STORIES

Are Google and Walmart Co-Conspirators in Trafficking a Prohibited Substance?

By Wesley H. on January 27, 2017

When it comes to the legality of cannabis, we’ve gotten used to confusion, legal gray areas and conflicts between state legalization and federal prohibition. However, because of the prominence of cannabidiol (CBD) products in mainstream commerce, it was not business as usual when the Drug Enforcement Administration (DEA) recently issued a three-page notice targeting CBD and opening an entirely new level of surrealism, bewilderment and angst.

On the surface, the DEA notice (published last December in the Federal Register) was a simple administrative action. It created a new Administration Controlled Substances Code Number (#7350) for “Marihuana Extract” as the DEA previously had codes only for Marijuana (#7360) and THC (#7370). Some observers consider it to be a potentially positive move because giving CBD its own code could make it easier to document the potential medical benefits of CBD and other cannabinoids. However, most of the cannabis community believes the DEA's move is far from harmless. At best, they theorize it is DEA overreach. At worst, it is an attempt by the DEA to ban all CBD products, psychoactive or not.

The resulting tempest is understandable given recent cannabis developments at the federal level, including: 1) A consistently cannabis-unfriendly DEA that, by refusing to reschedule cannabis, continues to equate it with heroin, LSD and other Schedule I drugs; 2) President Trump’s nomination of Alabama drug warrior Jeff “good people don’t smoke marijuana” Sessions to Attorney General; and 3) the nomination of fellow drug hardliner and Georgia Rep. Tom Price for Secretary of Health and Human Services. Add these to the new CBD notice, and cannabis activists have reason to be more than skeptical.

Green Rush Daily: “The DEA’s actions seem to protect big pharma’s pockets more than the health of American citizens.” 

Vice News: “The weed extract CBD doesn't even get people high—but the DEA continues to treat it like heroin.” 

Leafly: “By publishing a final rule in the Federal Register this week, the DEA has essentially staked out new legal ground around CBD. The agency has formally stated that the DEA believes CBD products to be illegal Schedule I substances.” 

Rolling Stone: "Immediately our reaction was panic," said one CBD-infused product manufacturer.

The DEA shot back that much is being made of nothing. DEA spokesperson Russ Baer professed that the notice was primarily an “administrative move,” “not a change in enforcement priorities,” and not a “broader conspiracy at play.” At the same time, Baer reiterated that the DEA’s position is that “those who ship CBD oil would be in violation of federal law.” (Note: Walmart sells CBD oil across state lines, but more on that later).

Not everyone agrees that this was a change in policy. The law firm Harris Briken, who publish the popular Cannalawblog, wrote: “In truth, CBD merchants were probably always on the wrong side of the gray area in the DEA’s eyes because CBD extracts almost necessarily contain other cannabinoids.” The executive director of the Hemp Industry Association, Eric Steenstra, also said the rule doesn’t do anything new (beyond the tracking code) "...since CBD products are already [federally] illegal.” Of course, if CBD is already federally illegal, why has the federal U.S. Patent and Trademark Office issued trademarks for CBD products but not cannabis products, which they claim they can't because of the plant’s federal prohibition? As we said, lots of confusion, gray areas and conflicts.

Background: What is CBD?

Cannabis contains hundreds of compounds, and more than sixty of these interact with the body’s endocannabinoid system. These are called cannabinoids. The two most common are tetrahydrocannabinol (THC) and cannabidiol (CBD). The difference between the two primarily comes down to the difference in how each interacts with the brain’s CB1 receptors. THC activates CB1 receptors through binding and produces psychoactive effects (i.e., gets you high), while CBD binds to other receptors and is non-psychoactive. In fact, CBD can actually reduce psychoactive effects triggered by THC. Many people became aware of CBD and its potential medical benefits via Dr. Sanjay Gupta’s CNN series Weed, and conditions that CBD can potentially help treat include epilepsy, glaucoma, chronic pain, PTSD and mental health disorders, among others. 

The CBD market is currently tiny. Industry sources cited by Forbes estimated that the total CBD product sales in the U.S. narrowly topped $200 million in 2015. However, these same sources expect sales to increase significantly and reach $2 to $3 billion over the next four years.


 

CBD From Industrial Hemp vs. Cannabis 

CBD is extracted from Cannabis Sativa L. plants, a genus that includes both hemp and marijuana. The primary difference between hemp and marijuana is the level of THC. Hemp is defined as having only trace amounts of THC (less than .03%), while marijuana can contain any amount of THC with some strains testing at more than 20 percent. Hemp is typically grown for its fibers and seeds and has been harvested for thousands of years.  

