Class Action Lawsuit Brought Against CBD Company for Deceptive Advertising

Just a week after the U.S. Food and Drug Administration (FDA) stated that it could not give CBD a “generally recognized as safe” designation, a proposed class action has been filed against a CBD company in California. The complaint alleges that Infinite Product Co.’s CBD products are misleadingly labeled and illegal to sell because they use CBD as an additive to food and topical cream products in violation of federal law. The “generally recognized as safe” designation allows a substance to be used as a food additive without going through the FDA’s approval process. Currently, there is no federal regulation that allows the use of CBD as a food additive. This proposed class action could be the first of many against CBD companies offering consumer products and food containing CBD as an additive, and may provide further impetus to the FDA to provide more guidance related to CBD products.

Tomorrow’s City Council Meeting on Portland’s Ordinance

Ok, so it's actually a meeting of the HHS and economic development subcommittees but, either way, it’s a necessary and important step to finalizing Portland’s ordinance and launching adult use in Maine’s largest city. The subcommittees will be taking public comment, so in terms of how many hours of comments we should expect to sit through, we’ll see if the craze around the cannabis industry or the distractions of Thanksgiving win out. I’m planning on a long night. 

A couple of particular items to look out for: 

• First, the current draft ordinance doesn’t permit the transfer of licenses. This would mean that an adult use store that transfers 10% or more of its equity to someone else would lose its license. Since bank loans aren’t really a thing in the cannabis industry, private investors are key and private investors want equity. Private investors also want to be able to sell their equity. So the ban on transferability doesn’t work in the industry. I expect we’ll hear some conversations about that.
  
• Second, THE CAP. It will be interesting to see if the cap stays at 20 retail stores total, or which direction it moves, or whether it is entirely eliminated. I’m sure the councilors are getting an earful on the daily about this.
  
• Third, the criteria to get a license look like a work in progress. They’re oddly structured in the current draft and really favor businesses that have owned or leased their retail location for a long, long time. They also strongly favor applicants who have operated a different type of licensed business in Portland for a long period of time. The lottery criteria tell us a lot about the city’s policy priorities, and I expect that the councilors will want some changes to these as well. 

See you tomorrow.

State Adopts New Restrictive Policy on CBD Sales That Is, at Least in Effect, Quite Similar to the Old Policy

The Maine Department of Agriculture has begun its next phase restricting sales of CBD in the state. Readers will recall that, over the summer, the State took the position that CBD sold in Maine had to be derived from hemp grown in Maine. The reality, of course, is that only a small portion of CBD sold in Maine has its origins in Maine and that policy expired in September.

Now, the State is handing out notifications to retailers and others in the CBD business that ingestible CBD products sold at retail in Maine must be produced in Maine. Here is a copy of that notification received by one retailer in the state:

This sounds different in substance than the State’s policy over the summer. Now, CBD sold in Maine doesn’t have to be derived in Maine. But the reality is that this policy will have largely the same effects since a huge portion of the CBD that is imported into Maine has already been incorporated into food products and is shelf-ready.

Trying to understand the State’s motivations for this latest policy shift, it appears to be related to the federal ban on CBD sold in edible products. The nuance of the State’s position isn’t entirely clear, but as we hear more we will post it here.

Do the Proposed USDA Hemp Rules Threaten Our CBD Industry?

We’re hearing concerns from some farmers and CBD manufacturers that the proposed USDA hemp rules, released earlier this week, could make it much more difficult to provide high-quality CBD products in the U.S. The concern, as I can best articulate it since I’m not a farmer, is that full-spectrum CBD is largely available in plants that have a longer growth cycle, but these plants may also have THC levels above 0.3 percent by virtue of being in the ground for longer. Under current regulations, some farmers and producers have found ways to reduce the THC content following harvest, which allows them to sell full-spectrum CBD products with compliant THC levels. The new USDA regulations, though, require that the crop be tested for THC content 15 days prior to harvest. Any crops with an excess of THC will need to be discarded. This eliminates the possibility of growing for longer and eliminating excess THC after the fact.

I can’t speak personally to whether this perceived threat is real or overblown, but its one interesting example of the many consequences (intended or otherwise) the new federal regime will have on the industry.

One other, related, strain: Though hemp must have THC levels below 0.3 percent, these new rules create a couple of safe harbors. First, they recognize that testing labs have margins of error, and so if your crop tests at 0.34 percent THC, but the lab results have a 0.05 percent margin of error, then the crop is legal and you’re good to go. Second, if your crop is above 0.3 percent but below 0.5 percent THC, you can’t sell it, but you also won’t be prosecuted. These rules basically recognize the inherent uncertainty involved with growing hemp.

USDA Hemp Rules Nearly Finalized

We haven’t seen a draft of the rules yet, but the latest news is that the White House has signed off on the proposed rules and they’ll be released any week now. Once the rules are released, a public comment period will begin. The USDA is still claiming that final rules will take effect before the end of 2019. 

The Maine Department of Agriculture, Conservation and Forestry (which houses our hemp program) is likely to respond by drafting and proposing new rules of its own. These rules will likely parallel the federal rules including any THC potency testing guidelines, quality control standards, and broader cannabinoid testing requirements. 

Maine will also seek USDA approval of a state regulatory plan governing hemp. Once this approval is obtained, Maine hemp will finally be legal.

California Regulators Issue Cannabis Banking Guidance That’s Actually Useful

On October 2, 2019, the California Department of Business Oversight issued some really helpful guidance aimed at California banks and credit unions that are currently or are planning to bank marijuana-related businesses (MRBs). The guidance document consists of an extensive questionnaire that is used by California state bank examiners when they audit a bank or credit union’s MRB compliance program. The guidance document is intended to help California financial institutions comply with Bank Secrecy Act and FinCEN guidance on cannabis banking. Although some of the guidance in the questionnaire is California-law specific, much of it is broadly applicable to any financial institution in any state that has legalized medical or recreational cannabis. We are encouraging all of our financial institution clients who have or are working on MRB compliance programs to take a look!

House Passes the SAFE Banking Act

On September 25, 2019, the Democrat-controlled U.S. House of Representatives passed the SAFE Banking Act by a vote of 321 in favor and 103 opposed. As we’ve previously posted, the Act would prohibit federal bank regulators from penalizing financial institutions that provide services to state-legal cannabis businesses and will result in greater access to financial services for the cannabis industry. Given the 91 Republicans who voted in favor, it appears that cannabis banking reform may be poised to become a bipartisan issue, although only time will tell.

The Act will now move on to the Republican-controlled Senate, where commentators agree that passage is far less certain. Historically, Senate Majority Leader Mitch McConnell has publicly opposed cannabis even while supporting the legalization of hemp. In any event, even if ultimately adopted, the protections granted to financial institutions under the SAFE Banking Act will only apply to state-law compliant cannabis customers, so it will continue to be vitally important for financial institutions to adopt robust marijuana-related business compliance policies and procedures and engage in continuous monitoring of cannabis customer compliance with relevant state laws.