Regulatory Limits on the Market for CBD Products

By David B. Bush Esq.

People often ask whether products made from non-psychoactive extracts of industrial hemp, in particular, tinctures, oils and infusions of cannabidiol (CBD) may be legally produced and sold in the US. Generally, the answer is no. Although there are some exceptions to the general rule, they are not yet enough to support a free, commercial market. Nevertheless, CBD markets are flourishing in some jurisdictions, such as Colorado, where commercial industrial hemp production is legal under state law. CBD products made in Colorado also are openly—but illegally— being transported across state lines and sold in interstate commerce. Conflicts between state and federal drug laws, and the uneven and ultimately unpredictable nature of federal law enforcement, place commercial CBD markets in an uncertain situation.

The General Rule

Extracts from the leaves and flowers of all cannabis plants, including industrial hemp, are federally classified as marijuana. Products made from such extracts, including non-psychoactive products such as CBD, are illegal and may not be manufactured or transported and sold in interstate commerce without a license from the federal Drug Enforcement Administration (DEA). Licenses are rarely granted, and when they are it is usually for limited purposes of academic or medical research only.

Controlled Substances Act of 1970.  The starting point for any analysis of the legality of products made from industrial hemp extracts is the federal Controlled Substances Act of 1970 (CSA) and its predecessor law, the Marihuana Tax Act of 1937. The CSA defines “marihuana” (archaic spelling) as a Schedule I controlled substance, which merits the highest and strictest degree of control. Growing, processing, possessing and distributing marijuana with the express authorization by the DEA are federal crimes that can subject the perpetrator for fines and imprisonment. The law directly affects industrial hemp because the federal definition of marijuana broadly includes all plants of genus Cannabis. It makes no distinction between high- or low-THC varieties—that is, between what is popularly understood to be marijuana versus industrial hemp.

Under the CSA, marijuana is defined as the whole cannabis plant and all parts of it, subject to limited exceptions for traditional industrial hemp products—mature stalks and fiber, seed oil and seed cake. With respect to the “controlled” parts of the cannabis, which includes leaves and flowers, the definition of marijuana extends to “every compound, manufacture, salt, derivative, mixture, or preparation of such plant.”  This means that any extract of the leaves and flowers of the cannabis plant, whether or not it contains a significant concentration of the psychoactive chemical tetrahydrocannabinol (THC), is characterized under federal law as marijuana. With apologies to the large and growing CBD industry across the United States, the products they make and sell remain federally classified as marijuana. The unlicensed production and sale of CBD products is still a federal crime.

Single Convention on Narcotic Drugs, 1961. The US is a signatory to the Single Convention on Narcotic Drugs (“Convention”), the basic international drug control treaty.  Cannabis is included among the drugs considered subject to the treaty, with limited exceptions permitted for cannabis grown “exclusively for industrial … [or horticultural] purposes,” which the treaty defines as production for purposes of fiber and seed. All medicinal products made from cannabis, whether or not those products exhibit psychoactive potential, are subject to the Convention. The Convention requires signatory nations that wish to permit cultivation of cannabis for medicinal purposes to do so under a strict licensing protocol, in which all product would be delivered by producers to designated responsible governing agencies in each country, who in turn have the “exclusive right” to import, export, trade and store such products. The Convention effectively obligates signatory nations to outlaw free, commercial markets in industrial hemp extracts, such as those used to make CBD products.

Reading the CSA and the Convention together, there is no difference in the legal status of CBD products made from imported versus domestically grown plant material. Both are equally subject to strict licensing and other controls under federal and international law. Rumors that CBD products made from imported hemp extracts enjoy more legal protections than those made from domestic sources are just that: rumors, without a sound basis in the law. All CBD products, regardless of source, are equally illegal.

Food, Drug and Cosmetic Act.  US federal Food, Drug, and Cosmetic Act is a set of laws passed by Congress in 1938 giving authority to the US Food and Drug Administration (FDA) to oversee the safety of food, drugs, and cosmetics. Since May of 2015, the FDA has taken the official position that CBD products are adulterated food products that cannot be sold in interstate commerce.

Exceptions to General Federal Illegality

There are a few exceptions to the general federal illegality of CBD products made from extracts of the leaves and flowers of industrial hemp. None of them are likely to have a significant impact on the development of open, commercial markets.