There is disagreement as to whether the efficacy of CBD extracted from hemp differs from CBD extracted from marijuana. To some, there is no difference as CBD is an organic compound with the same molecules regardless of the cannabis plant from which it was extracted. Others argue that, while hemp is an extremely useful plant, its low level of cannabinoids inhibits its medicinal qualities and thus fails to achieve the full benefits of CBD.

CBD from industrial hemp is marketed in all 50 states, while 15 states have laws specifically permitting the limited use of cannabis derivatives, such as CBD, with low levels of THC for medicinal purposes.

Domestic vs. Chinese vs. European CBD

Another factor is the geographical source of the CBD. Much of today’s CBD comes from industrial hemp grown abroad, a fact that is driven both by economics(cheap Chinese imports) and (convoluted) regulatory reasons. It turns out that, even though the DEA doesn’t have enforcement power over hemp products, it does control the cultivation of hemp. 

From the Cannalawblog: “In order to grow hemp in the U.S., you have to have a permit from the DEA which the DEA typically never issues. Therefore, cultivating hemp without a permit from the DEA remains a federal crime. The only exception is the 2014 federal Farm Bill which allows state departments of agriculture, universities, and colleges to cultivate hemp without a permit from the DEA (solely) for educational and research purposes. Because of the prohibition on hemp cultivation without a DEA permit, the hemp products we see in the U.S. typically come from hemp imported from overseas. This means that companies and individuals may freely sell CBD derived from processed hemp (not from marijuana) imported from outside the U.S.” 

Beyond the question of legality, industry participants disagree on the quality and relative safety of imported CBD compared to cannabinoids extracted from domestic plants. The true answer won't be known until clinical researchers conduct independent, high-quality studies. Until then, vested interests will continue to push whatever positions help them most. Caveat emptor.

Is Walmart’s CBD Oil Actually Illegal?

Most enthusiasts in states that legalized cannabis understand that their use of such products is protected by local and state laws like California’s Compassionate Use Act and Proposition 64. Most also know that these protections do not change the fact that cannabis remains prohibited at the federal level. They are in a legal gray area between federal and state law. However, consumers of industrial hemp-derived CBD oil purchased at mass merchants (e.g., Walmart) probably have no idea about the debate over the legality of such purchases or the Industrial Hemp Act of 2015.

This brings up Walmart, Target, Google and every other major retailer carrying CBD products. It is unlikely such major players would carry products that could risk violations of the Controlled Substance Act. That said, newspapers are filled with stories of big companies being charged with violating various laws so it’d be a mistake to rely solely on Walmart and other retailers carrying CBD products as prima facie that they are legal.

Major retailers are likely relying on the fact that, since hemp is not scheduled under the Controlled Substances Act, it is therefore not under the enforcement authority of the DEA. They are also likely carrying products from which CBD was derived from hemp grown outside the United States, but the retailers’ CBD positions may change due to the recent DEA notice. These companies don’t know whether or not there are even trace amounts of THC in their CBD products, and they don’t want to risk a fight (or even a war of words) with the DEA. From Green Rush Daily, “The DEA has made extracting CBD completely illegal whether it is from hemp or not.”

Smaller retailers, distributors and manufacturers with a more vested interest in maintaining CBD revenues are less likely to drop their CBD products because of this notice. Even though the DEA itself has said the December notice had nothing to do with a change of enforcement priorities, if there is a problem down the line, retailers may use various defenses and arguments in their favor, including the following:

  1. In Hemp Industries v. DEA, the US 9th Circuit Court concluded unanimously that non-psychoactive hemp had not been regulated by Congress under the scheduling system established by the Controlled Substances Act. Therefore, if the DEA wants to schedule hemp, it has to follow the established rules for doing so, which means going through Congress. It is this court decision that is most likely the reason that retailers such as Whole Foods sell hemp seed oil and the likely defense that industry attorneys will employ against any DEA action. (Source: Leafy) 

  1. A federal judge may not agree with the DEA’s interpretation and invalidate the final rule as it relates to CBD.

  1. In legal medical cannabis states, the Rohrabacher-Farr amendment prohibits the Justice Department and DEA from interfering in any way with state medical marijuana laws and regulatory systems. CBD products fall under the protections of that amendment. Consequently, even if the DEA considers CBD oil illegal, it may not be able to enforce it.

