Agencies, States and Local Governments Respond to Congressional Legalization of Hemp (Non-Psychoactive Cannabis)

On December 11, 2018, Congress took an initial step toward legalizing cannabis¹ and to resolve—at least in part—the conflicting federal and state laws governing this product.² The Agriculture Improvement Act of 2018, ³ commonly referred to as the 2018 Farm Bill, legalized hemp, a non-psychoactive varietal of the cannabis plant. The 2018 Farm Bill passed both houses of Congress by an overwhelming majority,⁴and was signed by President Trump on December 20, 2018. While this step does not legalize psychoactive medical or recreational marijuana, it opens up hemp—and constituents of hemp such as cannabidiol (CBD)—to broader consumer and industrial uses, subject to other statutory provisions that may limit use in foods and dietary supplements.

Those who want to cultivate, process, or sell hemp and hemp products—and those who may want to invest in such operations—should understand that the Farm Bill is merely the first step. It requires implementing regulations at the state level. Further, states can still restrict, and even prohibit, the cultivation and sale of hemp within their territories. Sellers of hemp and hemp products will also need to comply with regulations governing food, drugs or dietary supplements, depending on the nature of the product they sell. Now, six weeks after the Farm Bill was signed into law, state and local governments have begun to act to implement the law. This area will continue to develop as the federal government and states grapple with how to regulate this new industry.

What does the Farm Bill do vis-à-vis hemp?

One significant feature in the 2018 Farm Bill is the legalization of hemp by exempting it from the definition of illegal marijuana. This is the first significant step Congress has taken to loosen the federal prohibition on any variety of cannabis since it was criminalized in 1970 as part of the Controlled Substances Act. In the 2014 Farm Bill, Congress authorized hemp cultivation for research purposes, but did not allow its commercial use and sale. The 2018 Farm Bill expands on that earlier provision and now fully legalizes the cultivation and sale of hemp, subject to state and federal regulations. Of note is that the federal law will not preempt state regulation, so states are free to impose restrictions or prohibitions on hemp activities within their territories.⁵

More specifically, Congress defined hemp in the 2018 Farm Bill as

[T]he plant Cannabis sativa L. and any part of that plant, 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 concentration of not more than 0.3 percent on a dry weight basis.⁶

It then amended the definition of marijuana in the Controlled Substances Act to exclude hemp and its derivatives, as defined above.⁷ Thus, hemp is no longer a prohibited controlled substance subject to DEA enforcement and criminal sanctions, but is now classified as an "agricultural commodity."⁸

The Farm Bill outlines a regulatory plan for hemp production that allows states or Indian tribes to have primary regulatory authority, subject to coordination with the Secretary of Agriculture.⁹ States or tribes must submit a plan to the Department of Agriculture that includes, at a minimum, the following:

• A practice to maintain relevant information on land used to cultivate hemp;
• A procedure for testing hemp plants to confirm they contain no more than the allowed levels of THC;
• A procedure for the disposal of non-conforming plants or products derived from such plants;
• A procedure for conducting annual inspections of a random sample of hemp producers;
• A procedure for submitting to the Department of Agriculture contact information for hemp producers in the state or tribal territory, a description of their land under cultivation, and the status of each producer's license; and
• A certification that the state or tribe has the resources to carry out the plan.

States can impose additional requirements that are more stringent than those in the Farm Bill. The Farm Bill also provides federal civil penalties for violations of a state/tribal plan, including imposition of a corrective action plan for a negligent violation and loss of license for five years for repeated violations. These penalties no longer include criminal penalties.

The federal government still maintains some level of regulatory control, as it retains authority to approve state/tribal plans, can audit state/tribal compliance with a plan and revoke a plan for state/tribal noncompliance. Further, states are prohibited from interfering with the interstate transportation of hemp.¹⁰ The bill provides for federal regulation by the Department of Agriculture, similar to the state/tribal plan described above, in the absence of an approved state plan.¹¹

The Farm Bill adds hemp to a short list of other crops, namely tobacco, potatoes, and sweet potatoes, which are covered by the Federal Crop Insurance Corporation beyond the period during which those crops are in the field.¹² Moreover, the bill allows for a waiver of viability and marketability requirements for hemp production that would otherwise be necessary to obtain such insurance policies.¹³ Congress provided similar waivers for research reimbursements.¹⁴

Several of the hemp related provisions of the Farm Bill focus on research and development, signaling Congress' support for the development of hemp as an agricultural product. Many of these programs were already in place but did not include hemp. For example, the Farm Bill allocates $2 million a year to a program that funds research for the "development of new commercial products derived from plant material, including hemp, for industrial, medical, and agricultural applications."¹⁵ The bill also adds hemp to an existing program that focuses on the development of "critical agricultural materials from native agricultural crops having strategic and industrial importance."¹⁶ Finally, the bill calls for the Secretary of Agriculture to conduct a study of preexisting pilot programs to "determine the economic viability of the domestic production and sale of industrial hemp" and to issue a report describing those results.¹⁷

What is the significance of legalizing hemp?

In addition to taking the first step down the road to fully legalizing cannabis, Congress has provided a legal environment for development of the hemp industry in the United States and created a safe harbor for those who service the industry, such as financial institutions, transporters and property owners. It was not until the last 100 years that hemp began to be negatively associated with its "illicit cousin" marijuana¹⁸ and was made illegal in the United States. Its illegal status disadvantaged American farmers and thwarted the development of hemp products by US industry.

