requirements.

Finally, these rules are focused solely on the 2014 Farm Bill and make no reference to the 2018 Farm Bill. That may need to change as a majority of states are going to be operating under the 2018 Farm Bill next year.

Interested stakeholders should carefully review these rules if they want to make any changes.  DNR will be accepting public comments on the rules until 5:00 PM on Tuesday July 3rd, 2019. Comments can be submitted by email to industrialhemp@alaska.gov or online at  http://notice.alaska.gov/, and using the comment link.

Protection of Adult-Use Cannabis from Federal Enforcement Passes House in Resounding Bipartisan Vote

Good news!

On Thursday, the United States House of Representatives voted 267-165 to prohibit the United States Department of Justice from using appropriated funds to interfere with state-legal cannabis programs. The Rohrabacher-Farr Amendment (a.k.a. the Hinchey–Rohrabacher, Rohrabacher-Blumenauer, and Joyce Amendment) has provided similar protection to state-legal cannabis programs over the past decade, but only to medical programs. The new amendment would extend to adult-use cannabis regimes in addition to medical cannabis programs (but only if it is approved by the Senate and signed by the President). The amendment was introduced by Earl Blumenauer of Oregon as H. Amdt. 398 to H.R.3055, a bill providing appropriations for Departments of Commerce and Justice, Science, and Related Agencies for the fiscal year ending September 30, 2020.

A Spirited Debate With Alabama Leading the Opposition

Following Mr. Blumenauer’s introduction of the amendment, Mr. Robert Aderholt of (hemp friendly) Alabama spoke in opposition, arguing that under the Controlled Substances Act, the Drug Enforcement Administration defines schedule I drugs as having no current acceptable medical use and a high potential for abuse, and that there is no scientifically recognized medical benefit from smoking or eating marijuana plants.

Mr. Blumenauer responded with:

“[i]f we were rescheduling drugs today, cannabis probably wouldn’t be scheduled at all, and what would be Schedule I is tobacco, which is highly addictive and deadly. It is widely known now that there are, in fact, medicinal purposes to be obtained from using cannabis. That is why the voters in the gentleman’s own State just approved medical marijuana.

But the evidence is clear. You can find that out with children in your State who use medical cannabis to stop extreme seizure disorders; people who use cannabis to be able to stop the violent nausea associated with chemotherapy; or veterans that use it for PTSD, traumatic brain injury, or chronic pain. This is what the American people have demanded, why it is now legal in 33 States, why it has some version in 47, and is supported by two-thirds of the American public and 90 percent for medical marijuana. It is time that we extend this protection to these State legal activities so that they can thrive and move forward.”

Mr. Blumenauer yielded time to Mr. Jose Serrano of New York and Ms. Eleanor Holmes Norton of Washington, DC, who emphasized the importance of this protection to their respective jurisdictions. Following a voice vote that favored the Ayes, Mr. Aderholt demanded a recorded vote. The recorded vote showed wide bipartisan support for the measure, with 41 Republicans supporting.

Breaking Down the Rohrabacher-Farr Amendment

The Rohrabacher-Farr Amendment is a rider in an omnibus appropriations bill funding the federal government. Since it was first passed, it has been renewed periodically with bipartisan support. The Rohrabacher-Farr Amendment, which prohibits interference with state-legal medical cannabis programs only, is still included as Section 531 of H.R. 3055. The current version of the Rohrabacher-Farr Amendment is in effect through September 2019.

The Ninth Circuit has interpreted the Rohrabacher-Farr Amendment as prohibiting the Department of Justice from spending funds from relevant appropriations acts for the prosecution of individuals engaged in conduct permitted by state medical marijuana laws and who fully complied with such laws. See U.S. v McIntosh (9th Cir 2016) 833 F3d 1163, 1178 (McIntosh). In McIntosh, the Ninth Circuit warned that the federal government can appropriate funds for prosecutions under the Controlled Substances Act tomorrow, or the temporary lack of funds could become a more permanent lack of funds if Congress continues to include the same rider in future appropriations bills.

