January 2019

Updated March 2019

Janet Jackim

Decriminalization of Hemp Raises New Opportunities in Agriculture, Medicine, Fibers/Textiles and Biofuels

With passage of the 2018 farm bill, hemp is no longer a Schedule I narcotic under the Federal Controlled Substances Act.

After nine months of congressional deliberation, on December 20, 2018, the President signed into law the 2018 farm bill (the Agricultural Improvement Act of 2018). The 807-page document addresses numerous topics, including the removal of hemp[1] and its derivatives and associated THC[2] from narcotics classified under Schedule I of the federal Controlled Substances Act of 1970 (CSA). Hemp has historically been prized for food[3] and making ropes and more recently for producing shoes, fabrics, fuels and other useful consumer and commercial products.

With the President’s signature, hemp is no longer included within the definition of “marijuana,” a controlled substance under the CSA, and the U.S. Drug Enforcement Administration (DEA) no longer has jurisdiction to prosecute hemp offenders. Instead, hemp is now considered an agricultural commodity, defined as all parts of the plant having less than 0.3% THC on a dry weight basis, including hemp extracts, cannabinoids and derivatives. As a result, at the federal level the manufacture, possession and interstate commerce in popular hemp-derived CBD[4] products are definitively legal.

Federal legalization of hemp is a national game changer.

Paul Armentano, Deputy Director for NORML, the National Organization for the Reform of Marijuana Laws, recently stated

“[t]he significance of this law change should not be underemphasized. This law marks the first change in the federal classification of the cannabis plant since it was initially classified as a Schedule I controlled substance by Congress in 1970, and paves the way for the first federally-sanctioned commercial hemp grows since World War II.”

As discussed below, federal legalization of hemp is also of major significance to Arizona, too.

Regulations and administrative burdens will still apply.

The 2018 farm bill is not without licensing and administrative requirements. A state or tribal government will be required to submit a plan to the U.S. Department of Agriculture (USDA) concerning the monitoring, regulation and enforcement of the production of industrial hemp, and the USDA will have 60 days for review of the plan.[5] States and tribal governments may impose more restrictive parameters on hemp production than the 2018 farm bill but cannot alter the definition of hemp, employ less restrictive policies than those of that bill, or interfere with the interstate transportation or shipment of industrial hemp. Tribes located in states without an industrial hemp program can implement their own programs allowing the commercial cultivation, production and distribution of industrial hemp, and such programs should avoid DEA enforcement actions against the crop.

Federal regulations will apply to the states.

Like Arizona’s industrial hemp bill described below, state and tribal industrial hemp plans submitted to the USDA must track properties where cultivation is expected and promulgate testing, disposal and enforcement procedures. Penalties for violations of approved state and tribal plans must also be addressed in these plans. Participants discovered to be negligent in violating the plan must be noticed, a corrective action plan developed, and violations corrected, and the violator will be subject to periodic reporting to the state or tribe for at least two years, but criminal or civil enforcement actions are not applicable unless three such violations occur within five years. The term “negligent violation” means unintentional errors in the application for license, failures to obtain the required license, or the production of hemp with more than the 0.3% THC maximum. Other violations where a culpable mental state greater than negligence is present will subject the perpetrator to prosecution by the Department of Justice or the chief law enforcement officer of the state or tribe.

FDA will continue its oversight of hemp-based foods and topicals.

With respect to hemp-based food and cosmetic products, the U.S. Food and Drug Administration (FDA) is already weighing in on the effects of the 2018 farm bill by staking its claim to regulating dietary supplements and other food products containing hemp. In December 2018, FDA Commissioner Scott Gottlieb, M.D., who resigned in March 2019, issued a press release on the FDA’s continuing involvement in and oversight of foods, drugs and cosmetic products containing hemp under the Federal Food, Drug, and Cosmetic Act of 1938 and other laws (FFDCA), despite passage of the 2018 farm bill. To the Commissioner, the 2018 farm bill made no changes to the FDA’s jurisdiction or regulation of products containing hemp under the FFDCA; rather, according to the Commissioner, the FDA will continue to “closely scrutinize [hemp-based] products that could pose risks to consumers” including, specifically, products touted as therapeutic or intended for use in the diagnosis, cure, mitigation, treatment, or prevention of diseases – whether hemp-based or not – all of which must be submitted to the FDA vetting process. [6]

How Dr. Gottlieb’s resignation and the views of his successor will affect the FDA’s position on hemp-based CBD products remains to be seen.

FDA warns the hemp industry.

