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USDA Issues Rules for Hemp Production - Many Questions Remain for Hemp and CBD Sales

Client Alert

Authors: Jay A. Dubow, Judith L. O'Grady and Suzanne Forbis Mack

11/08/2019
USDA Issues Rules for Hemp Production - Many Questions Remain for Hemp and CBD Sales

Hemp production is a large and growing industry in the United States. Even before Congress’ passage of the Agriculture Improvement Act of 2018 (better known as the 2018 Farm Bill), the Hemp Business Journal estimated that there were $1 billion in U.S. sales of hemp-based products in 2018, and that sales would grow to $1.8 billion by 2022. With the passage of the 2018 Farm Bill, prospects looked even brighter, because the bill eliminates hemp (with THC levels less than or equal to 0.3 percent) from the list of Schedule I controlled substances and greatly expands the possibility for hemp production. While the 2014 Farm Bill had established a program that allowed hemp to be produced by state departments of agriculture and institutions of higher education to produce hemp for research purposes, the 2018 Farm Bill provides for general commercial production and interstate shipment of hemp.

Many farmers and businesses were ready to move forward as soon as the bill was signed into law on December 20, 2018. However, they have had to wait, because implementation of the bill required development of a regulatory system by the U.S. Department of Agriculture (USDA). The USDA worked diligently over the past 10 months, and issued an Interim Final Rule (IFR) on October 31, 2019, establishing the Domestic Hemp Production Program. This program provides the parameters for federal licensing of hemp production, as well as for approval of licensing plans established by states and Native American tribes. Because hemp containing THC levels greater than 0.3 percent remains a Schedule I illegal drug, most of the regulations relate to monitoring this issue.

While this new rule will allow farmers to begin planting hemp in the 2020 growing season, the rule does not address the issue of sales of food and dietary supplements containing hemp or its derivatives, such as cannabidiol (CBD). The 2018 Farm Bill explicitly preserved the authority of the FDA to regulate such products under the Federal Food, Drug, and Cosmetic Act (FDCA) and the Public Health Service Act (PHS Act), and sales of such products violate current FDA regulations. Although the FDA has the power to issue a regulation permitting such sales, it has not done so.

Below is an overview of the USDA Rule, and a discussion of (1) the THC-based provisions of the rule, (2) timing and implementation of the rule, and (3) the market for hemp and legality of sales of hemp-based products.

Overview of Rule

The Domestic Hemp Production Program Regulations are established at 7 CFR 990, and include:

  • State and Tribal Hemp Production Plan provisions (7 CFR 990.2-990.8)

    • States and Indian tribes desiring to have primary regulatory authority over the production of hemp within their borders may submit to the USDA a plan for monitoring and regulating that production, which must include:

      • A procedure to collect and report to the USDA specified information

      • A procedure for accurate and effective sampling of all hemp produced, that is sufficient to determine at a 95 percent confidence level that no more than 1 percent of plants sampled exceed the acceptable THC level

      • A procedure for testing that is able to accurately identify whether the sampled hemp exceeds the acceptable THC level

      • A procedure for effective disposal of hemp plants that exceed the acceptable THC level, and notification of the USDA regarding same

      • A procedure to comply with enforcement procedures set forth in 7 CFR 990.6, including penalties for producing hemp that exceeds acceptable THC levels

      • A procedure for conducting annual inspections of a random sample of producers to ensure compliance

    • States and Indian tribes must submit their plans to the USDA for approval, and may do so beginning on October 31, 2019. The USDA will either approve or disapprove plans within 60 days.

  • USDA Hemp Production Plan provisions (7 CFR 990.20-990.32)

    • Anyone wishing to produce hemp in a state or tribal territory that does not have its own plan and does not prohibit the production of hemp must obtain a license from the USDA

    • Producer license applications may be submitted beginning on December 2, 2019, and must be renewed every three years

    • Licensed producers must:

      • Report hemp crop acreage to the Farm Service Agency of the USDA and comply with other recordkeeping requirements

      • Within 15 days before harvest, have crop samples collected by an approved person, and have them tested by an approved company

      • Harvest their crops within 15 days of sampling

      • Dispose of any non-compliant hemp and notify the USDA of same

    • The USDA has the authority to audit producers every 3 years

    • Negligent violations of regulatory requirements may result in a notice of violation, a corrective action plan or license suspension. A producer that has three negligent violations in five years will have its license revoked and will be ineligible to produce hemp for five years. Violations resulting from intentional, knowing, willful or reckless conduct may result in immediate license revocation and criminal prosecution.

  • An appeals process, and other administrative provisions

  • Reporting requirements.

Maximum THC Percentage Regulations

Although the 2018 Farm Bill decriminalizes hemp that has THC levels of 0.3 percent or less, hemp with higher THC levels remains a Schedule I illegal drug. The IFR notes that hemp producers may take the necessary steps and precautions to grow compliant hemp, yet still produce plants that exceed the acceptable level of THC. Indeed, the same seeds planted in one location may produce a crop with compliant THC levels, but excessive levels when planted somewhere else. Based on discussions with states that have a hemp program under the 2014 Farm Bill, the USDA estimates that 20 percent of crops grown pursuant to the IFR will exceed compliant THC levels. Because of this uncertainty, every crop must be sampled and tested before harvest to ensure compliant THC levels, and all crops that exceed maximum THC levels must be destroyed.

