CBD, short for cannabidiol, is the wildly popular compound that has found its way into food, drinks, supplements, cosmetics, and even dog treats. CBD is a non-psychoactive instance of the 113 known cannabinoids, organic compounds unique to cannabis. Celebrity athletes have gotten into the game as well, with ex-Patriots tight end and lovable goofball Rob Gronkowski partnering with CBD Medic and North Shore cult hero professional surfer Jamie O’Brien extolling the virtues of the CBDMD line of products on his Instagram page. CBD’s proponents cite its purportedly therapeutic effects, ranging from analgesic, anti-inflammation, anti-anxiety, and mild sedation. Some proponents have even used the term the “boy scout molecule” to describe its positive effects because it always “does the right thing.”
Although the FDA has only approved CBD in the context of clinical trials for the drug Epidiolex—used to treat a form of epilepsy—the market interest in CBD, derived in part from the anecdotal reports of its benign and benevolent bodily effects, has skyrocketed in the recent past. In fact, the cannabis industry market research firms BDS Analytics and Arcview Market Research estimate that the CBD industry could reach a value of $20 billion by 2024. In spite of the overwhelming public interest and market demand, one question remains: is it legal? In the article below, we answer the fundamental frequently asked questions about the current, hazy legal framework.
CAN I DEPOSIT FUNDS FROM HEMP-DERIVED CBD WITH A BANK? CAN I GET A BANK LOAN FOR MY HEMP-DERIVED CBD BUSINESS?
Yes—if it is derived from hemp, not cannabis. The Agriculture Improvement Act of 2018 (the “Farm Bill”) passed by Congress revised Controlled Substances Act to differentiate between the plants cannabis and hemp. Without delving too deep into botany and plant genetics, generally speaking, hemp is the same species as cannabis sativa, but has little to no psychoactive properties—that is, a very low proportion of delta-9 tetrahydrocannbinol (THC).
Indeed, the Farm Bill defines hemp as “the 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 tetrahydrocannbinol [THC] concentration of not more than 0.3 percent on a dry weight basis.” Because the plant is itself legal, that has paved the way for the nationwide legality of CBD, provided it is derived from a hemp plant.
That being said, the Farm Bill also provides that hemp-derived CBD, as well as the hemp plants themselves, are subject to relatively strict state-federal oversight, where hemp cultivators, in states like California that have opted to develop a hemp program, must apply for licenses from state departments of agriculture who have submitted an approved plan to the United States Department of Agriculture. Cultivators in states that have opted not to develop a hemp program must apply to the federal government for licenses to grow.
The penalty for cultivators that grow a crop that is out of compliance—that is, one that contains more than 0.3% THC—is the harsh remedy of mandatory destruction of the entire crop. This legal regime has brought into relief the climate sensitivity of hemp, in that seeds grown in one state can generate a crop coming in under the 0.3% threshold, while identical seeds grown in a different state can result in a non-compliant crop subject to destruction. As the science on the plant develops, hemp cultivators will continue to have to bear the risk of these variations in THC content as long as cannabis and THC remain federally illegal.
Yes. Nothing earth shattering here, but a foundational point that puts California at odds with federal law once again. Now that cannabis has been legalized for recreational use in California, the whole plant, including CBD derived from cannabis, is now legal at the state level (provided the parties in the supply chain have the proper licensure, of course).
However, cannabis is still federally illegal. CBD derived from cannabis, as opposed to hemp, is still federally illegal, placing CBD in the same legal netherworld as California-legal cannabis and THC. That is, businesses and individuals that grow, manufacture, process, distribute, sell, and consume cannabis, even in states where it has been legalized for adult-use/recreational purposes, are still breaking federal law, which considers cannabis a Schedule I drug under the Controlled Substances Act.
However, there is a measure of protection for medical cannabis operators. Under the Ninth Circuit’s decision in United States v. McIntosh, 833 F.3d 1163 (2016), the federal government is prohibited from prosecuting individuals or entities for medical cannabis usage or distribution, provided that those same persons are in compliance with applicable state medical cannabis laws. Id. at 1177. In that case, the Ninth Circuit ruled that then-entitled Rohrabacher-Farr Amendment (now known as the Rohrabacher-Blumenauer Amendment)—a Congressional rider on appropriations bills that prevents the federal government from using federal funds to prosecute state law-compliant individuals or entities for cannabis usage/possession/distribution in states where medical cannabis is legal—was a binding prohibition on federal drug law prosecution against legal medical cannabis operators and consumers. The Rohrabacher-Blumenauer Amendment is currently in effect until September 30, 2020, having been renewed via the 2020 Fiscal Year omnibus spending bill on December 20, 2019.
However, the Amendment provides no protection from prosecution for recreational, as opposed to medical, cannabis. Although a broader version of the Rohrabacher-Blumenauer Amendment, which would have extended protection to recreational cannabis usage as well as medical cannabis usage, passed the House in June of 2019, the Senate refused to consider that expansion. On the other hand, the Cole Memorandum (“Cole Memo”), a now-defunct relic of the Obama administration, did provide some measure of protection for recreational cannabis, wherein the then-U.S. Attorney General James Cole in August 2013 instructed the DOJ to de-prioritize prosecution of cannabis cases, provided that the would-be defendants were in compliance with locally-enforced state law requirements. Of course, the Cole Memo explicitly stated it did not create any substantive civil rights or reduce the powers of the DOJ to prosecute cannabis cases, but instead provided prosecutorial guidelines. Although ostensibly geared toward avoiding prosecution of medical cannabis, the Cole Memo itself made no such distinction, referring to “jurisdictions that have enacted laws legalizing marijuana in some form,” and came after the first wave of recreational legalization in 2012 in Colorado and Washington. Regardless of the erstwhile Cole Memo’s scope, the vehemently anti-cannabis former Trump Administration U.S. Attorney General Jeff Sessions rescinded the Cole Memo with a one-page memorandum of his own in 2018.