Since the McIntosh decision, the Rohrabacher-Farr Amendment has been useful in halting federal prosecutions and asset forfeiture actions.  (See e.g. U.S. v Pisarski (N.D. Cal, No. 14–cr–00278–RS–1), and this story describing the return of $257,733 seized by law enforcement officers from a licensed California cannabis distributor.) Pursuant to the Ninth Circuit’s interpretation of the Rohrabacher-Farr Amendment, where a person’s conduct strictly complies with all relevant conditions imposed by state law on the use, distribution, possession, and cultivation of medical marijuana,  federal prosecution is barred unless and until a future appropriations bill permits the government to proceed.

Bottom Line

If the new Blumenauer Amendment becomes law, the same protections from federal prosecution afforded to state-legal medical cannabis programs will extend to adult use programs. Unless and until that happens, however, adult use programs remain at risk. We perceive that risk as relatively marginal, but hopefully the Senate agrees that it is time to eradicate the possibility altogether.

Oregon Hemp: ODA’s New “Total THC” Standard is a KEY Operations and Contract Issue

Get it right with Total THC testing requirements.

In the past few months, many of our Oregon hemp clients have asked us to clarify the testing requirements imposed by the Oregon Department of Agriculture (“ODA”). Unlike other jurisdictions that only test for tetrahydrocannabinol (“THC” or “delta-9 THC”) concentration, the ODA rules provide that any industrial hemp product sold to consumers must contain no more than 0.3 percent “Total THC.”

Under Oregon hemp law, “Total THC” means “the molar sum of THC and THCA [tetrahydrocannabinolic acid].” This creates some very important considerations for hemp farmers and related parties, and, as explained below, failing to account for this issue in production and sale agreements creates serious exposure. But first, some background on the “Total THC” standard.

THC and THCA are two compounds commonly found in the cannabis plant. As its name indicates, THCA is an acidic cannabinoid, whereas THC is a neutral cannabinoid, meaning it possesses active (psychoactive) proprieties. While these compounds are present in different forms, they are linked in that when exposed to heat or lights THCA converts into THC. This conversion process naturally occurs over time but can also be enhanced through a chemical reaction called decarboxylation. Specifically, decarboxylation removes a carboxyl group of THCA and releases carbon dioxide which turns the large 3-D shape of the THCA molecule into a THC molecule, which is smaller and can fit into a body CB1 (cannabinoid) receptors.

A while back, the ODA suggested in one of its public announcements that the “Total THC” testing requirements aimed to align with the 2018 Farm Bill. The 2018 Farm Bill defines “hemp” as, in part, “acids, […] with a delta-9 tetrahydrocannabinol [(“THC”)] concentration of not more than 0.3 percent on a dry weight basis.” (Emphasis added). Consequently, the ODA posits that because THCA is an acidic cannabinoid that “contains” THC, it must be added to the THC concentration to ensure that their total concentration does not exceed 0.3 percent. However, opponents of the “Total THC” approach have described this rational as flawed in that THCA and THC are separate and distinct molecules. As such, THCA does not “contain” delta-9 THC. Instead, a chemical process converts a THCA molecule into a delta-9 THC molecule.

States like Oregon also support the “Total THC” position because the 2018 Farm Bill provides that States and Native American Tribes that wish to hold primary regulatory authority over the production of hemp within their borders must submit a plan that includes, among other things, “a procedure for testing, using postdecarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe[.]” Although there is no “postdecarboxylation” testing method per se, the congressional intent was apparently to refer to a testing method known as gas chromatography (“GC”).

The GC testing method consists of heating up a hemp sample to separate out its compounds and measure them. This method is powerful enough to decarboxylate THCA in a sample, which means that GC generates the very molecule it is measuring, and thus, calculates the “totality of THC concentrations” found in a hemp sample. Many in the hemp industry have criticized this method, as it tends to increase the THC concentration in the hemp sample and pushes it over the 0.3 percent limit. This, in turn, limits the type of strains farmers can work with and gives farmers in jurisdictions that only require the testing of THC a competitive edge.

