You Ask, We Answer: Questions From the California Cannabis Webinar

I recently teamed up with my colleagues Hilary Bricken and Griffen Thorne to put on a free webinar answering all of your pressing questions about cannabis legal issues in California. (Check out the replay here.) The response was overwhelmingly positive, and we received a lot of great questions that we weren’t able to get to during the hour-long session. We’ll be offering similar webinars in the future, but in the meantime, we thought it would be useful to take some time and answer some of the questions we received that we weren’t able to cover live.

Questions on Hemp and CBD:

Questions on Cannabis in California:

Questions on Hemp and CBD

Q: If my CBD company posts a testimonial on its website that arguably includes a “medical claim” will a disclaimer protect me?

The FDA will treat products as drugs if the labeling or marketing of those products suggests they are “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease.” Phrases like “combats tumor cells” and “[has] anti-proliferative properties that inhibit cell division and growth in certain types of cancer” clearly suggest that the CDB product can cure, mitigate, treat or prevent cancer, and is thus a drug.

Any suggestion that a product might have a role in treating or diagnosing a disease, or that it is intended to affect the structure or any function of the body of humans or other animals, is a health claim that subjects the product to drug regulations (unless it falls within the narrow confines of the Dietary Supplement Health & Education Act – the FDA has ruled that CBD does not). There are certain requirements for making disclaimers when making structure/function claims on nutritional supplements, but because CBD products cannot be marketed as nutritional supplements, these requirements do not apply and a disclaimer will not protect you if you are making medical claims.

Also keep in mind that the Federal Trade Commission (“FTC”) guidelines for using endorsements or testimonials in advertising make it clear that testimonials and endorsements can’t be false or misleading, and if they are, the advertiser can itself be responsible. The FTC has issued warning letters to companies that advertise their CBD-infused products as treatments or cures for serious medical conditions.

Q: Given that CBD products cannot contain “medical claims” and given that the term “medical claim” is broadly defined, how can I describe the use of my product?

The analysis is nuanced here, but everything stated in the answer to the previous question applies. If you are including wording on your CBD products in your advertising for those products that suggests that your product might have a role in treating or diagnosing a disease, or that it is intended to affect the structure or function of the body, it is a health claim. One of the core functions of the FDA is to ensure that companies aren’t marketing products for the treatment of diseases when those products haven’t been approved by the FDA.

Here are some recommendations we’ve given in previous posts:

  1. Do not make health claims about the therapeutic value of your products;
  2. Monitor enforcement actions (i.e., warning letters) and regulations of both the FDA and the FTC to understand enforcement priorities; and
  3. Develop compliance programs to (i) ensure that your marketing efforts align with federal guidelines and (ii) ensure that your compliance team is familiar with the FDA and the FTC’s regulations.

According to guidance issued by the California Department of Public Health (“CDPH”) in 2018, “CBD is an unapproved food additive and NOT allowed for use in human and animal foods per the FDA, and thus it is not approved in California.”

AB 2827, the successor bill to AB 228 that was introduced on February 20, 2020, seeks to clarify that:

“a food or beverage is not adulterated by the inclusion of industrial hemp products, including cannabidiol derived from industrial hemp, and would prohibit restrictions on the sale of food or beverages that include industrial hemp products or cannabidiol derived from industrial hemp based solely on the inclusion of industrial hemp products or cannabidiol derived from industrial hemp.”

The bill is currently sitting in the Committee on Health.

Q: Is it true that hemp and cannabis cannot be combined?

In California, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) only governs the regulation of commercial cannabis activity and explicitly excludes “industrial hemp” from the definition of “cannabis:”

  • “Cannabis” means all parts of the plant Cannabis sativa Linnaeus, Cannabis indica, or Cannabis ruderalis, whether growing or not; the seeds thereof; the resin, whether crude or purified, extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds, or resin.
  • “Cannabis” also means the separated resin, whether crude or purified, obtained from cannabis.
  • “Cannabis” does not include the mature stalks of the plant, fiber produced from the stalks, oil or cake made from the seeds of the plant, any other compound, manufacture, salt, derivative, mixture, or preparation of the mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of the plant which is incapable of germination.
  • “Cannabis” does not mean “industrial hemp” as defined by Section 11018.5 of the Health and Safety Code.

The BCC has stated that retailers licensed by the BCC are licensed to sell cannabis goods and may not sell industrial hemp products on the same licensed premises where cannabis goods are sold.

Q: What about hemp products for farm animals in California?

The prohibition on edible hemp-derived CBD products in California extends to animals, as the CDPH’s guidance states:

“[u]ntil the FDA rules that industrial hemp-derived CBD oil and CBD products can be used as a food or California makes a determination that they are safe to use for human and animal consumption, CBD products are not an approved food, food ingredient, food additive, or dietary supplement.”

Industrial hemp is another issue altogether, as the Association of American Feed Control Officials does not recognize hemp as an ingredient in animal feed.

Q: If another state like Washington allows sales of hemp-derived CBD products, could a company in Washington sell those products to a person in California?

No, these products cannot be manufactured or sold in California. It is important that hemp-CBD manufacturers understand not only the regulations of the state in which they are based, but also the regulations of each state to which they ship products. Keeping track of the regulations in all 50 states is a hefty regulatory burden.

Questions on Cannabis in California

Q: I heard the three state licensing agencies were coalescing. Is that still happening? If so, any idea when?

