Senators Push for Updates to FDA Regulation of CBD Food Products and Dietary Supplements

With the passage of the 2018 Farm Bill and the proliferation of food products containing CBD, we’ve been writing extensively about how the United States Food and Drug Administration (FDA) and in particular, the United States Food, Drug, and Cosmetic Act (FDCA) apply to the interstate sale of CBD products. Unfortunately, however, we have little guidance from the FDA regarding how hemp-CBD products such as foods, beverages, dietary supplements and cosmetics should comply with basic FDA requirements, including labeling rules.

What we do know is that the FDA has consistently taken the position that that CBD is excluded from the definition of “dietary supplement” under the Federal Food, Drug & Cosmetic Act (“FDCA”) because CBD is an active ingredient in FDA-approved drugs and was the subject of substantial clinical investigations before it was marketed as a dietary supplement. Therefore, the FDA maintains, as stated by Commissioner Scott Gottlieb, that:

[It is] unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations before they were marketed as foods or dietary supplements. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.”

On January 15, 2019, in light of the FDA’s current position on hemp-derived CBD and the recent passage of the 2018 Farm Bill, Senators Ron Wyden (D-OR) and Jeff Merkely (D-OR) sent a letter to FDA Commissioner Gottlieb urging the Commissioner to update federal regulations governing the use of certain hemp-derived ingredients in food, beverages, and dietary supplements. The Senators began their letter by stating,

As authors of the Hemp Farming Act, which removed the outdated restrictions on the production and marketing of industrial hemp, we urge the U.S. Food and Drug Administration (FDA) to immediately update federal regulations governing the use of certain hemp-derived ingredients in food, beverages or dietary supplements.”

The Senators go on to note that the Act removed from the federal list of controlled substances the hemp plant, and “derivatives of cannabis, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (THC) concentration of less than 0.3 percent on a dry weight basis. Under this definition, Congress legalized the production and sale of industrial hemp and hemp derivatives, including hemp-derived cannabidiol (CBD).”

Because of the removal of hemp-derived CBD from the list of controlled substances, as well as growing interest from the public in CBD products, the Senators argue that the FDA’s regulations are outdated, and urge the agency to “immediately begin updating regulations for hemp-derived CBD and other hemp-derived cannabinoids, and [to] give U.S. producers more flexibility in the production, consumption, and sale of hemp products.” The Senators also requested a response from the FDA to the following questions within thirty days:

1. What steps are the agency advancing to clarify to the public the authority the agency has in the production and marketing of hemp, specifically Cannabis sativa L. and its derivatives?
2. What lawful pathways are currently available for those who seek approval to introduce Cannabis sativa L. and its derivatives as a food, beverages or dietary supplement, including into interstate commerce?
3. Are there circumstances in which Cannabis sativa L. and its derivatives may be permitted as a food, beverages or dietary supplement by the agency?
4. Will the agency consider issuing a regulation, or pursuing a process, that would allow Cannabis sativa L. and its derivatives in food, beverages or dietary supplements that cross state lines?

Given the ongoing government shutdown that has left the FDA short on staff, we will be waiting to see if they are able to respond to the Senators’ questions within the requested thirty days. There is no doubt that thorough responses to these questions would provide the hemp-CBD industry with some much needed clarity regarding the FDA’s position on the sale of these products.

source https://www.cannalawblog.com/senators-push-for-updates-to-fda-regulation-of-cbd-food-products-and-dietary-supplements/

Qualified Opportunity Zones and Cannabis

FREE Webinar February 21: West Coast Hemp CBD

In December 2018, Congress passed the Agricultural Improvement Act of 2018 (better known as the “Farm Bill”). Among other things, the passage of the bill removed industrial hemp from the federal Controlled Substances Act, allowing legal production of the crop. Despite this landmark legislation, pitfalls still lay on the path ahead. The legality of many industrial-hemp derived cannabidiol (“CBD”) products is in question now more than ever, with different states and federal agencies taking vastly different approaches on every facet of the hemp CBD industry.

Interest in hemp is at an all-time high, and with an industry that has a potential to be worth $20 billion by 2022, it is easy to see why. If you are a hemp CBD business, have interest in the industry or are interested in the state and future of hemp CBD legality, please join us on February 21, 2019 at noon (PST) for the latest installment in our lunchtime webinar series entitled “West Coast Hemp CBD After the Farm Bill.”

In this hour-long session, Harris Bricken lawyers Daniel Shortt (Seattle, Washington), Nathalie Bougenies (Portland, Oregon), and Griffen Thorne (Los Angeles, California) will provide an in-depth look at changes in federal law and policy post Farm bill, as well as its impact on each of the three west coast states (Washington, Oregon, and California). Throughout the presentation our team will also discuss the status of laws and regulations in each state. Some of the topics we will cover include:

• the future of hemp permitting;
• Farm Bill implications for Internal Revenue Code section 280E;
• banking for hemp CBD businesses;
• intellectual property for hemp CBD businesses;
• CBD in food, beverages, vape cartridges, oils, topicals, and other products; and
• the Food and Drug Administration’s role in hemp CBD.