But regardless of which position is most meritorious, Oregon hemp farmers and processors are obliged to comply with these ODA rules. As we have highlighted in several of our blog posts (here and here), hemp players must strategically and carefully plan when entering into a hemp-related contract. This careful approach mitigates their risks of financial loss and litigation. Consequently, Oregon hemp farmers and processors should account for the “Total THC” testing requirements in their transactional documents with the assistance of experienced hemp attorneys. For more information on hemp-related contracts and Oregon’s testing requirements, do not hesitate to contact our team of CBD attorneys.

Brothers (and Sisters) in Farms: The Pros and Cons of Joining a California Cannabis Cultivation Cooperative

California cannabis cooperatives are still going strong.

Our firm’s cannabis practice group represents licensed cannabis cultivators of all sizes, ranging from the small artisanal grower to the medium/large farm with a country farmhouse to the mega farm jumbo operation. Common problems permeate cannabis cultivation operations of any size in this state: California’s cannabis taxes are high; traditional financing is unavailable; licensing and environmental compliance fees are burdensome; and the black market is still too strong a competitor. However, those challenges hit the little guys much harder, which is why we see stories about legacy farmers being forced out of business or back underground because they’re just unable to compete in the regulated environment. Then came the new emergency state regulations, which paved the way even more for mega farms through a loophole that allowed growers to “stack” small cultivation licenses to get around the 1-acre cap per licensee.

The little guys fought back, and sued the state arguing that the emergency regulations were contrary to the intent of voter-approved Prop 64 in 2016, which was intended to limit grows in the short term to allow smaller farmers to get back on their feet after expending initial capital investments and having to come into compliance with state environmental laws. But earlier this year, the plaintiffs dropped their lawsuit against the state, soon after the final regulations came out affirming the state’s position would not change.

But now the farmers are starting to explore a new tactic: joining forces as cannabis cultivation cooperatives to better compete with the bigger players. But didn’t cooperatives get phased out by the new regulations? The short answer is that yes, the traditional cooperative model that existed under the Compassionate Use Act is now gone, but a new model exists under current law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Generally speaking, under MAUCRSA a cannabis cooperative association is a group of 3 or more cultivator licensees, each farming no more than 10,000 square feet of outdoor canopy, and collectively not farming more than 4 acres total. But cooperatives have advantages and disadvantages as a potential vehicle for ownership and operation.

Advantages

When cannabis cultivators join a cooperative association, the members are able to spread fixed costs from the services that the association is able to provide, such as access to land and financing, equipment leasing, bulk purchase of supplies, group insurance plans, hiring and recruitment services, security and property management services, and marketing and advertising resources. Associations are also allowed to merge or consolidate with other cannabis cultivation associations, allowing even greater economies of scale.

Members are able to enter into collective marketing agreements, which allows them to offer purchasers a steadier and larger supply of more uniform products. This creates a more competitive market position than growers could attain on their own, while still allowing them to devote the time and attention required for producing high-quality appellations and artisanal strains. The cooperative model also eases the pain of licensing and regulatory compliance through group access to consultants, accountants, and attorneys familiar with the group’s operating model.

Disadvantages

To be a member or stockholder in a cannabis cooperative association, a person or entity must be a licensed cannabis cultivator, meaning that opportunities for outside investment in the cooperative itself are lacking. Members also cannot hold cannabis licenses in any other state or country, and their operations are limited to 4 acres in total. And if you’re thinking that members could get around that by contracting to operate as a single entity, think again: members shall not “conspire in restraint of trade, or serve as an illegal monopoly, attempt to lessen competition, or to fix prices in violation of” California law.


Whether or not it makes sense for a small grower to join a cooperative association depends on the risks and benefits it has to weigh for each of its options, and each grower has unique circumstances it must consider. But as long as the black market continues to thrive in California, even with the cost savings and other advantages available under a cooperative model, the state will have to continue coming up with creative solutions for incentivizing illegal operations to join the licensed community.

New Law Allows Sales of Medical and Adult-Use Marijuana in Maine

Maine Gov. Janet Mills signed a bill June 27, 2019, setting up a legal framework for the sale of recreational marijuana to adults as early as next year.