Seemingly to remind the hemp community that the FDA’s mission is to regulate food and drug products including hemp, Commissioner Gottlieb referred in his December 20 letter to several warning letters his office had issued in late 2017 to producers and promoters of CBD hemp oil and other products containing hemp.[7] These warning letters called out the violators for marketing their hemp products while substantial clinical investigations have been instituted, thus disqualifying CBD as an unregulated dietary supplement. As such, the FDA warned, the promoted CBD products were new drugs requiring FDA prior approval.[8] The DEA currently defines a CBD drug as “a drug product in finished dosage formulation that has been approved by the [FDA] that contains cannabidiol … derived from cannabis and no more than 0.1 percent (w/w) residual [THC].” Thus, FDA approval of hemp-based products will still be required to keep the DEA at bay, and the 2018 farm bill did nothing to change this outcome, but with the passage of that bill the FDA is now pledging to make its processing of applications for approval more efficient and timely.

2018 FDA-issued GRAS notices to Fresh Hemp Foods permit certain hemp products for sale.

Further instructive to the hemp industry is the Commissioner’s reference in his December 20 letter to (and in praise of) several GRAS (Generally Recognized as Safe) notices issued in 2018 to Fresh Hemp Foods, Ltd.'s hemp seed food products. As a result, on December 20, 2018, the Commissioner announced that hulled hemp seeds, hemp seed protein and hemp seed oil containing no CBD or THC have been approved as additives to food products under certain circumstances. Clearly, the FDA was reminding hemp producers to follow the Fresh Hemp Food process before conducting interstate commerce in any hemp-based products not exclusively made from hulled hemp seeds, hemp seed protein and hemp seed oil containing no CBD or THC.[9]

Numerous questions arise about the effects of the 2018 farm bill.

Much has yet to be analyzed about the effects of the 2018 farm bill on Arizona consumers, dispensers and cultivators. We do not yet know how Arizona will react to the 2018 farm bill, including whether or how commercialized industrialized hemp operations now authorized under the 2018 farm bill will be regulated by Arizona. But hemp farmers and distributors may now  have easier access to banking, finance, insurance (via federally insured coverages) and USDA federal grants. Experts are opining that the hemp industry will explode from $700 million annually in 2018 to $2 billion or more annually in just a few years.[10]

Questions abound concerning the effects of the 2018 farm bill on commerce, including the following:

• What research will be conducted on hemp-based CBD’s effects on medical conditions?

• Will insurance be readily available to growers and medical users of hemp-based CBD?

• Will traditional lenders make business loans to farmers who grow industrial hemp and distributors who sell it?

• Will the U.S. Patent and Trademark Office accept federal trademark protection for hemp-based CBD products, and, if so, under what circumstances?

• Will mass retail marketers such as Target and Wal-Mart introduce or re-introduce hemp-based products?

• Will businesses in the hemp-based CBD marketplace be relieved of current taxation under IRC §280E applicable to the illegal sale of drugs (limiting the deductibility of business expenses to cost of goods sold)?

These and many other questions will arise, and we will attempt to provide answers as additional information, governmental positions and regulations, agency and court decisions are issued, and commentators make their opinions public.

Arizona’s criminal statutes impose substantial penalties for the possession or distribution of cannabis.

Under Arizona’s criminal statutes, possession or sale of cannabis or marijuana is illegal (A.R.S. §§ 13-3401 and -3405), subjecting perpetrators to fines and prison terms. “Cannabis” (under whatever name designated) is defined in Arizona’s criminal code as:

• the resin[11] from any part of the plant of the genus cannabis[12];

• every compound, manufacture, salt, derivative, mixture or preparation of the plant, its seeds or its resin; and

• every compound, manufacture, salt, derivative, mixture or preparation of such resin or THC (A.R.S. § 13-3401[4]).

Under Arizona criminal law, the term “cannabis” does not include oil or cake made from the seeds or stalks of the plant, but it does include the resin extracted from the seeds or stalks. The term “marijuana” means all parts of any plant of the genus cannabis from which the resin has not been extracted, whether growing or not, and the seeds of such plant. “Marijuana” does not include the mature stalks of such plant or the sterilized seed of such plant which is incapable of germination. (A.R.S. § 13-3401[19]).

Remember, hemp is a cannabis plant containing THC (albeit typically in minimal amounts), thus causing confusion on whether persons producing, selling or possessing hemp or hemp-based CBD can be criminally prosecuted in Arizona. Part of this confusion lies in the fact that, after Arizona’s criminal statutes were passed (years ago), the Arizona Medical Marijuana Act (AMMA) was passed in 2010 to make another cannabis plant (marijuana) legal for certain medical conditions when dispensed by licensed dispensaries to licensed patients. The Arizona Industrial Hemp Bill, regulating hemp as an agricultural product (see discussion below) and enacted in 2018, caused further confusion. The 2018 farm bill at the federal level added another layer of uncertainty.