With moderator Hilary Bricken, our panel of attorneys will address audience questions throughout the presentation. Please register for the event here! Should you have any further questions, please feel free to reach us at firm@harrisbricken.com.

source https://www.cannalawblog.com/free-webinar-february-21-west-coast-hemp-cbd/

Proposed California Legislation May Allow Hemp CBD in Foods

Federal Court Dismisses RICO Suit Against Sonoma County Cannabis Cultivator

For a while, criminal conspiracy lawsuits against cannabis operations looked like a potentially promising strategy for cannabis prohibitionists to try and use litigation to reverse the trend of legalization. The idea is to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”), a federal statute intended to combat organized crime–and which allows private rights of action for lost property value resulting from criminal operations–to enjoin cannabis operations and recover damages to force the operators out of business. The typical set of facts is that a residential neighbor plaintiff claims that his or her property value is damaged by the existence of a nearby cannabis operation, usually outdoor cultivation, and names as a defendant every single person and business that had any conceivable connection to that operation.

There were a handful of relative successes with this strategy early on, culminating in a 10^th Circuit Court of Appeals decision allowing a RICO claim against cannabis cultivators to move forward on a theory of diminished property value. However, that victory was soon followed by a resounding defeat in a jury verdict finding no such diminution of property value. Subsequent U.S. District Court decisions from Oregon continued the backward slide, finding that although the residential neighbor plaintiffs might have potential personal injury claims for nuisance, they were unable as a matter of law to demonstrate a plausible claim for injury to the value of their property.

That trend has now found a secure foothold in California, where a San Francisco federal court recently dismissed a lawsuit by residential plaintiffs in Sonoma County alleging RICO claims against a neighboring cannabis cultivator. While the court acknowledged that the plaintiffs could potentially move forward with their claims for “diminished sense of serenity” and various “cleaning, medical, legal, and other expenses,” it found those damages would have to be pursued though traditional state law nuisance claims, not federal RICO claims, noting that “RICO was intended to combat organized crime, not to provide a federal cause of action and treble damages to every tort plaintiff.” Ouch.

Furthermore, California law added another unique element to the court’s decision. Although California recognizes claims for diminution in the market value of their homes, including prospective future losses, and such losses could potentially be compensable under RICO, under California law, “a plaintiff in a continuing nuisance case may not recover diminution in value damages because the plaintiff would obtain a double recovery if she could recover for the depreciation in value and also have the cause of that depreciation removed.” And in this case, the court found that the alleged cannabis cultivation issues would be better classified as a continuing nuisance and that the defendants had already abated the nuisance while the lawsuit was pending. Therefore, the plaintiffs’ property loss claims were effectively moot.

In the end, although the defendants prevailed on the motion to dismiss, the case was more of a pyrrhic victory because the defendants had to shut down, as they were not properly permitted by the county or licensed by the state, and the court granted leave to amend the complaint to still allow the nuisance claims to proceed. But at least in terms of the viability of RICO lawsuits as a tool to reverse cannabis voter initiatives, this was another nail in the coffin.

For more on RICO cannabis litigation, check out the following posts in our series:

• Much Ado about RICO
• Much Ado About RICO and Cannabis, Part 2
• Much Ado About RICO and Cannabis, Part 3
• Much Ado About RICO and Cannabis, Part 4
• Much Ado About Rico and Cannabis, Part 5: Multi-State Update
• The Neighborhood “Gangbusters”: Avoiding RICO Cannabis Lawsuits
• Cannabis RICO Lawsuits Are Failing: Oregon and Colorado Updates

source https://www.cannalawblog.com/federal-court-dismisses-rico-suit-against-sonoma-county-cannabis-cultivator/

The FDA’s Stance on Hemp-Derived CBD as a Dietary Supplement (Part 2)

This is the second installment in our series on the Food and Drug Administration (“FDA”) and hemp-derived CBD (“Hemp-CBD”). Our last post focused on the Drug Exclusion Rule, which essentially states that an article cannot be marketed as a dietary supplement if it was investigated or approved as a drug before the article was marketed as a dietary supplement (or food). Today, we’ll take a look at what that use of “before” really means.

Prior Market Clause

A key component of the Drug Exclusion Rule is that the article at issue was not previously marketed before the article was evaluated or approved by the FDA (the “Prior Market Clause”). So what does it mean to “market” a product? Helpfully, the FDA FAQs link to Draft Guidance for Industry: Dietary Supplements: New Dietary Ingredient Notifications and Related Issues (“NDI Guidance”) to provide an explanation of the phrase “marketed as.”

The NDI Guidance, which like the FDA FAQs is nonbinding, elaborates on the idea of “marketing”:

FDA considers ‘marketing’ a dietary ingredient to mean selling or offering the dietary ingredient for sale (1) as or in a dietary supplement, (2) in bulk as a dietary ingredient for use in dietary supplements, or (3) as an ingredient in a blend or formulation of dietary ingredients for use in dietary supplements. A dietary ingredient may be “marketed” by offering the article for sale online or at a retail establishment, listing it for sale in a catalog or price list, or through advertising or other promotion, if the promotion makes clear that the article is available for purchase. ‘Coming soon’ advertisements would not qualify.”

The NDI Guidance goes on to state “[i]n considering whether a substance has been ‘marketed as a dietary supplement or as a food,’ FDA looks for evidence of one of the following:”

1. Evidence that the substance itself was sold or offered for sale in the U.S. as a dietary supplement, dietary ingredient for use in dietary supplements, or conventional food. For example, a catalog listing a product identified as a ‘Substance A supplement’ would establish the marketing of Substance A as a dietary supplement. Similarly, business records documenting that a substance was sold or offered for wholesale or retail sale for use as an ingredient in a conventional food would establish the marketing of the substance as a food.