Naturally Occurring CBD in Non-Controlled Parts of the Cannabis Plant.  While existing processes are technically difficult and expensive, it is possible to create useable extracts of industrial hemp from the non-controlled parts of the Cannabis plant, particularly from mature stalks.  Under the seminal ruling by the US Court of Appeals in Hemp Industries Association v. Drug Enforcement Administration, 357 F.3d 1012 (9th Cir. 2004), products made from non-controlled parts of the cannabis plant are legal, even if those products contain trace concentrations of substances such as THC.  Some makers of CBD products claim to have successfully produced CBD products from mature stalks of the cannabis plant. If that is true, they could be manufactured and sold without violating the CSA. But cost and quality considerations would seem to make this an unlikely source of material for a commercial CBD products market.

Synthetic CBD. CBD is not separately listed under federal law as a controlled substance. It is characterized as a controlled substance only to the extent that it is produced from naturally-occurring sources in the leaves and flowers of cannabis plants, which meets the federal definition of marijuana. Synthetically-produced CBD does not fall in that category and therefore, is not considered a controlled substance. But clinical evidence indicates that products made from synthetic CBD fail to exhibit comparable benefits to those made from naturally-occurring CBD, probably due to the “entourage” effect of combining CBD with other cannabinoids and compounds typically occurring in natural plant extracts. Given the current state of technology, the market potential for CBD products made from synthetic CBD probably is limited.

Agricultural Act of 2014 (the “Farm Bill”). In early 2014, Congress passed and President Obama signed into law the Agricultural Act of 2014. Included within the massive bill was a single page authorizing limited cultivation of industrial hemp by state departments of agriculture and institutions of higher education only, for purposes of research and development only. In its recently published “Statement of Principles” of August 12, 2016, the US Department of Agriculture clarified that the Farm Bill was not intended to authorize general commercial activity. Moreover, even the limited production of industrial hemp and industrial hemp products allowed under this law is transient at best, as the Farm Bill is due to expire at the end of fiscal year 2018.

Federal Law Enforcement Priorities

Although the federal government has established its authority through both the DEA and the FDA to prevent the otherwise legal production and sale of products made from extracts of industrial hemp in states that authorized it, federal law enforcement activity against such commerce continues to be relatively subdued. The FDA has issued warning letters to manufacturers but has done little else. The DEA has been almost invisible.

Cole Memorandum. One of the main reasons for the general absence of federal law enforcement activity against commercial markets in CBD products is a matter not of substantive law but of federal law enforcement policy. The best-known statement of current policy was set forth in a statement published by the US Attorney General on August 29, 2013, under the authorship of Deputy Attorney General James M. Cole, commonly referred to as the “Cole Memorandum.”  In it, Deputy Attorney General Cole offered a general guideline of non-interference by federal law enforcement with otherwise cannabis activities that are legal under state law, provided that certain federal priorities were not implicated. The priorities included preventing the diversion of marijuana to children, to organized crime, or to states where marijuana remains illegal; crimes of violence; other drug crimes; operating motor vehicles while under the influence of marijuana; and cultivating and using marijuana on federal property.

The upshot of the Cole Memorandum is that states that have, to some extent, legalized Cannabis are generally being left alone by federal law enforcement. In Colorado, where the CBD business has boomed since legalization, manufacturers and retailers generally have been able to make and sell their goods within the state without interference by either federal or state officials. But the Cole Memorandum does not insulate the same products from the very different risks of intervention posed by selling them outside the state, as interstate commerce is governed by federal, not state, law.

Federal Budget Amendments. Congress has adopted temporary measures to curtail the ability of federal law enforcement to interfere with cannabis activities that are legal under state law by withholding certain funding in both the 2015 and 2016 budgets. In the Consolidated Appropriations Act for fiscal year 2016, Congress specifically approved three such amendments. In particular, section 763 bars the use of any federal funds “to prohibit the transportation, processing, sale, or use of industrial hemp that is grown and cultivated in accordance with … [the 2014 Farm Bill] within or outside the State in which the industrial hemp is grown or cultivated.” This amendment would appear to allow the interstate sale of CBD products, so long as the products were made from industrial hemp grown in compliance with the Farm Bill.  While not yet opening the door to general commerce on a national scale, it does represent a step toward legal acceptance of the CBD industry.

Conclusion

Producers and sellers of CBD products are beginning to see their years of effort pay off. While CBD products remain federally legal, exceptions in the substantive law and federal law enforcement policy do allow limited production and sale in interstate markets. As legal reform continues to advance, one can envision a day in the not too distant future when senseless prohibition will at last come to an end.

David B. Bush is the managing member of David B. Bush, LLC, dba DavidLaw, a business law practice dedicated to furthering the successful development of industrial hemp in Colorado and throughout the United States. His web page is www.davidlawcolorado.com and he may be reached at bush@davidlawcolorado.com.