Her office said that the state’s Office of Marijuana Policy plans to accept applications for licenses by the end of 2019. The Democratic governor said her administration has worked quickly to implement the voter-approved law since she took office earlier in 2019.

The state’s voters chose to legalize both the use and sale of recreational marijuana among adults in November 2016, but months of delays and political squabbles have slowed the implementation of a commercial industry. 

State officials say retail adult-use marijuana could arrive in stores as soon as early 2020. 

Medical marijuana was already legal in Maine, and under the 2016 law, adults over 21 can possess up to 2.5 ounces (70.9 grams) of marijuana without penalty.

The new law becomes effective in September 2019. At that point, the Office of Marijuana Policy has 60 days to finalize regulations. Then, the state must start accepting applications within 30 days.

In the meantime, Mills’ administration is working on a public health and safety education campaign, and figuring out how the state will track, trace and license marijuana.

“We have drafted these rules with a view toward keeping the public’s health and safety at the forefront,” said Office of Marijuana Policy Director Erik Gundersen.

The new framework makes several changes to state law ahead of sales.

Municipalities could opt in or out of allowing marijuana sales. Only a handful of cities and towns have laid the groundwork for retail sales.

Currently, state law defines poisonous or harmful substances as “adulterated.” The new law says Maine would not consider edibles produced with recreational marijuana adulterated.

Under the new law, Maine residents who have lived in the state for at least four years would have to claim at least 51% ownership of a cannabis company to qualify for a license. The state would also authorize the department to impose an administrative hold on a licensee.

Marijuana is legal for adult use in 10 states and the District of Columbia, though some, like Maine, have yet to set up commercial sales. 

— Marina Villeneuve


Feature image: Democratic Maine Gov. Janet Mills signed a bill June 27, 2019 setting up a legal framework for the sale of adult-use marijuana that could arrive in stores as early as 2020. (AP Photo/Robert F. Bukaty, File)

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With Public Pressure, New Jersey Could Still Pass Legalization in 2019

Like Mark Twain or the old guy getting tossed onto a cart in Monty Python’s film “The Holy Grail,” reports of the death of legal marijuana in New Jersey have been exaggerated.

At least that’s what Kelli Hykes, the Government Relations Director for Weedmaps, maintained at a June 18, 2019, conference on the status of marijuana in Somerset, New Jersey, and presented by the nonprofit news organization NJ Spotlight.

Hykes argued that there is still time to approve the bill, the New Jersey Cannabis Regulatory and Expungement Aid Modernization Act, an option she sees as far preferable to a referendum vote that is more than a year away. But to do so, she said, supporters of marijuana reform need to let lawmakers know how they feel.

“I may be the Pollyanna of pot in New Jersey but it’s not dead yet and I’m still holding out hope that we can breathe life into it,” she said.


It’s premature to call the (marijuana legalization) bill dead. It definitely was involved in a fiery crash, but I think it’s more accurate to say that the bill is in a coma.
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Hers was the minority opinion at the event.

In March 2019, New Jersey seemed poised to become the first state to create a regulated, taxed marijuana market for adult use through the state Legislature. Democratic Gov. Phil Murphy was fighting for the measure, which had the support of the leadership in the state Senate and Assembly. The votes were there in the Assembly, but supporters were unable to cobble together the 21 votes needed in the Senate for passage.

After a morning of intense lobbying, Democratic Senate President Steve Sweeney pulled the bill rather than see it defeated. He and Murphy had said the bill would return, but even Sweeney now says it will be taken to New Jersey voters as a ballot measure in 2020 rather than trying to push it through the Senate. 

Another panelist at the event, Fruqan Mouzon, helped write the bill. Mouzon has served as general counsel to New Jersey’s Senate Majority Office and is now the chair of the cannabis practice group at the law firm McElroy, Deutsch, Mulvaney, and Carpenter LLP.

Fruqan Mouzon chairs the cannabis practice group for McElroy, Deutsch, Mulvaney, and Carpenter LLP and served as General Counsel for the New Jersey Senate Majority Office. He helped write the New Jersey adult-use marijuana legalization bill, which was pulled when it did not have enough Senate support to pass. (Photo by Bill Barlow)

According to Mouzon, the bill became increasingly complex in part because of efforts to create a new, multibillion-dollar legal industry that also would help address social and economic justice issues.  