2. Evidence that the substance was a component of a food or dietary supplement that was sold or offered for sale in the U.S., and that a manufacturer or distributor of the food or dietary supplement marketed it for the content of the substance by, for example, making claims about the substance or otherwise highlighting its presence in the product.  For example, in Pharmanex v. Shalala, the firm marketed lovastatin, a component of its red yeast rice product Cholestin, by promoting the lovastatin content of Cholestin. Merely showing that the substance was present as a component in a marketed food would not be enough to show that the substance was ‘marketed,’ however.”

Red Yeast Rice

The NDI Guidance’s reference to Pharmanex v. Shalala is of note as that case may have a major bearing on Hemp-CBD. Back in April 1997, the FDA issued a warning letter to Pharmanex, stating that it was selling a drug as a dietary supplement. Pharmanex manufactured Cholestin, a dietary supplement derived from red yeast rice intended to promote healthy cholesterol levels. Cholestin contained the substance mevinolin. Mevinolin was chemically identical to lovastatin, the active ingredient in the prescription drug Mevacor. The FDA approved Mevacor back in 1987. The FDA advised Pharmanex that it considered Cholestin to be a drug which could not be marketed without FDA approval. Pharmanex argued that red yeast rice had been used a food ingredient for thousands of years. The FDA was not convinced, ultimately holding that Cholestin containing lovastatin did not meet the definition of a “dietary supplement”  because lovastatin was an “article” that had already been approved as a drug. The FDA determined that Cholestin did not satisfy the Prior Marketing Clause because it did not contain red yeast rice as that product had traditionally been manufactured and marketed. The FDA ran tests on samples of red yeast rice and found small amounts of lovastatin. In the FDA’s view, Pharmanex had manipulated red yeast rice  to increase the lovastatin content and therefore the Drug Exclusion Rule applied.

Pharmanex challenged the FDA’s ruling in district court. The district court set aside the FDA’s decision, agreeing with Pharmanex that the term “article” as used in the FDCA did not refer to a single ingredient in a drug. The Court of Appeals for the Tenth Circuit reversed, holding that “article” could include the active ingredients of approved new drugs, such as lovastatin, which would exclude them from the dietary supplement definition. On remand, the district court affirmed the FDA’s original conclusion that lovastatin was not marketed as a dietary supplement or food before the FDA approved Mevacor as a prescription drug.

Cholestin containing lovastatin is no longer on the market in the US. There are still red yeast rice supplements available but the FDA monitors whether those supplements contain more than the naturally occurring amount of lovastatin.

The Future of Hemp-CBD 

The Pharmanex case could dictate how the FDA treats Hemp-CBD. Hemp contains many active compounds, including cannabinoids like CBD and terpenes. Hemp can be processed in a number of ways, some of which will isolate these active compounds. Chemical extraction methods can isolate these active compounds while removing water, fiber, and other unwanted material.  Alternatively, hemp can be processed without the use of chemicals (e.g., dried flowers; chopped up plant material placed in pellets, etc.).

“Full spectrum” extracts are the extracts that contain a wide array of compounds found in the hemp plant, including cannabinoids and terpenes. Processors can also isolate specific compounds by repeatedly extracting and refining the compound. Epidiolex is an example of a CBD isolate. A CBD isolate generally contains almost no other compounds. In turn, full spectrum extracts contain trace amounts of CBD and their compounds.

Following the reasoning in Pharmanex, CBD isolate may be subject to the Drug Exclusion Rule, but processed hemp, including full spectrum extracts may not due to the Prior Marketing Clause. This is because like Red Yeast Rice, hemp has been consumed as food and medicine for thousands of years. Hemp is not the same as the CBD isolate. The Pharmanex case turned on the an interpretation of the term “article.” CBD isolate is the article that was approved as a drug. Full spectrum extracts and other processed hemp products that contain naturally occurring CBD also may be outside of the scope of the Drug Exclusion Rule by way of Epidiolex. In turn, CBD isolate or processed hemp that had isolated and increased CBD could only legally be sold as drugs.

Though the parallel between Hemp-CBD and red yeast rice are impossible to ignore, there is no gaurantee that the FDA will take the same exact approach. For one, perhaps it can be established that CBD, in its isolated form was marketed prior to the Epidiolex studies being made public. CBD was first discovered by Dr. Roger Adams at the University of Illinois in 1940. However, any marketing of CBD isolate prior to the first Epidiolex investigations in 2014, would have likely violated federal law because the 2014 Farm Bill was not yet in effect, making it illegal under federal law.

However the FDA’s statement following the 2018 Farm Bill included some very interesting language:

[P]athways remain available for the FDA to consider whether there are circumstances in which certain cannabis-derived compounds might be permitted in a food or dietary supplement. Although such products are generally prohibited to be introduced in interstate commerce, the FDA has authority to issue a regulation allowing the use of a pharmaceutical ingredient in a food or dietary supplement. We are taking new steps to evaluate whether we should pursue such a process.”

The FDA Secretary can override the Drug Exclusion Rule by issuing “a regulation, after notice and comment, finding that the article would be lawful under [the FDCA].” The statement also went onto ask for input on the future of Hemp-CBD:

Given the substantial public interest in this topic and the clear interest of Congress in fostering the development of appropriate hemp products, we intend to hold a public meeting in the near future for stakeholders to share their experiences and challenges with these products, including information and views related to the safety of such products.”