Hemp has long been used in industrial and personal products, valued for its strength and light weight. Hemp has been used in clothing, rope, and paper throughout the world for thousands of years. It was found in fabrics dating back to approximately 8,000 BC,¹⁹ and its fibers were used to make the Gutenberg bible.²⁰ In recent years, newer uses for the strong, light weight hemp fibers include automobile parts²¹ and more energy efficient concrete.²²

While hemp fibers have received most of the attention throughout history, hemp and hemp seeds have more recently appeared in foods, supplements and cosmetics, accompanied by a variety of health and beauty claims.²³ Perhaps the most high profile marketing of hemp today is of the derivative cannabidiol (CBD), an oil extracted from the cannabis plant, including hemp. CBD is believed by some to be a natural anti-inflammatory and pain reliever, among other uses.²⁴ Moreover, FDA recently approved Epidiolex° (cannabidiol) a prescription drug to treat seizures associated with certain rare forms of epilepsy.²⁵ Ongoing research may prove or disprove many of the claims being made today about hemp or discover new uses for the plant or its derivatives.

What legal barriers still exist?

In the near term, existing state laws governing hemp and hemp products will continue to apply until states have time to consider the new hemp law and implement new regulations. This means that anyone that wants to cultivate, process or sell hemp or hemp products will need to understand and comply with the laws of the states in which they do business. These laws differ from state to state, creating a patchwork of requirements. The situation may not improve as states consider the Farm Bill provisions because, as noted above, the Bill leaves the details of regulation to the states, and states may implement additional and/or more restrictive requirements than provided in the Farm Bill. State-specific laws governing testing, packaging and labeling may present significant challenges to businesses that want to sell products in multiple states.

In addition, cultivators, processors, and sellers of hemp or its derivatives still must comply with existing regulations governing agricultural practices and products. For example, hemp growers must comply with EPA regulations governing pesticide use. Further, hemp products that qualify as drugs, food, dietary supplements, veterinary products, and cosmetics will be regulated by FDA under those regulatory frameworks. FDA currently takes the position that certain hemp ingredients, such as CBD, are not lawful for use in conventional foods and dietary supplements." Specifically, citing Federal Food, Drug, and Cosmetic Act (FDCA) sections 201(ff)(3)(B)(i) and (ii), to date FDA has concluded that "it is a prohibited act to introduce or deliver for introduction into interstate commerce any food (including any animal food or feed) to which THC or CBD has been added" due to prior, public clinical investigations of CBD (and THC) for drug use, and the recent approval of the CBD-based epilepsy drug Epidiolex.²⁶ While there is an exception to the provisions of sections 201(ff)(3)(B)(i) and (ii) if the substance was "marketed as" a dietary supplement or as a conventional food before the drug was approved or before the new drug investigations were authorized, "based on available evidence, FDA has concluded that this is not the case for THC or CBD." Whether FDA will actually take broad enforcement action against the CBD-containing food and dietary supplement products remains to be seen.

Cosmetics containing hemp do not fall within the above-referenced exclusion rule, but must comply with the FDCA and related FDA implementing regulations governing cosmetics, including that the product meet the definition of a "cosmetic" (i.e., be "intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body...for cleansing, beautifying, promoting attractiveness, or altering the appearance"), be properly labeled (i.e., not misbranded), and be safe (i.e., not adulterated).

State and Local Reactions to the Farm Bill

Reactions from state and local governments in the wake of the Farm Bill have varied greatly. Many states have continued to take their cues from the federal government. For example, health authorities in New York City, Ohio and Maine, relying on the FDCA, have taken steps to stop the sale of food and drinks containing CBD.²⁷ This should come as no surprise, as state and local governments frequently attempt to limit the sale of food and health products. In the past, cities across the country have imposed taxes on sugary drinks,²⁸ and the New York Attorney General's office aggressively pursued strict reforms for herbal supplements in the state.²⁹

Other states have taken their own approach. Mississippi recently rejected an amendment to its drug laws that would have legalized hemp in a manner consistent with Farm Bill.³⁰ Virginia, too, is proceeding with caution. The state's Department of Agriculture and Consumer Services has stated that it will review the Farm Bill and determine the best path forward, but in the meantime will continue to restrict hemp production to authorized research programs and will not issue any registrations for CBD-related products.³¹ The Illinois Department of Agriculture, which actually proposed its own program prior to the Farm Bill's passage, is going through its rulemaking process to reconcile its proposals for hemp production with the Farm Bill's requirements, but those changes are unlikely to be made in time for the 2019 growing season.³² Meanwhile, a small county in Nevada has plans for a 2,800 acre organic hemp grow operation.³³

Conclusion

The 2018 Farm Bill opens the door for a domestic hemp industry to develop and perhaps sets the stage for future federal cannabis legislation. Those considering entering the market, however, should understand the regulatory system that Congress mandated, along with the significant barriers that still exist in certain product categories due to FDA regulation and potential state bans. If recent state and local activity is a sign of things to come, a patchwork of regulatory schemes will continue to govern the hemp industry.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.