Law360 (November 10, 2020, 3:52 PM EST) —
The difference between legal CBD and hemp, which are governed by the U.S. Department of Agriculture and the U.S. Food and Drug Administration, and the federally criminal narcotic of marijuana, governed by the U.S. Drug Enforcement Administration, rests on a decimal point of difference of psychoactive THC potency in the product — 0.3% versus 0.31%.
While it is unknown whether the DEA or federal enforcement agencies will use that fine line to prosecute those who are involved in any part of the process that results in a variance above the 0.3% threshold, those involved with CBD and hemp should pay heed to the DEA’s recent proposed rule on this and how the landscape for marijuana-related businesses could change in light of the November election.
The DEA Interim Final Rule
On Aug. 20, the DEA issued an interim final rule implementing changes to its regulations as a result of the 2018 Farm Bill, which permits hemp cultivation and the sale, possession, and transfer of hemp and hemp-derived products across state lines for commercial purposes, provided that the products are produced in a manner consistent with the law. The comment period on the DEA’s interim final rule closed about two weeks ago.
As background, the 2018 Farm Bill defines hemp as any part or derivative of the Cannabis sativa L. plant containing, by dry weight, no more than 0.3% THC, which is the psychoactive compound in the plant. The Farm Bill also exempts from Schedule 1 of the Controlled Substances Act CBD derived from hemp meeting the definition above, where the hemp is produced by a licensed grower in compliance with pertinent state and federal regulations.
The preamble to the DEA’s interim final rule explains that the rule is not intended to add any additional requirements to the regulations, but rather, to conform DEA’s regulations to the 2018 Farm Bill’s statutory amendments to the CSA.
However, as will be discussed below, the rule could be construed to cover a step in the supply chain that is not addressed under the 2018 Farm Bill: namely, the processing of hemp plants into derivative substances like CBD extracts.
In greater detail, while the 2018 Farm Bill legalizes the cultivation of hemp and makes hemp derivatives, extracts and cannabinoids legal under the CSA, it does not expressly provide that processing hemp into derivatives, extracts and cannabinoids is also lawful. The DEA’s interim final rule could be interpreted as filling in this regulatory gap.
The preamble to the rule provides that “the definition of hemp does not automatically exempt any product derived from a hemp plant, regardless of the derivative’s delta-9 THC content. To meet the definition of ‘hemp,’ and qualify for the exemption from Schedule I, the derivative must not exceed the 0.3% delta-9 THC limit.”
The interim final rule is explicit that any cannabis-derived material that exceeds the 0.3% THC limit “remains controlled in Schedule 1 … even if the plant from which it was derived contained 0.3% or less delta-9 THC on a dry weight basis.”
The DEA’s interpretation of the 2018 Farm Bill puts hemp processors at risk of federal criminal prosecution under the CSA and other laws discussed below because the interim final rule does not indicate that only end-use products containing more than 0.3% of psychoactive THC remain on Schedule 1.
As written, the rule treats as a controlled substance all hemp extracts over the 0.3% threshold, regardless of whether those derivatives will be further processed and ultimately diluted below the legal THC content limit. To illustrate, under one reading, the rule would treat as a Schedule 1 drug CBD crude oil concentrates that exceed the 0.3% limit, even if the processor had intended to dilute the work-in-progress concentrate before the time of sale.
According to Kinner & McGowan PLLC, which submitted a comment on the rule to the DEA on behalf of Georgetown Hemp, this would be similar to the Bureau of Alcohol, Tobacco, Firearms and Explosives issuing a rule providing that alcohol distillers would violate federal regulations if at any point in the fermentation and distillation process, the mash of yeast, water and carbohydrates exceeded the permitted alcoholic content of the finished alcohol product.
Many who have submitted interim final rule comments to the DEA contend that it is difficult to control the THC concentration while extracting derivatives from the plant, as the extraction process concentrates cannabinoid content, including THC. For instance, cannabis plants contain both psychoactive THC as well as THCA, or tetrahydrocannabinolic acid.
