Litigation and law enforcement in the cannabis space around the country.

There’s a common belief in the hemp and cannabis industry that law enforcement is low. Therefore, risk is low. But is that changing?

Hi, I’m Morgan Davis. I’m an attorney practicing cannabis and business in North Carolina. Let’s talk about how to keep your business protected and thriving. In the past year, we’ve seen not only litigation increase in that cannabis industry, but also law enforcement increase in the cannabis industry, both above the point 3% Delta nine, THC. So in the regulatory base and in the hemp space, in addition to that, it seems as though the DEA at the federal level, the DEA, may be changing its position and be ready to get a little more in the ring when it comes to hemp and hemp derivatives, which could lead to more enforcement, both at the federal and state level.

And we’re seeing state agencies at the state level take a more active role and also other states propose a more active role. Finally, we’re seeing litigation, private litigation between companies and lawsuits, class action lawsuits on behalf of consumers pick up from anything from trademark infringement to negligent misrepresentation and common corporate law. Issues like acquisitions that fall through at the last minute.

Let’s start at the federal level with the DEA

So let’s start at the federal level with the DEA, the Drug Enforcement Agency. Since 2018, the DA’s position on hemp and him derivatives has consistently been that as long as it’s 0.3% Delta nine, THC or less by dry weight, it is hemp and therefore exempted from Controlled Substances Act. They have said this publicly private Lee and at many, many levels, federal and state.

That position seems to be changing. Recently there was a conference where a presentation was made, including some part about hemp derivatives, including Delta eight and the DEA position at that time in that conference, which was only made public by someone who attended it, was that Delta eight is a synthetic cannabinoid and therefore does not fall under the definition of hemp and is still subject to the Controlled Substances Act.

Huge revelation. The DEA is position about that publicly has not been consistent. There have been other letters that have come out since that presentation that might sway in a different direction with the DEA is saying is that they are in the process of making a new rule to address hemp and hemp derivatives. And the big question of what’s synthetic and what’s non synthetic, what is hemp and what’s not hemp?

And it seems as though they’re willing to even get down to regulating individual cannabinoids. If you’ve been following along or you’re in the have been cannabis industry, you understand that hemp is made up of hundreds of cannabinoids. There’s only there’s a little I can’t remember at this moment, but we at this moment are probably seeing anywhere from 10 to 20 minor cannabinoids as common cannabinoids now in the market at the state level and at the federal level.

Most regulations up until the past 12 months have not been specific to individual cannabinoids, maybe CBD, but certainly not with some of the others. That has changed. The DEA has issued a letter on thc o, which they say since it does not naturally occur in the plant, it’s not hemp. HHC Same position does not naturally occur in the plant, so it’s not hemp.

THCA seems unclear.

The DEA issued a recent letter in response to an inquiry from a company about THC, a That position comes down to is, is it the Delta nine THC standard only or is it more of a total THC standard and which should be controlling at the federal level, even even down to the product level? Honestly, reading the DEA letter, it’s unclear what their position is.

So the hope is that if they’re going to clarify it, it will be clarified soon in this new rule that they’re coming up with. We have no idea when the new rule is coming out or what their proposed standard is going to be at this time. Delta eight unclear. The presentation said Delta eight is synthetic. A letter post.

The presentation said that if Delta-8 is made from plant materials, then it’s not synthetic. So if you’re making Delta-8 products from plant materials and not synthetic materials, then perhaps it does fall under the definition of hemp. The letter doesn’t go that far, but it certainly leans in that direction. So the trend we’re kind of seeing from the DEA is if if a if a cannabinoid exists naturally in hemp, you can find it in the plant itself and it’s extracted naturally or in a process using plant materials.

Then it falls and it still falls within the point three Delta-9 THC limit. Then it’s hemp. But if it’s synthetic at some point and again, it’s not clear, does that mean it’s synthesized? Does that mean it’s using synthetic materials? And what is synthetic? If we’re only using natural products like carbon or heat, does that mean it’s synthetic?

There’s a lot of questions left to be left open, but it is clear that the DEA is now starting to get into the process of weighing in on its position down to certain cannabinoids. So I think with the new rule, we’re going to have a significant shift in the industry whenever it comes out as to the legality of consumable hemp products or end of line hemp products, state level.

So at the state level, we’re seeing state agencies that are responsible for regulating state hemp programs, state hemp products start to weigh in more than they have before. Minnesota just passed sweeping legislation about marijuana legalization, but also hemp products and came up with a very robust regulatory system that delineates hemp products that can be sold outside of the regulated, regulated market, hemp products that must be sold inside the regulated market.