We will continue to monitor the FDA for additional updates on Hemp-CBD.

source https://www.cannalawblog.com/the-fdas-stance-on-hemp-derived-cbd-as-a-dietary-supplement-part-2/

The FDA’s Stance on Hemp-Derived CBD as a Dietary Supplement (Part 1)

Since the 2014 Farm Bill passed, products containing cannabidiol (“CBD”) derived from hemp (“Hemp-CBD”) have become widely popular and available in a wide range of stores and online. The Food and Drug Administration (“FDA”) has, for the most part, sat on the sidelines. The FDA has occasionally sent out warning letters to Hemp-CBD distributors who made medical claims about their products, but that was it. The days of relative non-enforcement may be over, as the FDA has recently seized Hemp-CBD products.

This two-part series will take a look at how the FDA will regulate Hemp-CBD. Today’s post will focus on why the FDA does not currently view Hemp-CBD is a dietary supplement. Tomorrow, we’ll examine some issues with the FDA’s position and look at how the agency may regulate Hemp-CBD in the near future.

The 2018 Farm Bill makes it explicit that it does not limit the FDA’s authority to regulate consumer products, and the FDA has made clear that it is focused on Hemp-CBD, making an announcement on Hemp-CBD just moments after the 2018 Farm Bill was signed by Trump. FDA’s jurisdiction over products is triggered by the Food, Drug & Cosmetics Act (“FDCA”).

For the purposes of this post we’ll look at the following categories of products under the FDCA and FDA regulation:

• “Drug” is any article “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals” or  “intended to affect the structure or any function of the body of man or other animals. In addition, anything intended as a component of a drug is also drug.  21 USC § 321(g). The FDA’s jurisdiction is triggered by the intended use oof an item. The FDA determines intended use generally based on claims made by the distributers of a product, which are often uncovered on labeling, advertising, and other promotional activities related to a product. Drugs are tightly regulated by the FDA and subject to pre-approval before being introduced into interstate commerce.
• “Food” is any “article for use as food or drink for man.” Unlike drugs, which are determined by intended use,  the FDA exerts its jurisdiction over food based on actual use.
• “Dietary supplement” is a product intended to supplement the diet that contains one or more of the following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical; (d) an amino acid; (e) a dietary substance for use by man to supplement the diet by increasing the total dietary intake; or (f) a concentrate, metabolite, constituent, extract, or combination of any ingredient described in clause (a) through (e). 21 U.S.C. § 321(ff).

Hemp-CBD appears to makes the most sense as “dietary supplement.” After all, it is is a concentrate of a botanical: hemp. Hemp-CBD could also be a food (based on actual use) or drug (based on intended use). The FDA’s warning letters mostly have focused on Hemp-CBD as a drug, but those letters and other statements by the FDA make it clear that the FDA does not believe that Hemp-CBD qualifies as a dietary supplement or food. For today’s post, we’ll focus on the dietary supplement side of things.

Drug Exclusion Rule

There is an exclusion clause in the definition of “dietary supplement” that generally disallows the use of an FDA approved “drug” as a dietary supplement. We will call this the “Drug Exclusion Rule.” The FDCA’s definition of “dietary supplement” excludes any article that is approved as a new drug or has been subject to a publicized Investigational New Drug (“IND”) clinical investigation, unless the substance was marketed in food or as a dietary supplement before the FDA approved it as a new drug or began the IND investigation. The FDA addresses numerous cannabis related issues on its “FDA and Marijuana: Questions and Answers” page (“FDA FAQs”). According to the FDA FAQs, products containing CBD cannot be sold as dietary supplements because CBD has been investigated and approved as a new drug, namely Epidiolex.

Though the FDA FAQs is a nonbinding guidance document, it seems to indicate that the Drug Exclusion Rule applies to CBD, because of the approval of Epidiolex and IND investigations of CBD:

The existence of substantial clinical investigations regarding CBD has been made public. For example, two such substantial clinical investigations include GW Pharmaceuticals’ investigations regarding Sativex and Epidiolex. (See Sativex Commences US Phase II/III Clinical Trial in Cancer Pain and GW Pharmaceuticals Receives Investigational New Drug (IND) from FDA for Phase 2/3 Clinical Trial of Epidiolex in the Treatment of Dravet Syndrome ).”

However, to determine whether the Drug Exclusion Rule applies, the FDA also needs to prove that CBD was not marketed as a food or dietary supplement prior to those investigations, which started in 2014. Check back early next week, when I’ll take a close look at the FDA’s position on that issue, and take a look at how the agency may regulate Hemp-CBD in the near future.

source https://www.cannalawblog.com/the-fdas-stance-on-hemp-derived-cbd-as-a-dietary-supplement-part-1/

ICYMI: The BCC Drops its Final Regulations

On Wednesday, January 16, 2019, the California Bureau of Cannabis Control (“BCC”)—the agency that licenses distributors, retailers, testing labs, and event organizers—dropped its final regulations. Until then, BCC licensed commercial cannabis operators or applicants for BCC licenses had been in no man’s land, complying with emergency regulations while trying to divine what the final regulations would look like, what they would need to change, and when they would need to change it. While the final regulations are by no means perfect, they are at least here (alongside the CDPH permanent regulations, which we covered on Monday). While these final regulations from BCC appear to mirror the proposed regulations submitted back in early December, they depart from the emergency regulations in some pretty significant ways. Below are a few of the more key areas.