While THCA does not produce a high, it partially converts to delta-9 at high temperatures, which may occur during the CBD extraction process. Similarly, when processors separate the parts of the hemp plant that contain higher levels of THC and CBD, the leaves and flowers, from the parts of the plant that contain minimal amounts of these compounds, the stalks and stems, the concentration of THC would inherently be higher.
The DEA’s proposed rule also has implications for those who provide ancillary services to hemp processors. For instance, the rule means that those who transport or sell CBD extracts that exceed 0.3% across state lines may also face exposure under the CSA, which forbids transporting controlled substances across state lines.
As another example, a company that offers cold storage to a hemp processor that has extracted crude CBD concentrate from a hemp plant could be punished under the CSA for aiding and abetting violations of federal criminal law.
Potential Implications Under Federal Criminal Law
The DEA retains the power to arrest those who cultivate, process or sell industrial hemp products, including CBD, and fail to comport with the Farm Bill’s requirements as interpreted by the DEA’s own agency rules. The risks under federal law include violation of the CSA, which outlaws a wide variety of drug-related activity, including manufacturing, distributing, dispensing or transporting across state lines a controlled substance, or conspiring to do so.
The U.S. also has a money laundering statute that makes it unlawful to deposit, withdraw, transfer or exchange funds through financial institutions where the funds are derived from certain unlawful activities, including the manufacture, importation, sale, or distribution of Schedule I drugs, including cannabis.
Additionally, transactions with cannabis proceeds also potentially implicate the Travel Act. As relevant here, the Travel Act prohibits foreign or domestic travels or uses of the mail or “any facility in interstate commerce,” e.g. wires, email, telephone or fax, with the intent to distribute the proceeds of any unlawful activity or otherwise promote or facilitate the promotion of any unlawful activity, defined to include any business enterprise involving narcotics or controlled substances.
All together, this means that a person or company that sells or facilitates the sale of marijuana, including cannabis derivatives containing over a threshold amount of psychoactive THC, including extracts labeled as CBD, could face federal criminal exposure under the CSA, money laundering statutes and the Travel Act.
Whether or not that exposure is hypothetical or an actual threat depends on how federal law enforcement agencies, including the U.S. Department of Justice and DEA interpret federal laws regulating cannabis, and the political will to prosecute what could amount to foot faults. That said, the mens rea requirement for prosecutors to demonstrate criminal intent makes convictions based on unknowing activity involving slight variances above 0.3% unlikely.
Nevertheless, escaping conviction for someone indicted and forced to defend themselves against criminal charges is relatively minor solace. Those involved with hemp and CBD may want to consider obtaining confirmation from growers, processors and others in the chain representations that the percentage of the product being received/handled is less than 0.3%.
Remember too that willful blindness may be sufficient for prosecution, so sticking one’s head in the sand about known issues is generally insufficient to evade criminal liability.
Whether or not the DEA’s interim final rule signals an imminent crackdown on hemp processors remains to be seen. On one hand, the DEA has not issued any warnings to industrial hemp processors since the passage of the 2018 Farm Bill, nor has it issued any statements suggesting that hemp processors are an enforcement priority.
The DEA also signaled that it is focusing its resources on thwarting the opioid epidemic and disrupting Mexican cartels that are trafficking deadly substances into the U.S. On the other hand, the DEA stood opposed to implementing a domestic hemp program, has historically been an obstacle to cannabis research and has expressed concern with the legalization of medical and recreational marijuana at the state level.
The November election results may give interested parties at least some clue as to what is in store for hemp processors and other marijuana-related businesses. Democratic Party control over both the presidency and legislative branch could lead to the passage of legislation that would significantly decrease cannabis companies’ risks under federal law. For instance, two pieces of legislation loosening federal restrictions on cannabis were introduced in the current legislative session and appear to have sufficient support to pass a Democratic-controlled U.S. House of Representatives and U.S. Senate.
