May 2019


Hemp Update: USDA’s Position on Interstate Transport of Hemp and Hemp-Derived Products

As Sarah and I slowly begin to reopen our practice to select new clients (we have not openly accepted new clients for almost 5 full months), we are finding ourselves being called on to answer an increasing number of questions about hemp. Although we blogged about the federal hemp rules after the 2018 Farm Bill was passed last December, metric tons of legal changes have happened since then, including Tuesday’s issuance of the USDA’s “Legal Opinion on Certain Provisions of the Agricultural Improvement Act of 2019 Relating to Hemp,” a release that smashed my legal expectations and I think is a pretty huge deal. Here’s why:

1. A Winner in the Conflicting Application of the 2018 Farm Bill is Emerging.

The 2018 Farm Bill was unclear as to whether its key terms (such as the protection for interstate shipping) applied to hemp and hemp-derived products produced under the currently existing hemp laws, a.k.a. the 2014 Farm Bill. Two federal district courts, in Idaho and West Virginia, came to different conclusions on the application of the 2018 Farm Bill to hemp products produced under the 2014 Farm Bill:

  • In February, the “Big Sky” case held the shipment of hemp produced in compliance with the 2014 Farm Bill may violate STATE LAW where transported through states which do not authorize hemp. The driver in that case, Denis Palamarchuk, was arraigned on the illegal trafficking of over 6,000 lbs of marijuana through Idaho. *His pre-trial conference is set for October 2, 2019.
  • In March, the “Grassy Run” case held that hemp seeds produced in compliance with the 2014 Farm Bill were exempted from the federal Controlled Substance Act and thus no FEDERAL CAUSE OF ACTION could prohibit shipment across state lines.

Based on the USDA’s analysis announced this past Tuesday, the Grassy Run case is emerging the clear winner in the conflict created by these two cases.

2. An Increasing Number of Federal Agencies Seem to Agree.

Since March, several federal administrative agencies have weighed in on the application of the 2018 Farm Bill provisions to hemp produced under the 2014 Farm Bill, by implication or formal legal analysis. These agencies, including the U.S. Department of Agriculture (USDA), the U.S. Patent and Trademark Office (USPTO), and the U.S. Transportation Security Administration (TSA), each decidedly coming to a similar legal conclusion:

While the interstate shipment/transport of hemp and hemp-derived products produced lawfully under the 2014 Farm Bill may not be expressly authorized by the 2018 Farm Bill, the products are exempted from the Controlled Substances Act. 

3. The Lack of Prohibition is Not the Same as the Presence of Authorization.

Thus, the federal agency positions are not based on the express authority to interstate ship hemp, but rather upon the legal effect of deleting hemp from the Controlled Substance Act (“CSA”), a feat the 2018 Farm Bill also accomplished in a separate section. (Compare Section 10114, exempting hemp produced in compliance with the 2018 Farm Bill from interstate shipping prohibitions, with Section 12619, deleting hemp from the definition of “marihuana,” and therefore leaving the production of hemp arguably unprohibited for the moment).  

The legal underpinning for hemp produced under the 2014 Farm Bill (i.e. 100% of the hemp available on the market today) is more a lack of prohibition, as opposed to the presence of authorization, which here proves to be a distinction with a difference sufficient to give numerous federal governmental agencies the legal cover necessary to amend weighty governmental procedures.

  1. The USDA Legal Opinion Takes it a Step Further.

Most importantly, the USDA (a.k.a. the same federal agency tasked under the 2018 Farm Bill with promulgating the regulations everyone is fighting about) surprisingly (to me, anyway) released two documents yesterday which evidence the agency’s legal position on hemp.

Interestingly, one of the documents was a lengthy legal memorandum from the USDA’s own attorneys finding that hemp and hemp-derived products produced in compliance with the 2014 Farm Bill cannot be PROHIBITED BY STATE LAW. This interpretation was based on the grounds the 2018 Farm Bill provisions apply to states that do not have a federal plan under the “legal effect” language, a bold but supported legal analysis.

So What?

This is big. People are being indicted for this, so yeah, this is big.

It is important to note, though, that the USDA is not a federal law enforcement agency, whereas the Department of Justice (“DOJ”) and U.S. Drug Enforcement Administration (“DEA”) or Federal Bureau of Investigation (“FBI”) are. Thus, while the USDA’s civil attorneys may be ready to challenge the legal status quo (perhaps buttressed by the White House’s never-ending scandals), the criminal potentials inherent on the fringes of the federal hemp laws remains firmly in the hands of state and federal prosecutors.

Our nation’s prosecutors are constitutionally mandated to enforce the law as they see it, and while the USDA opinion is powerful in its clear guidance to other administrative and enforcement bodies, it is not a mandatory directive to state and federal law enforcement.

In terms of risk analysis, this does change the game. More importantly, less people will be indicted or sued under vague applications of the law. Clarity is a win-win for all, and Tuesday’s USDA opinion moves us closer to that goal, at least for one manifestation of the cannabis plant.

May the same soon come to all manifestations of the plant.

~hb
#protectourfarmers

The Business Fundamentals Every California Cannabis Company Needs to Know: a five-part blog series

By: Heather Burke and Virginia Ryan 

BLOG 1 of 5: INTRODUCTION TO THE BUSINESS BLOG SERIES

With Nevada County’s recent enactment of its commercial cultivation ordinance, cannabis farmers are scrambling to begin their growing season and to start building their businesses. As the bulk of the regulatory mountain-moving is behind us (for the moment), wise operators should be turning their attention to the business now at hand. And the business at hand today is the nuts and bolts of doing business.

The question of exactly how to do business in our newly regulated industry is largely still being figured out, as the mechanics are just beginning to work themselves out as more and more farms come online. Although we all have some idea of how the new supply chain works, no one has ever done this before (not even folks with regulated farms elsewhere because last season was not tracked-and-traced and NONE of them were in the Sierras).

While there are a lot of vulnerabilities in trying to start a small business in a field that has no operating history, the good news is that we get to write the rules of doing business in our region and for our license types. So, while those first few licensees who pushed through the tribulations of these past two years did suffer greatly, now is the time to reap the rewards by (1) having access to contracts with multi-year terms long before those who took a wait-and-see approach, (2) being able to do business as an industry leader/pioneer, and (3) having a greater voice in policy shaping regarding your business operations, to name just a few benefits.

However, since the scope of cannabis business is so vast and complex, one of my favorite local business lawyers Virginia Ryan has thankfully agreed to co-author this five-part blog series with me, which we’re calling “The Business Fundamentals Every Cannabis Company Needs to Know.”

We will be focusing on the following four areas:

(1) Cleaning Your Own HouseRegulatory Compliance & Entity Governance

(2) Snakes in the GrassDue Diligence & Proper Vetting of Potential Deals  

(3) Contract FundamentalsDude, Where’s My Indemnity Clause (and Other Super Fun Terms Every Cannabis Business Owner Should Know)

(4) Contracts OverviewWhat Paper to Push? (+ Sample Contract Templates)

Our goal is to push each of these out over the next couple weeks to both our blog lists, so make sure you’re signed up!

To sign up for Virginia Ryan’s blog list, go here: https://virgielaw.com/contact/

To sign up for Origin Group LLP’s blog list, go here: http://hburkelegal.com/blog/ 

Now let’s do some business.

~hb

This email is a communication from a lawyer, but it does not constitute legal advice, nor does it create an attorney-client relationshipThis is intended for educational purposes only.
Please contact an attorney for specific legal advice.