Owner Changes. One of the more significant final regulatory expansions comes in the disclosures that must be made to the BCC when a licensed entity is owned by another entity. The BCC previously required that some of the people who own or run entity owners of licensees be disclosed in BCC applications, but the new regulation greatly expands those requirements. For example, in the readopted emergency regulations, entity owners needed to disclose their CEOs and/or board members if those entities were considered owners based on 20 percent or more equity in the licensee.

Now, entity ownership requirements kick in in any situation in which a company owns a licensee—not only where the ownership is based in equity (remember that ownership can also be based on direction, management, or control of a licensee or other grounds). If an entity is considered an owner, then anyone with a financial interest in that entity must be disclosed to the BCC and may be considered an owner.

This is a tremendously significant requirement and means that virtually everyone in the corporate chain must be disclosed (and probably must provide all of the many significant and burdensome disclosures). For example, if John Smith directly owns 1% of the BCC licensee ABC Retailer and does not exercise any control over ABC Retailer, he will be considered a financial interest holder as opposed to an owner.  But if he owns 1% of XYX Holdings, which has a 20% stake in ABC Retailer, he will need to be disclosed to the BCC and may be considered an owner.

What is less clear is how the BCC will evaluate whether persons like John Smith in the above example are owners. The rule isn’t very clear on this point, but does give examples such as “all entities in a multilayer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons who have control of a trust, and managing members or nonmember managers of the entity.” Persons like John Smith, who really have no say over the company and have just a small monetary interest, probably won’t be considered owners even under these new rules. But again, they probably will need to make full ownership disclosures before the BCC makes that determination.

One other significant point in the final regulations is that the BCC now expressly considers persons who expect 20% or more of the profits of a licensee to be owners. This means that various kinds of contracts (subject to the discussion below) between a licensee and third party could turn the third party into an owner depending on the compensation—even if that third party otherwise would not be an owner.

Interest Holder Changes: Similar to the owner regulations, the financial interest holder rules (regulation 5004) were also enlarged. Unlike in the readopted emergency regulations, the interest holder regulations provide a non-exhaustive list of persons or entities who must be disclosed as interest holders:

• An employee who has entered into a profit share plan with the commercial cannabis business.
• A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.
• A consultant who is providing services to the commercial cannabis business for a share of the profits.
• A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.
• A broker who is engaging in activities for the commercial cannabis business for a share of the profits.
• A salesperson who earns a commission.

The ownership changes discussed above may seem at first glance to be one of the more onerous changes in the regulations. And to some extent—especially for licensees in corporate families or which are owned by other companies—this is true. But these interest holder disclosure requirements are equally, if not more complex because they require disclosure of virtually anyone with any sort of stake in a cannabis company—small or large. This will require companies to take stock of all third-party agreements to which they are a party and spend serious effort analyzing whether the disclosure obligations apply.

Not only are there likely to be larger disclosures of financial interest holders than of owners, but licensees are also now obligated to make similar disclosures where their financial interest holders are entities. Now, anyone who is an “owner” of a financial interest holder will need to be disclosed to the BCC. This rule is admittedly narrower than the ownership disclosure requirement in that it is limited to just owners of the financial interest holder and that the categories of information that must be submitted are much narrower, but it is significant nonetheless and will require a lot of work and evaluation.

IP Licenses and Other Third-Party Agreements: Back in October, we wrote about how changes to BCC regulation 5032(b) could prohibit IP licenses and other transactions with non-licensed entities. This is obviously significant as there are many such transactions in this industry (and any). The October version of rule 5032(b) was subsequently scaled back to remove examples of unlawful third-party agreements, but now we are left with a regulation which is ambiguous as to its scope: “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.” In the final statement of rules that accompanied the December 2018 proposed final regulations (which have been removed from the BCC’s website), the BCC suggested in response to comments that third-party license agreements could be permissible if an unlicensed entity were disclosed as an owner or interest holder. But whether the BCC maintains this position remains to be seen.

Packaging and Labeling: A few weeks ago, I wrote about the packaging and labeling mess that was likely to ensue if the December proposed regulations became the final regulations. It looks like that’s happened, so I won’t repeat that article verbatim. But what bears repeating is that, except for child-resistant packaging, there doesn’t appear to be any sort of grace period for compliance with the new labeling regulations. To compound matters, while distributors can re-label cannabis and pre-rolls, they apparently can no longer re-label manufactured goods—and retailers can’t do any sort of labeling. We therefore expect that there will be a good deal of chaos over packaging that was compliant but now suddenly is not, and confusion over what to do about it.

Delivery Expansion (or Not?): As I highlighted back in the October when the BCC’s modified proposed regulations were issued, one of the bigger changes to the regulations was to section 5416(d), which allows deliveries into any jurisdiction in the state so long as they comply with the BCC regulations. This change stuck in the final regulations. While it would seem that licensed cannabis retailers can deliver anywhere in the state, there are a number of jurisdictions that still forbid it. This thus creates a conflict between local laws and statewide regulations that is not so clear as one may think.

For example, Malibu recently passed a measure that permits adult use cannabis sales and deliveries, but forbids deliveries into Malibu for entities that don’t have Malibu permits. Pasadena, which is currently undergoing a massive licensing competition, prohibits its permittees from delivering into cities or counties that prohibit deliveries. And of course there are numerous other California cities which are even more restrictive and prohibit all commercial cannabis sales or deliveries.