Producers that have made good-faith efforts to grow compliant hemp will not be deemed negligent for producing non-compliant hemp, so long as their crop’s THC level does not exceed 0.5 percent. The IFR identifies using certified seed or seed that has reliably grown compliant plants in the past as one such act of good faith, and seeks input regarding additional actions that may be contribute to a finding of good faith. The USDA arrived at 0.5 percent as an upper limit after reviewing test results of samples from several states that have a hemp research program under the 2014 Farm Bill and by independently testing hemp plants.

However, producers that have not made a good-faith attempt to grow complaint hemp, or who produce a crop that has THC levels exceeding 0.5 percent, will suffer consequences. Producers that are charged with a negligent violation may be required to enter into a corrective action plan, but will not be subject to criminal enforcement. Multiple negligent violations may lead to suspension or revocation of a producer’s license. In addition, producers that have acted intentionally, knowingly, willfully or recklessly may have their licenses revoked immediately, and the violation will be reported to the U.S. Attorney General and the applicable state or tribal law enforcement officer, which could lead to criminal prosecution.

Timing and Implementation

The USDA has issued the IFR without notice and comment based on the good cause exception found at 5 USC § 553(b)(B), relying on Congress’ request that the USDA “promulgate regulations and guidelines to implement this subtitle as expeditiously as practicable.” The IFR provides for a 60-day comment period, and all comments received during this period will be reviewed and taken into consideration in implementing the final rule, which will be issued within two years.

Even without a notice and comment period, it took the USDA more than 10 months to prepare the IFR, and farmers were not able to grow hemp under the 2018 Farm Bill for the 2019 planting season. Because the IFR becomes effective immediately, farmers will be able to plant hemp in the 2020 planting season using the new regulations. If the USDA had followed the procedures for notice and comment rulemaking, implementation would have been delayed until the 2021 planting season or beyond.

Market for Hemp and Legality of CBD

Hemp was grown in the United States for hundreds of years and used in numerous products, including fabric to make rope and clothing, paper, construction materials, food products, cosmetics, and cannabidiol (CBD). Before being outlawed,1 production declined in favor of alternatives such as cotton, jute and abaca. Hemp production began a resurgence with passage of the Agricultural Act of 2014 (the 2014 Farm Bill), which allowed state departments of agriculture and institutions of higher education to produce hemp for research purposes. Sale of hemp was included under the program as market research, so hemp produced pursuant to the 2014 Farm Bill has been cultivated and sold as inputs into consumer products, including CBD.

Forty or more states enacted hemp legislation after passage of the 2014 Farm Bill, and most of the remaining states have done so since passage of the 2018 Farm Bill. In 2016, which was the first year of production under the 2014 Farm Bill, 817 hemp producer licenses were issued, and 9,649 acres of hemp were planted. By 2018, the acreage of hemp planted had grown to 77,844 acres, and the USDA estimates that this will double in 2019. Currently, just under half of the hemp grown in the United States is grown in Colorado, Oregon and Kentucky, and the USDA estimates that 99 percent of all hemp producers qualify as small businesses, with annual receipts from hemp sales of less than $750,000.

The IFR qualifies its market projections, however, noting that the future market prospects for hemp are unclear. On one hand, “producer interest in hemp production is largely driven by the potential for high returns from sales of hemp flowers to be processed into CBD oil.” On the other hand, the 2018 Farm Bill explicitly preserved the authority of the FDA to regulate hemp products under the FDCA and the PHS Act.

Currently, the FDA treats CBD as a pharmaceutical product, and any product containing CBD must go through the drug approval process and demonstrate the safety and efficacy of the formulation at issue to receive FDA approval. To date, the FDA has approved one such product, Epidiolex, which contains a purified form of CBD, for the treatment of seizures associated with Lennox-Gastaut and Dravet syndrome, for patients two years of age and older. The FDA has also approved three other compounds that contain synthetic forms of THC or THC-like substances.

The FDCA prohibits the sale of any food or dietary supplement that is an active ingredient in an approved drug product, unless the FDA issues a regulation permitting such sales (21 U.S.C. § 331(ll)). Because the FDA has not issued such a regulation, the sale of foods and dietary supplements containing CBD violates the FDCA. Despite this prohibition, sales of CBD-based dietary supplements and foods have skyrocketed in the past five years. The FDA has issued more than 20 warning letters during this period, primarily aimed at companies making unsupported health claims about their products. However, it has not initiated any enforcement actions. The effect of this toothless enforcement has been to allow the market for ingestible CBD products to quietly grow, but to remain in a legally gray zone, with many of the drawbacks of legalized marijuana sales, including limited access to banking and financing.

In the wake of the 2018 Farm Bill, Congress and private parties have put pressure on the FDA to open up a legal path for the sale of CBD-based products. Although the FDA has publicly committed to addressing the issue, and conducted a public hearing on May 31, 2019, it has not provided any information regarding the timing of any proposed regulation, and many expect the process will take years, leaving the market in legal limbo.

The IFR does not change this equation. Rather, it notes that its market projections are based on underlying data that assumes no restrictions on sale of CBD products, and concludes that, “If FDA does not provide clarity about their plans for future regulation of CBD, there will continue to be uncertainty and downward pressure on the CBD portion of the hemp market.”

Endnotes

1 The 1937 Marihuana Tax Act first placed restrictions on hemp production, but was structured to allow the government to penalize marijuana growers without punishing industrial hemp growers.  Production became criminalized when marijuana was deemed a Schedule I controlled substance with the 1970 passage of the Controlled Substances Act (CSA).  The definition of marijuana in the CSA included hemp and imposed a THC limit of 0.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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