Therefore, unless otherwise excepted/exempted (see below), the possession or sale of resin from the plant or anything made therefrom (i.e., “cannabis,” defined above), or the possession or sale of any part of the plant containing resin (i.e., “marijuana,” defined above) may result in imprisonment.

Arizona’s Medical Marijuana Act of 2010 permits the cultivation, production and possession of cannabis that is marijuana under certain circumstances.

A qualified exemption from criminal liability for possession or sale of cannabis was established in 2010 by enactment of the AMMA, legalizing the possession and sale of medical marijuana in limited circumstances. (A.R.S. §§ 36-2801 et seq.). A patient registered with the state may possess up to 2.5 ounces of “usable marijuana,” defined as the dried flowers[13] of the marijuana plant (which flowers contain resin) and any mixture or preparation thereof. (A.R.S. § 36-2801[15]). In late June 2018 the Arizona Court of Appeals affirmed a medical marijuana patient's criminal conviction for possession of marijuana, a narcotic, in the form of "hashish," the resin extracted from cannabis flowers, on the premise that the plant's resin is not a mixture or preparation of marijuana but an "extraction" not included within the AMMA's definition of "usable marijuana."[14]  Various industry groups have filed amicus briefs requesting the Arizona Supreme Court accept an appeal of the appellate court's decision.

The AMMA includes a (rebuttable) presumption that a qualifying patient is legally using medical marijuana if he/she has a patient registration card and is not in possession of more than the permitted 2.5 ounces of marijuana. (A.R.S. § 36-2811). A registered dispensary and its agents are not subject to criminal enforcement for working in the dispensary or cultivation facility, provided that the AMMA is being complied with. (A.R.S. §§ 36-2811[E] and [F]).

Therefore, the AMMA provides protection from criminal penalties to registered patients, dispensaries, and dispensary and cultivation facility agents only, and only provided that the possession, sale and cultivation are in compliance with the law. Unregistered patients, companies and persons are not so protected, and their possession, sale or cultivation would be illegal in Arizona. Can dispensaries cultivate and sell hemp-based CBD to AMMA-licensed patients under the AMMA? Probably not (see the discussion below).

THE ARIZONA INDUSTRIAL HEMP BILL

Commercial production of industrial hemp permitted by federal law will soon be permitted in Arizona.

In May 2018, to stimulate economic growth and agricultural vitality in Arizona, Governor Doug Ducey signed into law the Arizona Industrial Hemp Bill, establishing limited pilot programs on hemp cultivation and production, such as those conducted for research at universities.[15] Additionally, the Arizona Hemp Bill permits the commercial growth, cultivation and marketing of industrial hemp and hemp products in Arizona on the condition that federal law permits such activities (A.R.S. §§ 3-311 et seq.). The exact interplay between the Arizona hemp bill and the federal 2018 farm bill is not yet certain, but there now appears to be a larger window of opportunities opening in Arizona for the cultivation, production and distribution of industrial hemp-based products in interstate commerce.

Regulation of hemp production in Arizona resides with the Arizona Department of Agriculture (AZDOA), not the Department of Health Services, which today regulates medical marijuana (also a cannabis plant). After the Arizona hemp bill was enacted, special committees were formed by AZDOA (comprised of a majority of farming interests) to recommend administrative rules and application processes for implementing the Arizona bill. As a result of the Department’s interest in obtaining community input on the bill, its effective date was delayed until August 2019.

Federal legalization of hemp is an Arizona game changer, too.

The passage of the 2018 farm bill was a game changer for the AZDOA and Arizona’s own hemp bill. On December 20, 2018, Brian McGrew, AZDOA’s industrial hemp program manager/Plant Services Division, advised the author that “we will be adjusting our program rules accordingly … mak[ing] the licensing and compliance process easier and allow[ing] for the interstate movement of industrial hemp.” He cautioned, however, that “a licensing program [must first] be established [by AZDOA] before planting can begin. Growers will still need to wait for the Department to establish administrative rules and an application process.” On December 27, 2018, Mr. McGrew further confirmed “there will be no changes to the [Arizona hemp bill] based on the provisions in the [federal 2018] farm bill. There is nothing in the Arizona law that will prohibit CBD production,” assuming that hemp-based CBD has a THC below 0.3%. As we have pointed out elsewhere, however, this is not a pass to anyone producing or distributing hemp-based CBD (e.g., medical marijuana dispensaries in Arizona); rather, there are licensing requirements under both farm bills, and the FDA maintains review jurisdiction over ingestible and topical CBD.