Ultimately, the current administration has shown relatively little intention of prosecuting recreational cannabis. Sessions’ successor, William Barr, is less dogmatic about cannabis and its enforcement, and favors a “federalist” approach where the federal government would cede enforcement power and responsibility to the states. Barr even went as far to say that he “accept[s]” the Cole Memo, but has yet to reinstate it with a memorandum of his own, preferring to delegate the discretionary authority to individual U.S. Attorneys.
Until the federal government speaks more concretely, as of now, the only thing protecting legitimate cannabis businesses, even if their only product is non-psychoactive CBD (derived from cannabis, not hemp), are the whims of the local U.S. Attorney. However, California legitimate cannabis businesses can take some comfort in the fact that two of the four California U.S. Attorneys—Robert Brewer of the Southern District of California and McGregor Scott of the Eastern District of California—have made neutral-to-positive remarks regarding their enforcement priorities and personal attitudes toward cannabis, while the other two have remained sphinxish on the matter.
Not right now, per the FDA. The FDA regulates food and drink in interstate commerce, and currently prohibits infusion of CBD into human or animal food or drink, citing the dearth of research on the toxicity of the molecule. However, this status is subject to change, as researchers within and without the FDA continue to explore the effects of CBD on humans and animals.
In fact, despite the widespread availability of CBD-infused food and drink products, the FDA has recently begun to assert its authority. On November 25, 2019, the FDA issued a press release announcing that it had “issued warning letters to 15 companies for illegally selling products containing [CBD] in ways that violate the Federal Food, Drug, and Cosmetic Act (FD&C Act).” The warning letters cited the 15 companies for various violations of the FD&C Act, including “marketing CBD products to treat diseases or for other therapeutic uses for humans and/or animals” and “marketing CBD products as dietary supplements and adding CBD to human and animal foods.” In so doing, the FDA noted that “it cannot conclude that CBD is generally recognized as safe . . . among qualified experts for its use in human or animal food.” The FDA cited back to its prior consumer update, where it pointed out the results of several preliminary studies indicating potential negative effects of CBD, including but not limited to liver damage. In short, the FDA continues to rely on the absence of reliable science on the effects of CBD in justifying a conservative approach to the legal regime surrounding CBD infused food and drink. More importantly for operators in the hemp and CBD industries, the FDA has shown that is not afraid to crack down on those who would flout the prohibition on CBD-infused food and drink. Whether these warning letters lead to prosecution for the 15 businesses or their competitors, however, remains to be seen.
Can I deposit funds from hemp-derived CBD with a bank? Can I get a bank loan for my hemp-derived CBD business?
Unclear. The federal government and the banking industry are engaged in an ongoing ping-pong match wherein Congress urges banks to accept hemp money, and the banking industry responds by requesting additional guidance from the federal government.
The initial volley came in April 2019 where Senators Mitch McConnell and Ron Wyden sent letters to banking regulators urging them to issue guidance so that banks would “feel secure in engaging” with the hemp industry, but also noting that “[l]egal hemp businesses . . . should not [be] discriminated against.” The American Banking Association sent a follow-up letter to financial regulators in June 2019 similarly urging for issuance of guidance to the banking industry such that they would be empowered to accept money from legal hemp businesses.
On December 3, 2019, federal banking regulators responded by confirming that they would not require federally insured banks to file suspicious activity reports for hemp business clients. In so doing, they confirmed that hemp is no longer considered a Schedule I controlled substance, and that hemp business customers are responsible for compliance with the regulatory framework put forth by the Farm Bill. Despite this reassurance, the ABA responded positively to the announcement, but stopped short of announcing it was open season for hemp business loans, noting that they would work with regulators to “develop additional guidance.” In short, although federal regulators and the banking industry are closer to reaching consensus on providing financial services to hemp businesses than they were in early 2019, the banking industry has not indicated that they are entirely open for business. That being said, the rollback of the suspicious activity reports rule perhaps paves the way for more risk-tolerant financial institutions to jump into servicing the hemp industry while the more conservative wing of the industry waits for additional federal guidance and assurances.
The legal framework for CBD, much like that of cannabis more broadly, has yet to catch up to the market demand. Because of the potential pharmaceutical, food, and drink applications of CBD, the FDA has taken the lead on its regulation, holding a public hearing from various stakeholders at the end of May 2019. The FDA has not yet issued further rules or guidance since then, presumably to digest the numerous comments made at that day-long hearing. Until then, hemp-derived CBD is safely in the stream of commerce, as long as it is not in food or drink. Cannabis-derived CBD is in the same legal purgatory as California-legal cannabis, but may benefit from the same amount of prosecutorial discretion. As far as your favorite CBD lemonade your local liquor store stocks, that product is in jeopardy of being taken off the shelves, as demonstrated by the FDA’s November warning letters.