  1. The 2014 Farm Bill (a.k.a. Agricultural Act of 2014) may also provide a defense.

  1. If the Industrial Hemp Farming Act of 2015 is passed (currently there are versions in the House and Senate, H.R. 525 and S. 134), all current restrictions on the cultivation of industrial hemp would be removed, along with its classification as a Schedule I controlled substance.

This fight might not be the one the DEA intended to have challenged in court. It's one thing for them to take on THC-laden plants and products, but industrial hemp/CBD pulls together a large contingent of patient advocates, agricultural interests and cannabis activists who would have public opinion and a strong judicial win (the Hemp Industries case) under their belt.

Hemp in California and Prop 64

Though this might change with the passage of Proposition 64, hemp farming has been moribund in California. The California Hemp Act of 2013 created an "insurmountable legalcontradiction" in that it failed to establish a mechanism for the issuance of hemp cultivation permits. Consequently, there were regulations in place but no legal means by which the state's commercial farmers could actually grow the crop. A further conundrum was that the California Hemp Act required federal compliance.

The passage of Prop 64 addressed these problems and eliminated the need for a federal license. State licenses for industrial hemp cultivation, production and manufacturing will be issued under Division 10 of the Business and Professions Code, and they will be regulated by California’s Bureau of Marijuana Control. Under Prop 64, commercial hemp farmers are required to obtain a laboratory test report from a DEA-registered testing facility indicating the level of THC from a random sampling of the dried flowering tops. The percentage content of THC must be less than or equal to 0.3 percent. If it tests higher, the hemp must be destroyed. 

Industry Response?

Attorney Bob Hoban, who heads the cannabis business law firm Hoban Law Group, cautioned that the “marihuana extract” notice could trigger consequences for the cannabis industry. Hogan told Leafy: 

“Even if this new code may be rooted in an administrative action to better track research and imports and exports, the danger lies in when other federal and state agencies use the drug codes as defining factors of what’s legal and illegal.”

Hoban noted specifically U.S. Customs and Border Protection, which could seize products that appear to be illegal substances. 

“At a minimum, it interferes with commerce, at a maximum, it exposes people potentially to criminal action.”

At the time of the announcement, Hoban warned that (instead of waiting for a DEA enforcement action) a lawsuit challenging the DEA rule could come soon and that his law firm was in communication with other cannabis attorneys and experts around the country. Hogan was later quoted in Rolling Stone:

"As an attorney, I've become tremendously frustrated by people who say that CBD is a controlled substance, because it’s simply not a controlled substance per se. The definition of marijuana—laid out in the CSA—excludes certain parts of the cannabis plant, so if CBD is extracted from those exempt parts, it would not, in fact, be classified as marijuana. Moreover, CBD, or any cannabinoids, derived from domestically produced industrial hemp under the Farm Bill are expressly excepted from the CSA." 

It didn't take long to happen. In early January, the Hemp Industries Association, RMH Holdings and Centuria Natural Foods filed suit in the U.S. Court of Appeals for the 9th Circuit in San Francisco against the DEA (calling the DEA's action "arbitrary, capricious, and unconstitutional"). The group is represented by Hogan.

What the DEA Notice Means to Individuals, Producers and Investors

For individuals and patients, there will likely be very little impact from the DEA notice, and there is very little risk of any DEA enforcement against individual consumers. It is possible that, instead of buying CBD products from Walmart, consumers may need to buy them from smaller retailers or, if in medical legal states, from dispensaries. However, the DEA's action could have the unintended consequence of increasing the awareness of the different types of CBD on the market (industrial hemp vs. marijuana) and the different sources (including cheap Chinese CBD) and what these mean in terms of safety and efficacy. The resulting dialogue could end up leading to a more robust and healthier CBD market. 

For producers of CBD products, it is critical that they become aware of their state CBD laws and not rely on the belief that, if Walmart carries CBD products, everything with CBD must be legal. 

From Cannalawblog: “Anyone undertaking the sale of hemp-derived CBD should make very clear to regulators and to its customers that its products come from imported hemp and not from marijuana. Moreover, anyone selling or making hemp-derived CBD should take great care to avoid making any medical claims about those products or else they risk facing the consequences under the FDCA.” 

For investors, CBD-infused products are likely to become an important product category. Because of the potential to sell them in all 50 states, CBD could be a good way to develop a national brand. However, CBD derived from industrial hemp already faces competition from cheap Chinese imports that could squeeze margins and possibly tarnish the industry. Furthermore, investing in a company that creates a product for human consumption with imported raw materials will have unique and difficult-to-mitigate risks that shouldn't be ignored. 

Wesley H. is a contributor to California Cannabis Ventures.

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