While not very clear, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) provides: “A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads by a licensee acting in compliance with [MAUCRSA] . . . .” Arguments could therefore be made on either side of the spectrum about whether MAUCRSA permits cities to preclude deliveries: cities could argue that MAUCRSA permits them to ban deliveries off of public roads (i.e., on private property); others could argue that deliveries made using public roads and to residences or other private properties adjacent to public roads cannot be prohibited. We expect that there may be future litigation here.

These are just some of the significant changes in the regulations. Compliance with the regulations is critical, and it’s always recommended to consult with experienced regulatory cannabis counsel in doing so. Stay tuned to the Canna Law Blog to see how the BCC regulations shake out and for other California cannabis developments.

source https://www.cannalawblog.com/icymi-the-bcc-drops-its-final-regulations/

Practical Tips for Your Cannabis Co-Branding Deals

I’m currently advising multiple cannabis clients that are seeking to enter into co-branding deals, some with other cannabis companies, some with non-cannabis companies, and some of these clients were initially unaware of the potential risks to their intellectual property (“IP”) that could result from a poorly-drafted agreement (or from failure to adequately protect their IP from the outset).

Most of the industry, at least here in California, is aware of the collaboration between Lagunitas Brewing Company and CannaCraft (under its AbsoluteXtracts brand) that produced Hi-Fi Hops, an IPA-inspired cannabis sparkling water. In Oregon, East Fork Cultivars partnered with Coalition Brewing to create a CBD-infused beer called Certified Hazy IPA. And there are no shortage of other brand collaborations within the industry, from gourmet chocolate to vape cartridges.

Co-branding is a common marketing strategy wherein two or more brands collaborate to create a product that is representative of both or each of the brands. Co-branding can be a great opportunity for publicity and can also serve as an opportunity to introduce one of the co-brander’s customers to the other co-brander’s product. It can be an effective tool for expanding the reach of your brand into other markets if executed properly. Co-branding can also serve to enhance the value of the goods if both of the brands are well-known and respected by their consumers.

But if these types of deals aren’t well thought out and well executed, co-branders run the risk of diluting their brand, or if they are a small company, finding their brand overshadowed by the larger, better established brand. If an agreement is poorly drafted, you may find yourself in a situation without much control over the product or its quality, and a sub-par product could ultimately lead to negative publicity and reputation damage.

Below are some of the things you should think about before entering into a cannabis co-branding deal.

     1.   Choose your co-branding partner wisely.

We’ve talked about this in the context of IP licensing generally, but the same rules apply here. Make sure you feel comfortable with the company you intend to partner with. In a co-branding deal, it’s important that the products or services offered by each co-brander are complementary and that each party stands to gain through affiliation with the other. Ask yourself whether partnering with this other company would expand your consumer base and introduce potential new customers to your product, and whether your brand would provide the same benefit to your partner. The goal with these types of deals is to create a win-win situation for both parties.

In the cannabis industry in particular, it’s also important to make sure that your potential co-branding partner is on solid legal footing. Do your due diligence, and make sure they’re operating in compliance with all applicable state and local laws. If they aren’t, you run the risk not only of reputational harm, but of legal liability.

     2.   Don’t relinquish too much power.

While it’s fine and may make sense for one partner to take the lead in pushing the co-branding deal forward, it’s important for both partners to have input into how the deal is executed. Don’t ever turn over all decision-making authority to your partner, as it’s important to exercise control over how your brand is used at all times. Failure to police your trademarks could lead to big issues down the road, including loss of any trademark rights.

     3.   Make sure your agreement is solid and your IP is protected.

Finally, as always, make sure you aren’t relying on a template or generic agreement. Co-branding agreements are all unique and can be more complex than your typical trademark licensing agreement, not to mention the added complexity of one or more parties being in the marijuana industry.

These agreements will have some similarities to trademark licensing agreements, since each party will, in a sense, be licensing their brand to the other. It is therefore important that each party maintain independent control over their own marks and how they are used throughout the deal. Neither party wants its mark(s) to be diluted or tarnished through the co-branding venture. And each party needs to come out of the deal with all of its IP ownership rights intact.

Control, as I mentioned above, is one of the key considerations in any co-branding deal: Quality control provisions should be fleshed out, and each party should clearly specify how its trademarks are to be used and displayed, where they will be permitted to be used, and how the product will be marketed.

Each party should feel comfortable with the termination provisions of the agreement, and should be able to exit the deal if, for example: sales targets are not met; laws or regulations change in a way that renders the deal legally problematic; legal enforcement actions are taken against either of the parties; if there is infringement or misuse of the trademarks; or if one party does anything that could negatively impact the other’s brand or reputation. To that end, make sure the agreement contains comprehensive representations and warranties from each party, as well as mutual confidentiality and indemnification provisions. Some of these provisions should survive termination of the agreement.

These are only the most basic considerations for constructing a cannabis co-branding deal. These types of ventures can be exciting and drum up a lot of publicity, which has the potential to greatly benefit both parties. But it is essential to carefully consider how your co-branding agreement is drafted, and to make sure that you and your intellectual property are adequately protected.

source https://www.cannalawblog.com/practical-tips-for-your-cannabis-co-branding-deals/

California Cannabis: Breaking Down the CDPH Permanent Regulations

The State of California finally adopted permanent cannabis regulations earlier this month. In a series of posts, we’re going to cover the highlights of each agency’s permanent rules so that you know what big changes to expect during 2019. This post will cover the main changes (in our opinion) regarding the California Department of Public Health Manufactured Cannabis Safety Branch’s (“CDPH-MCSB”) permanent regs. Without further ado:

No more Farm Bill hemp-CBD ingredients or additives. It’s no secret that the California Department of Health Food and Drug Branch (“FDB”) has an issue with hemp-CBD. Specifically, an FAQ that issued from FDB last year made clear that FDB prohibits hemp-CBD in “Food” for humans and pets. Now, CDPH-MCSB is following suit (indirectly). Pursuant to new regulation 40175(c), “a manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” What this means is that using Farm Bill hemp-CBD as an ingredient or addictive to cannabis manufactured products is not allowed unless it comes from a licensed cannabis cultivator. The protections of the Farm Bill won’t apply.