With the House remaining a majority Democratic after the November election, it remains to be seen whether Republicans will continue to control the Senate — no winner has been declared in Georgia’s two Senate races, which will advance to a runoff in January. Democrats must gain two more seats for a 50-50 split, and Kamala Harris as vice president would cast tiebreaking votes in the chamber.
In particular, the Strengthening the Tenth Amendment Through Entrusting States, or STATES, Act would amend the CSA so that it no longer applies to persons acting in compliance with state laws on cannabis, and allow states to set cannabis policies. If the STATES Act became law, the proceeds of any compliant transaction would not be deemed illegal under federal money laundering statutes and the Travel Act.
While the STATES Act was introduced in the House and Senate with bipartisan co-sponsors, the bill ultimately stalled in the Senate Judiciary Committee with most commentators pointing to the committee’s focus on the impeachment inquiry, Congress’ focus on coronavirus relief and lack of support from Republican legislative leadership as the causes.
However, given that the STATES Act would maintain marijuana’s status as a Schedule I drug — and interstate cannabis commerce would remain curtailed as a result — the bill attracted a measure of support from Republicans and President Donald Trump had stated that he would likely sign the bill into law.
The Marijuana Opportunity Reinvestment and Expungement, or MORE, Act goes a step further by removing cannabis from Schedule 1 of the CSA, and would provide a process for the expungement of records for certain individuals who have federal cannabis convictions. The MORE Act also imposes a federal 5% tax on sales, revenue from which would be reinvested in communities most impacted by the drug war.
The House Judiciary Committee approved the MORE Act in November 2019, but House leadership deferred a full vote on the legislation until after the election and to maintain focus on coronavirus relief legislation. While several Republican legislators have expressed support for the MORE Act, the vast majority of Republican members of the House and Senate oppose the bill.
However, the MORE Act is gaining support from Democrats, including Vice President-elect Harris, who are increasingly supporting the bill over the STATES Act because it includes social justice and equity provisions, and would remove federal penalties rather than just protecting state-legal markets.
Finally, if the House remains under Democratic control while the Senate remains majority Republican, it is still possible that Congress would pass the Secure and Fair Enforcement, or SAFE, Banking Act, which last year passed the House with bipartisan support. The SAFE Banking Act would prohibit federal regulators from taking adverse actions against financial institutions for providing services to state-licensed marijuana-related businesses.
It is also important to remember that the U.S. president appoints the head of the DEA. The DEA chief, in turn, reports to the U.S. attorney general through the deputy attorney general, both of whom are also appointed by the president. As such, stakeholders must be diligent for new guidance from the DOJ on marijuana enforcement.
For instance, the election of Joe Biden as president could signal a return to the DOJ’s guidance under President Barack Obama, even if the House and Senate do not pass legislation reconciling federal and state cannabis regulations. This guidance, which is reflected in a 2013 memorandum by then-U.S. Deputy Attorney General James Cole, directed prosecutors not to go after cannabis companies operating in compliance with state law.
Federal criminal enforcement is but one of several regulatory hazards faced by the burgeoning hemp industry. For instance, state and local law enforcement who fail to comprehend the complexities of federal hemp regulation may erroneously treat federally compliant hemp crops as unlawful.
Moreover, stakeholders must carefully monitor varying state laws and requirements applicable to CBD: Some states have legalized CBD, while others prohibit it. CBD is not legal at the state level just because hemp-derived CBD is now federally legal. Additionally, some states allow for CBD to be sold without restriction, while others prohibit it from being sold in combination with food or beverages, except in licensed cannabis stores.
As an additional twist, the FDA has made clear its view that CBD food and beverage products currently on the market are not permitted under the FDA’s current regulations. The FDA is currently working to craft federal regulations around consumer goods containing hemp and hemp-derived products like CBD.
E.K. McWilliams is an associate and Wade A. Thomson is a partner at Jenner & Block LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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