“What we didn’t want was three big conglomerates taking over the marijuana industry in New Jersey,” he said. The bill aimed to create space for women, minorities, and disabled veterans as entrepreneurs.

But the complexity also came at a cost. There were several elements that he described as “damned if you do, damned if you don’t.” He described a balancing act in which compromises that were needed to bring in one reluctant Senate vote would in turn lose two others.

For Hykes, that complexity is an important reason the bill should be passed legislatively. The language of the referendum question will likely be very simple, without including the detailed policy that is needed to launch a new industry.

In New Jersey, she said, the referendum vote would amend the state’s Constitution. If approved as supporters expect, that would mean a slow and difficult process to make any changes that contradict the language on the ballot, a process that takes years at best. That’s a bad idea in a fast-changing industry, she said.

“The idea that we would be putting ourselves in a situation that it could take two to three years to course-correct is very dangerous, in my opinion,” Hykes said.

Not only is it a good idea for New Jersey lawmakers to pass the bill, she argued, but it is also doable, if supporters start putting political pressure on their representatives. A vote could happen after the November 2019 election, which Hykes described as the “lame duck” session. That would give lawmakers months to work out a compromise.

“It’s premature to call the bill dead,” she said. “It definitely was involved in a fiery crash, but I think it’s more accurate to say that the bill is in a coma.”

Kelli Hykes, Government Relations Director for Weedmaps, says that voters can call upon their elected leaders to revive and pass adult-use marijuana legalization in New Jersey during a “lame duck” session after the November 2019 election. (Photo by Bill Barlow)

Mouzon did not believe a lame duck vote is likely. If voters support legalization, the Legislature would still have to act to create the regulations that would cover sales and use. At that point, he said, lawmakers would dust off that complicated bill, now with the political cover to vote yes.

He seems certain voters will say yes.

“I don’t think that there’s any fear that it won’t pass overwhelmingly, 70%,” he said. The vote will come in a presidential election cycle, one with President Donald Trump on the ballot, which is likely to strongly motivate Democrats and progressives to get to the polls.

Hykes also said at the event co-sponsored by Weedmaps that the legislative route is the best policy option for New Jersey.

“What we haven’t seen is an uprising, a swell of support from the public. I think that if we saw that, the likelihood of passing during lame duck would be much higher,” she said. “Possible and likely are very different. It is absolutely possible, and it would be much more likely if people picked up the phone and demanded it.”

Mouzon agreed. “I think she’s absolutely right. There wasn’t a cry for legalization. The only voices you heard were in opposition.” Though the bill’s social justice element earned vocal support, Mouzon said legalization advocates didn’t build much of a case beyond that.

In the meantime, lawmakers in New Jersey and beyond continue to move forward on the issue. New Jersey approved wide-ranging reforms to its medical marijuana system, part of a package of bills set to be voted together with adult use. New York approved a statewide decriminalization bill after also falling short on legalization.

Illinois, however, was able to pass marijuana legalization in its General Assembly. Democratic Gov. J.B. Pritzker signed the bill June 25, 2019, in Chicago. Adult-use sales go into effect Jan. 1, 2020.

Mouzon argued that decriminalization is not the answer, citing some people’s long-held belief that marijuana is a “gateway” to other drugs.

“The drug dealer is the gateway,” he said. “If the only way that you can get marijuana is on the street, that guy can also give you cocaine. He can get you heroin. He can get you anything else you want. So we wanted to make it legal so we can regulate it and we can control how it gets out.”

The arrests continue as well. In arguing for quick action on legalization and expungement, Murphy said about 600 people get arrested on marijuana-related charges each week in New Jersey, and about 450 of those are people of color. 


Featured Image: John Mooney, CEO and education writer for NJ Spotlight, introduces a panel of experts discussing how New Jersey can pass legislation this session to legalize marijuana. (Photo by Bill Barlow) 

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