Owners and financial interest holders. I recently wrote about how it’s unclear as to how far the state will now go in finding and vetting entity owners and entity financial interest holders, especially since the Bureau of Cannabis Control (“BCC”) articulates in its rules that it intends to locate and vet every human possible in pretty much any ownership structure. But what about MCSB? MCSB entity owner regulations now state that “if the owner . . . is an entity, then the chief executive officer and members of the board of directors of the entity shall be considered owners,” and for financial interest holders, MCSB rules mandate only that “financial interest holders shall be disclosed on the application for licensure.” On balance, the BCC’s owner and financial interest holder rules are much more aggressive than MCSB, and the BCC’s comments to its owner and financial interest holder rules was that all agencies would apply the same standards for vetting. However, this clearly isn’t going to be the case if stakeholders go off of a plain reading of the law. Though it will be strange, the MCSB will very likely stick to its minimal vetting requirements while the BCC goes full bore on retailer, distributor, and lab owners and financial interest holders.

Changes in ownership. Again in contrast with the BCC, the MSCB is going to be much easier on changes in ownership of licensees. Under BCC regulations, if there’s a full buy-out of all existing owners, the entity can no longer operate while the change of ownership is being reviewed and processed by the BCC. The MCSB however has no such standard, at least not one that’s codified under the new regs. Specifically, for any changes of ownership or changes to financial interest holders, the MCSB expects the following protocol:

“The licensee shall notify the [MCSB] of the addition or removal of an owner through [the agency’s online system] within 10 calendar days of the change; Any new owner shall submit the information required [by law]; The [MCSB] shall review the qualifications of the new owner in accordance with [state law] and these regulations to determine whether the change would constitute grounds for denial of the license. The [MCSB] may approve the addition of the owner, deny the addition of the owner, or condition the license as appropriate, to be determined on a case-by-case basis; An owner shall notify the [MCSB] through [the state agency’s online system] of any change in their owner information . . . within 10 calendar days of the change; and a licensee shall notify the [MCSB] through [the state’s online system] of any change in the list of financial interest holders . . . within 10 calendar days of the change.”

Labeling. Labeling is still just as intense and comprehensive as it was under the emergency regulations. Now though, manufacturers need to ensure that, if a product container is separable from the outer-most packaging (e.g., a container placed inside of a box), the product container includes the following: (1) For edible cannabis products, topical cannabis products, suppositories, or orally-consumed concentrates, all information required for the primary panel except for cannabinoid content, and (2) for inhaled products (e.g., dab, shatter, and wax), the universal symbol (which is the black triangle with a cannabis leaf and an “!” with “CA” underneath). We also now (finally) have specific labeling requirements for pre-roll and packaged flower that didn’t exist before outside of the statute, itself. Overall, there are additional technical change requirements for labeling, including the weight of the product now needing to be in metric and U.S. customary units, specific labeling for flavoring in line with federal law, and more specific labeling restrictions for cannabinoid content.

Packaging. Until 2020, manufacturers are off the hook for providing child resistant packaging (“CRP”). Until then, retailers will bear the burden of CRP through the continued use of CRP exit packaging. Once CRP for manufacturers kicks in though, they’ll need to adhere to a litany of requirements, including compliance with the Poison Prevention Packaging Act of 1970 Regulations.

New product definitions. Via the permanent regulations, MCSB has introduced a number of newly defined terms, which is ultimately better for licensees so that confusion doesn’t abound as product development continues. For example, we now have as recognized definitions like:

• “Infused pre-roll,” which means “a pre-roll into which cannabis concentrate (other than kief) or other ingredients have been incorporated”;
• “Kief,” which means “the resinous trichomes of cannabis that have been separated from the cannabis plant”; and
• “Orally-consumed concentrate,” which means “a cannabis concentrate that is intended to be consumed by mouth and is not otherwise an edible cannabis product. ‘Orally-consumed concentrate’ includes tinctures, capsules, and tablets . . .”

OSHA training. Given that cannabis remains federally illegal, people often think that violating one federal law somehow gives you a license to violate every federal law, which is entirely untrue. Under the permanent MCSB regulations:

“for an applicant entity with more than one employee, the applicant employs, or will employ within one year of receiving a license, one supervisor and one employee who have successfully completed a Cal/OSHA 30-hour general industry outreach course offered by a training provider that is authorized by an OSHA Training Institute Education Center to provide the course.”

Clearly, safety and federal compliance in the workplace still applies, even to cannabis operators, which is now demoralized under the permanent MCSB rules.