Minnesota’s Board of Pharmacy and is one of the agencies in control of regulating that, and they have already issued made an action against a company inside the state of Minnesota that is selling products over the THC, a hemp product over the THC cap without a license. So unlike before, where we’ve seen state regulation passed, but because there’s no agency established to enforce it or maybe the legislation passes and then the regulations take a while to be created and the regulatory body gets created, it already exists in Minnesota is the Minnesota Board of Pharmacy.

They’re enforcing regulations

They’re already up and running. They’re already enforcing a regulated market, and they’re very quickly transitioning to enforcing the new regulations on the hemp industry inside Minnesota. That action came with a $50,000 fine. So it’s a significant action. California’s tax agency, which is responsible for collecting sales tax and tax related to the sale of cannabis and hemp products inside the state of California has picked up its enforcement in terms of raids and investigations across the state of California in the last 12 months, including vape shop smoke shops that are selling hemp derived products.

A lot of them are also selling illicit cannabis material, but they are confiscating hemp products and hemp derived products in addition to whatever else they find that’s being sold outside of their existing regulations. And it comes with license revocation, warning letters and civil fines. North Carolina is now proposing legislation that would put that would develop regulations just like Minnesota, not the regulations are like Minnesota, but it’s in similar in nature in terms of establishing licensing and production standards, etc..

But in addition, it establishes the Ali is the law enforcement arm for hemp products and licensing in the state of North Carolina. The alley is in already established law enforcement agency. They have been around North Carolina working in the alcohol industry for a very long time. So they’re not going to have any issues in terms of getting up and running and having the manpower ability to start enforcing these regulations.

So I think it’s going to be something similar to Minnesota. We’re going to see law enforcement action quickly. So that’s what’s happening at the state level litigation wise. So moving away from criminal state action or even civil state action into private civil action, a lot of times companies this is a new industry, lots of small companies, lots of startups, and the fear of litigation isn’t very high, I would say.

Litigation is increasing

I think that that is changing. I think litigation is increasing and it’s certainly increasing the more successful you are as a as a company in the hemp and cannabis space, the bigger the target is on your back. And we see that in litigation. There’s several lawsuits pending right now, one against the company that has Derek Jeter’s pre-roll or I think they’re called jitters.

The lawsuit alleges, among other things, that the Pre-rolls are false advertising and intentionally misrepresenting to customers what is in the pre-rolls specifically independent testing in the pre-rolls was done and sometimes the pre-rolls were 70 to 100% above in terms of THC content, what was on the label. So the THC content is significantly higher. Similar lawsuits have been filed against the vape favorite brands, Dizzy for overcharging for, for both for overcharging people for THC content and then for putting more THC in products that shouldn’t be that that are above the hemp limitations.

And there’s a lawsuit in California filed against cannabis manufacturer Lowell Farms for inaccurate THC content labeling. Toys R US has filed a trademark infringement lawsuit against a retailer Zarza r US cannabis retailer for trademark dilution and infringement. These are the types of issues that are becoming more and more common, which makes sense. If you look if you walk into a vape shop, if you look at products online, there are a lot of hemp products out there that are infringing upon known candy trademarks.

And the bigger we get, the bigger those companies get, the more likely you are to trigger a reaction from an existing national brand. In addition to that, the more and more we see products on the shelves that mislead consumers as to what the THC content is and the more and more they have adverse reactions, consumer litigation will increase.

So the idea that, oh well, everybody out, everybody out there is doing it, everybody just wants to get as high as possible. That’s not true anymore. You are going to have consumers entering this market who aren’t regular THC users who don’t know a lot about what they’re taking. And if you’re creating a product that is misleading in its labeling and they end up having a bad reaction, that litigation is happening.

It is a risk and I don’t think it’s a low risk anymore. So what does all this mean? Civil liability in the hemp and Canada’s hip hemp and cannabis industry is a risk. Mislabeling products is a risk. Trademark infringement is a risk. And it’s especially true the bigger and more successful you get, which is everybody’s desire. Everybody wants to make money, right?

So what does that mean? What’s the key to successful avoidance of legal litigation, legal issues in hemp and cannabis industry? It’s having an advisor that understands what the risk is from the beginning and can help you before and during a launch of your product and then well into distribution so that you can be successful without being the target of litigation.