State governments and the federal Food and Drug Administration (“FDA”) take wildly different approaches when it comes to Hemp-derived cannabidiol (“Hemp CBD”), and for the most part, the ball is still in the government’s court to actually regulate hemp and Hemp CBD. The Food and Drug Administration (“FDA”) and U.S. Department of Agriculture (“USDA”) haven’t issued regulations yet, states like California are still considering laws that would allow (or ban) many Hemp CBD products, and the interstate transport protections under the 2018 Farm Bill arguably still haven’t been fully implemented because the USDA hasn’t even reviewed a single state hemp production plan.
All of this makes for a lot of uncertainty for Hemp CBD companies, both in terms of how they operate internally and how they contract with third parties. It can be tough enough for Hemp CBD companies to comply with the little available guidance that’s out there, but things get increasingly difficult when Hemp CBD companies have to trust that their suppliers, manufacturers, distributors, or other partners are actually following the rules or even trying to follow the rules.
It almost goes without saying that when doing business, comprehensive written contracts that detail each party’s rights and obligations are essential. Our Hemp CBD lawyers still see comprehensive transactions memorialized on one- or two-page, bare-bones contracts or even on a “handshake” basis. This is almost always a bad idea, and is especially dangerous in an industry with so many legal and regulatory pitfalls and constant changes in the law. Hemp and Hemp CBD products should be treated like any other commodity, and legitimate contracts should be a serious consideration. No matter what kinds of Hemp CBD contracts a company might enter into, there are some important things that companies should at least consider when inking a transaction.
#1 Making Sure the Hemp is Legal
Hemp and Hemp CBD purchasers should want reassurances that the hemp or Hemp CBD products they are purchasing was grown in accordance with both state and federal law, using approved seed cultivars, passes stringent state testing requirements, etc. It’s not enough to just trust a seller or to assume that because hemp is being sold, it’s legal. Failure to vet suppliers could lead to serious legal ramifications. This doesn’t just apply to purchasers of biomass—buyers of manufactured products can ask the same (and even more) questions. If the hemp isn’t grown in accordance with the law, then that could legally “taint” all products made from that hemp and pose risks to everyone in the supply chain.
#2 Making Sure the Hemp is “Hemp”
One of the biggest concerns for Hemp CBD companies should be ensuring that the product that they are purchasing is not “cannabis” or “marijuana” as defined under state or federal law. The difference between “hemp” on one hand, and “cannabis” or “marijuana” on the other, usually is the .3% THC threshold (although states are taking varied approaches to how this is measured). If what’s cultivated has .3% or less it’s hemp and could be legal under federal and state law. But if it has any more than .3% THC, it may be considered cannabis and then be illegal under federal law, or be unregulated (and by extension, illegal) under local law. Even though more and more states are requiring lab testing, it’s always a good idea to include lab testing as a requirement in a contract.
#3 The Chain of Custody
Even if the parties ensure that lab testing is performed or that hemp is legal where it came from, it can be a moot point if the results aren’t properly used. If a government decides to investigate a Hemp CBD company, it may demand proof that what they’re making actually contains legally produced hemp. If companies can’t prove the “chain of custody” of the hemp, an investigator could conclude that the hemp at issue was not grown in accordance with state law. It’s much easier to get all the chain of custody information in a contract, rather than hoping your suppliers will give an investigator information that will help you.
#4 Watching the Advertisements
In the next few years, we’re likely to see more and more litigation over claims made in connection with Hemp CBD products (one such case alleging misleading statements on a company’s website was just filed in August 2019). We’ve already seen the FDA send warning letters to companies who make medical claims on in connection with their Hemp CBD products, and it’s likely that in the coming days the Federal Trade Commission (“FTC”) could take action against online advertisers (I recently wrote about the FTC dangers relative to using social media influencers to advertise cannabis, which are very similar for Hemp CBD companies). Hemp CBD companies can in many cases face penalties if third parties market their products unlawfully. Hemp CBD companies should take a hard look at what’s in their third-party contracts relative to marketing.
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