Mr. McGrew also advised that a recently proposed Arizona bill, Senate Bill 1003, sponsored by State Sen. Sonny Borrelli (R. - Lake Havasu City) would move back the effective date of the Arizona hemp bill to May 31, 2019. Senator Borrelli recently stated, “We want to make sure we start growing the first hemp crop in its growing season. This is a $500 million industry. It’s time Arizona is a part of it.” The AZDOA expects to accelerate its work to accommodate the earlier effective date if passed.

Arizona expects to grant four types of industrial hemp licenses.

Under the Arizona hemp bill, “industrial hemp” is defined as any part of the plant cannabis sativa L. with THC of < 0.3% on a dry-weight basis (A.R.S. § 3-311[7]). The term “hemp products” is defined as products such as cloth, cordage, fiber, building supplies, and paper, but the term excludes a hemp product to be ingested except when made from sterile hemp seed or hemp seed oil.

AZDOA expects its licensing regime to grant four types of industrial hemp licenses:

• Grower, for persons interested in growing and propagating industrial hemp

• Harvester, for persons interested in providing harvesting services to a licensed hemp grower

• Transporter, for persons transporting industrial hemp to a licensed hemp processer

• Processor, for persons interested in processing harvested industrial hemp into seed or products.

AZDOA reports that applicants will be expected to disclose the physical location of the cultivation area, expected planting and harvesting dates, expected end-users of hemp products, and knowledge of state and federal requirements for propagating and processing industrial hemp. Applicants must pass fingerprint clearances and otherwise comply with policies and procedures of the Department. A link has been provided by the Department as Q-and-A’s at www.agriculture.az.gov/plantsproduce/industrial-hemp-program.

Under Arizona’s current hemp regulatory and licensing scheme, Arizona medical marijuana dispensaries may be able to cultivate and sell hemp-derived CBD to patients and non-patients alike under an exemption from state criminal penalties provided by the Arizona Industrial Hemp Bill, if the hemp is commercially cultivated, produced and sold as industrial hemp pursuant to federal law (i.e., the 2018 federal farm bill). However, as we have discussed above, under the 2018 farm bill each state will be required to submit its own plan for licensing and regulating hemp-based products for the USDA’s approval. Arizona is fast-tracking the building of its own plan for submission to the USDA.

Thus, until that plan is approved and Arizona has licensed a hemp provider, it appears that Arizona’s criminal laws preclude the legal cultivation and distribution of hemp-based CBD products. It further appears that medical marijuana dispensaries and  other cultivators, producers and promoters of hemp will be required under federal law to comply with the Arizona’s regulatory and license plan when it has been approved by the USDA.

We are attending meetings of the AZDOA and committees tasked with writing rules and regulations to implement the Arizona hemp bill, and we will issue additional articles as developments occur. The next meeting is expected to be held in January, but a date has not yet been picked by Mr. McGrew.

CONCLUSIONS

Despite the passage of the 2018 farm bill removing industrial hemp from the CSA, as this article is written the fact remains that, in Arizona, to avoid criminal prosecution for possessing or selling hemp-derived CBD products, the actor must be one of the following:

• a person or entity in receipt of an AZDOA license to cultivate, possess or sell industrial hemp products under a pilot program approved by the state; or

• a person or entity engaged in the commercial production, processing, manufacturing and distribution of industrial hemp pursuant to the 2018 farm bill (A.R.S. §§ 13-3405 and 3-220), provided that that person or entity also has a license from the state and the state’s plan to regulate hemp has been approved by the USDA.

Neither of the above exceptions is currently available. The Arizona Industrial Hemp Bill is not effective until August 2019, and the 2018 farm bill, while effective immediately, must still be implemented through the federal regulatory process. Persons cultivating, possessing or selling hemp-derived CBD products in Arizona remain at risk of prosecution, at least until we learn more from Arizona and the USDA on implementing the federal and state hemp bills enacted in 2018.

If Janet Jackim, whose practice is focused on cannabis, marijuana and hemp business law, can assist you, please call (480) 425-2616 or email her at Jackim@SacksTierney.com.

DISCLAIMER: Possessing, using, distributing, and/or selling cannabis, marijuana or marijuana-based and hemp or hemp-based products is presently illegal under federal law, regardless of any state law that may decriminalize such activity under certain circumstances. Although federal enforcement policy may at times defer to states’ laws and not enforce conflicting federal laws, interested businesses and individuals should be aware that compliance with state law in no way assures compliance with federal law, and there is a risk that conflicting federal laws may be enforced in the future. No legal advice is intended to provide any guidance or assistance in violating federal or state law.