For those who are unfamiliar, on January 10, 2020 the Bureau of Cannabis Control (“BCC”) issued a press release entitled, “Consolidation of California Cannabis Licensing Authorities” related to a budget proposal released by Governor Newsom. According to the press release, Newsom’s intent is to combine all three California cannabis regulatory agencies (the CDPH Manufactured Cannabis Safety Branch, the CDFA CalCannabis Cultivation Licensing Branch, and the BCC) into one single Department of Cannabis Control by July of 2021. The new department would have an enforcement branch and would align the three current, different sets of regulations for cannabis licensees.

Although the press release stated that more details would be released this spring, we have yet to see those details.  Given the shift in priorities over the last couple of months with the Covid-19 pandemic, we wouldn’t be surprised if implementation is delayed, but we also have no reason to believe that consolidation isn’t still on the table.

Q: I’m an accountant in New York and would like to research what is required for potential clients dealing with cannabis. Are these laws consistent in every state?

No. One of the greatest challenges faced by cannabis companies (and this goes for both “marijuana” and hemp-CBD cannabis companies) is that regulations vary widely from state to state. On top of that, regulations are changing on a near-constant basis, and these changes can be difficult to keep track of.

In order to serve our MSO clients who are kept up at night by these shifting regulations, our firm has developed a 50-state survey of hemp-CBD rules and regulations that is updated on a monthly basis. The survey outlines each state’s position on the sale of hemp-CBD in three product categories:

  • Ingestible products (foods, beverages, dietary supplements and other consumable goods for humans)
  • Smokable products (dried flower, vaping products and cigarettes)
  • Cosmetic products (salves, lotions and other topicals)

States have adopted distinct and evolving approaches to regulate these products, often inconsistent with FDA positions. For example:

  • Some states allow the manufacture and sale of all Hemp CBD products, including foods, dietary supplements, smokable products, and cosmetics.
  • Other states strictly prohibit the production and/or sale of any such products unless Hemp CBD is used for “medical treatment.”
  • A number of states ban Hemp CBD foods and dietary supplements but seem to take no issue with the sale of other nonfood or non-beverage products (such as Hemp CBD cosmetics).
  • A handful of states allow the sale and marketing of Hemp CBD foods and dietary supplements but strictly prohibit the sale or restrict the processing and manufacturing of Hemp CBD smokables within their borders.

Unfortunately, we do not provide such a survey regulated marijuana businesses, as those rules and regulations tend to be much more robust and complex. We do, however, advise clients on these regulations in a number of states, including California, Washington, and Oregon, and have worked with local counsel in a variety of other states. Staying on top of regulatory compliance is one of the biggest burdens of every MSO.

Q: Have you worked with or for cannabis labs?  If yes, what issues and challenges are they facing? What are the companies that are utilizing testing are saying about the cost and quality of testing?

We have worked with numerous cannabis labs in California, as well as in Oregon and Washington. Many of the labs we represent are MSOs, and that seems to be where the greatest challenges fall for any licensee, regardless of license type. Complicated ownership structures necessitate complicated disclosures, and this is often cumbersome during the licensing process.

But aside from the standard licensing hurdles faced by cannabis businesses, labs must also obtain and maintain ISO/IEC 17025 accreditation, which is complicated process on its own.

As far as cost and quality of testing, there have long been complaints in the industry that test results vary from lab to lab, calling into question the accuracy of testing and the issues created by a lack of federal guidance.

Q: Have you seen “liens” on licenses by creditors, actually perfected by the lien holder? Assuming of course that the creditor was approved as an Owner?

We have not yet seen liens on cannabis licenses in California perfected by a lien holder, although we have seen the assets of cannabis businesses placed into receivership and sold at auction.

For background, another challenge facing the cannabis industry is that bankruptcy protection is not available to cannabis businesses due to the fact that cannabis remains a federally-illegal Schedule I controlled substance under the federal Controlled Substances Act (“CSA”). Bankruptcy cases are handled in federal court, and the rationale is that it wouldn’t be possible for a United States Trustee to control and administer a debtor’s assets (cannabis) without violating the CSA.

Both Washington and Oregon have statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis – Oregon rules provide “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our firm has assisted multiple clients in both Washington and Oregon in acquiring and perfecting security interests in licensed cannabis businesses.

Unfortunately, in California, although we have statutes specifically addressing the use of receiverships to transfer the interest of a debtor in an alcoholic beverage license, no such laws currently exist for cannabis licenses. We are certain this will change in the future. We’ve written previously in more detail about receivership and distressed cannabis assets in California.

Q: Collection on payment is very difficult as operators do not want to pay. What legal options does a business have against the delinquent cannabis operator? Demand letters and collection agencies are not working.

This is a problem we see regularly, in a variety of forms. First, and most importantly, get everything in writing. Don’t rely on handshake deals or form agreements – take the time to draft up a thorough distribution agreement that contains both a very clear payment schedule and  protocol for disputes specifically related to failure to pay. Having clear dispute resolution provisions in place can save a lot of time and money in the event a breach of contract does arise.

When drafting these agreements, think carefully about the payment terms. Will the distributor pay for the product when they pick up the product, or will they pay once the product sells at retail? The latter is much riskier for a wholesaler, for example. And pay close attention to whether your distributor is extending credit to retailers, because if the distributor doesn’t have to pay until the retailer pays, this could delay payment even further.

Having a solid agreement in place from the outset will make it easier to state your case and prove a breach in the event that your distributor doesn’t pay. And having detailed dispute resolution provisions, perhaps beginning with an obligation to mediate, can save time and money as well as (hopefully) avoid the need to sue the other party in court for breach of contract.