Changes to operations that now require state approval. As the state moves along with licensing and enforcement, it was inevitable that certain licensee actions would first require state approval. What this usually means is that major changes to your business or SOPs can’t go down without the state’s blessing, which can take weeks or months to secure. Specifically, for the MCSB, licensees will now have to report to and clear with the state the following action items before the licensee pulls the trigger on them (all to the tune of a $700 change application fee, which is non-refundable):

• the addition of any closed-loop extraction method;
• the addition of any other extraction method that necessitates a substantial or material alteration of the premises;
• the addition of infusion operations if no infusion activity is listed in the current license application on file with the [MCSB] (you’ll also have to tell the state about “any changes to the product list on file with the [MCSB] and provide a new product list within 10 business days of making any change” to the products you’re making”); or
• a substantial or material alteration of the licensed premises from the current premises diagram on file with the [MCSB].

Importantly, a “substantial or material alteration” includes: “the removal, creation, or relocation of an entryway, doorway, wall, or interior partition; a change in the type of activity conducted in, or the use of, an area identified in the premises diagram; or remodeling of the premises or portion of the premises in which manufacturing activities are conducted.” Be advised!

source https://www.cannalawblog.com/california-cannabis-breaking-down-the-cdph-permanent-regulations/

MLK Day 2019: Marijuana and Civil Rights

Happy MLK Day!

For our international readers, Martin Luther King, Jr. Day is a federal U.S. holiday marking the birthday of its eponymous civil rights hero. Dr. King was the chief spokesperson for nonviolent activism in the Civil Rights Movement, which successfully protested racial discrimination in federal and state law. Dr. King was assassinated in 1968, four years after the passage of one of the great U.S. laws of the 20^th century, the Civil Rights Act of 1964. His death also came two years prior to one of the 20^th century’s most controversial and insidious laws, the Federal Controlled Substances Act of 1970 (CSA).

As cannabis business lawyers, we write about cannabis law topics every day of the year on this blog, but we seldom address pure social issues. When it comes to cannabis, however, it is sometimes difficult to separate law and policy. This is because the federal prohibition of marijuana in the United States has had a racially disparate impact on non-white individuals, especially black and Latino Americans. That should come as no surprise to anyone: It is well documented that former president Richard Nixon wanted to link marijuana use and its negative effects to black people and hippies, who he perceived to be his enemies, when he signed the CSA.

That was almost 50 years ago, but in a way, not much has changed. Although the Trump administration has instated policies that make it more difficult to track drug arrests, publicly available FBI data reveals that 659,700 marijuana-related arrests occurred in 2017, comprising 40.4% of all reported U.S. drug arrests. This is nearly 12,000 more marijuana arrests than were made in 2016 (which, in turn, saw an increase from 2015). Thus, marijuana arrests are increasing, even as more states legalize possession and sale of the plant. It is profoundly regrettable that non-white individuals are arrested for marijuana crimes on a grossly disproportionate basis to whites, today and historically, despite lower levels of consumption overall. Most arrests are made for simple possession of small amounts of weed, and are made at the state and local level.

Last year at this time, Jeff Sessions was our Attorney General. Although he is gone, his retrograde policies live on as Department of Justice directives with respect to marijuana and marijuana-adjacent issues. These policies include:

• Support of draconian federal sentences for drug-related convictions (which affect blacks and Latinos disproportionately);
• Support of federal private prisons (which impound blacks and Latinos disproportionately);
• Support of the police tool of asset forfeiture, a legally problematic procedure which allows law enforcement to seize property of individuals who have been suspected of, but not charged with, crimes (in violation of everyone’s civil rights, but to affect blacks and Latinos disproportionately); and
• Rescission of the Cole Memo, which gave some cover to marijuana businesses.

Today, it seems fairly certain that William Barr will be our next confirmed Attorney General. He won’t be as bad as Sessions, but he is no friend of marijuana either. Barr commented last week that although he would not use federal dollars to chase state-compliant actors, “it’s a mistake to back off marijuana.” That’s not the type of leadership we need from the nation’s chief law enforcement officer.

As to Congress, it recently passed the First Step Act, a mild reformation of the federal criminal justice system. That law is mostly a dud when it comes to marijuana, however. And none of the “straight” marijuana bills, from the STATES Act on down, have made it to a floor vote. All the while, marijuana arrests continue to increase, despite the facts that a) two in three Americans now support legalizing marijuana, and b) new adult use and medical marijuana states are coming online in waves.

The War on Drugs started out as a war on minority groups, and not much has changed in 50 years. If Dr. Martin Luther King Jr. were alive today, it is almost certain that he would be advocating for an end to the War on Drugs, starting with removal of marijuana from Schedule I of the CSA. Until that happens, and in honor of Dr. King, here are some ways you can pitch in to reverse the racist, immoral and counterproductive state of federal law with respect to marijuana:

• demand that your Senator finally step up and co-sponsor the Marijuana Justice Act, the Marijuana Freedom and Opportunity Act, and other progressive federal legislation containing expungement and social justice provisions;
• demand that local officials endorse social equity programs, as we have begun to see everywhere from New York to California;
• support and advocate for city and state programs that aim to help disadvantaged communities cash in on marijuana legalization;
• support organizations across the political spectrum, from the American Civil Liberties Union to Republicans Against Marijuana Prohibition with respect to their efforts to end federal prohibition; and
• support trade groups like the Minority Cannabis Business Association, which promote diversity in the cannabis industry.

Dr. King died 50 years ago, but his legacy continues to resonate and expand. On this day honoring one of our greatest leaders, it is important to remember all of the reasons we strive to put an end to prohibition, including the most important ones. Let’s hope to finally see some meaningful progress on marijuana and civil rights in 2019, particularly at the federal level.

source https://www.cannalawblog.com/mlk-day-2019-marijuana-and-civil-rights/