Cannabis and Hemp: Regulatory Green Light or Still a Pipe Dream?

10 Min Read By: Satish Kini, Paul Rubin, Meryl Holt Silverman, Andrew Field

IN BRIEF

  • Passage of the 2018 Farm Bill has wide-ranging implications for stakeholders in the industry.
  • The various states have reacted to its passage in different ways, and shifting international developments continue to pose compliance and legal challenges.
  • Until a final U.S. federal resolution is reached, those challenges will remain present.

Recent months have been busy for banking lawyers focused on the cannabis industry and the legal and regulatory risks of providing financial services to marijuana-related businesses. Of principal note, in mid-December, President Trump signed the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) into law, which lifted the federal prohibition on hemp production. This law also has significant implications regarding the legality of cannabidiol (CBD), a popular hemp derivative. This article will first explain the significance and implications of the 2018 Farm Bill, describe possible divergences in state and federal law regarding cannabis generally, and briefly touch on international developments.

For decades, the United States has been the only industrialized nation where hemp was not a legally authorized crop. Schedule I of the federal Controlled Substances Act of 1970 (CSA), 21 U.S.C. § 801 et seq., has long prohibited the growing, production, and sale of marijuana, which has been defined under the CSA as including all parts of the Cannabis sativa L. plant, with the exception of “the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound . . . of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.”[1] Hemp has been subject to the marijuana definition because it is also a variety of the Cannabis sativa L. plant. Hemp is characterized by low levels of tetrahydrocannabinol (THC), the primary psychoactive chemical in marijuana, and high levels of CBD, believed to have numerous therapeutic benefits. It is also capable of use in a diverse array of products, including construction materials, clothing, paper, cosmetics, pharmaceuticals, food, and dietary supplements.

Passage of the 2018 Farm Bill marks the first change in the federal classification of marijuana since Congress designated it a Schedule I controlled substance in 1970. Specifically, the 2018 Farm Bill’s hemp-specific provisions amend the CSA so that hemp, so long as it contains 0.3 percent THC or less, no longer comes within the federal definition of marijuana.[2] Certain cannabinoid derivatives of hemp would therefore also be removed from the purview of the CSA, including hemp-derived CBD. The 2018 Farm Bill’s hemp provisions build on the framework set forth in the 2014 farm bill, which allowed for some legal cultivation of hemp by states. The previous iteration of the farm bill allowed cultivation of hemp for research purposes under state-approved pilot programs connected to universities or state agricultural departments.[3] Some states declined to participate, however, and the Drug Enforcement Agency often took the position that the 2014 farm bill allowed only for the cultivation, not sale, of hemp and hemp-derived products.[4]

Section 10113 of the 2018 Farm Bill allows states to regulate hemp production if they so choose. Otherwise, federal requirements to be promulgated by the U.S. Department of Agriculture (USDA) will constitute the default regulatory regime in all 50 states. States must submit their plans to the USDA for approval prior to becoming effective. USDA review is meant to ensure that state laws comply with at least the minimum level of federal statutory requirements, and the USDA must act within 60 days of receipt. However, the USDA has indicated that it will not begin acting on state plans it receives until it promulgates its own regulations regarding hemp production, which it expects to do in fall 2019.

Under section 10113, state plans must include information concerning locations of hemp production, testing for THC concentration, disposal of noncompliant plants, compliance with the bill’s enforcement provisions, participation in law enforcement information sharing, and a certification that the state has sufficient resources to carry out its plan. These requirements indicate Congress’s desire to maintain a strict legal separation between marijuana and hemp.[5] As an additional step to ensure that marijuana is not grown under the auspices of hemp legalization, the 2018 Farm Bill bars individuals with felonies related to a controlled substance from entering into hemp production for 10 years following conviction.[6]

Notwithstanding hemp’s removal from Schedule I of the CSA, the legality of certain FDA-regulated categories of hemp products—including products containing hemp-derived CBD—remains uncertain at the federal level. Specifically, the 2018 Farm Bill provides that it does not “affect or modify the Federal Food, Drug, and Cosmetic Act [‘FFDCA’] . . . [or] the authority of the Commissioner of Food and Drugs and the Secretary of Health and Human Services.”[7] The U.S. Food and Drug Administration (FDA) has taken the position that cannabinoids, including CBD, are impermissible for use in food and dietary supplements.[8] Despite the existence of counterarguments, at the present time certain CBD products currently on the market, particularly those intended for ingestion, may therefore remain unlawful. The FDA has intermittently sent warning letters to entities that sell CBD products, including dietary supplements and topical cosmetic products, for making unproven drug claims about CBD’s health-related properties.[9] Moreover, FDA Commissioner Scott Gottlieb indicated in a statement released with the passage of the 2018 Farm Bill that the agency will “continue to closely scrutinize products that could pose risks to consumers . . . warn [them] and take enforcement actions.”[10] That said, the FDA is under significant political pressure to take a more relaxed attitude toward these issues. For instance, Oregon Senators Ron Wyden and Jeff Merkley recently sent a letter to the FDA Commissioner arguing that “it was Congress’ intent to ensure that both U.S producers and consumers have access to a full range of hemp-derived products, including hemp-derived cannabinoids.”[11] As a result, the FDA has indicated it will hold a public meeting in the near future to evaluate ways in which the current regulatory framework should be changed.[12]

Another difficulty for stakeholders in the industry will be accounting for the various treatments of hemp and CBD under state law. The 2018 Farm Bill does not preempt state law, and states could choose to regulate hemp and hemp-derived CBD in a more restrictive manner. In fact, it provides: “No Preemption—Nothing in this subsection preempts or limits any law of a State or Indian tribe that (i) regulates the production of hemp; and (ii) is more stringent than this subtitle.”[13] States have their own controlled substances laws that often mimic the provisions of the CSA as it existed prior to the 2018 Farm Bill’s amendments. This means that hemp and certain hemp products may still come within the marijuana definition under state law. Many state attorneys general have even publicly declared—prior to passage of the 2018 Farm Bill—that products containing CBD come within state marijuana prohibitions and are therefore subject to state enforcement.

States have chosen to react to the passage of the 2018 Farm Bill in several different ways. Some have chosen the path of Alabama. Alabama’s attorney general recently announced that because of the 2018 Farm Bill, the state is altering its prior position that the sale of CBD products violates state law.[14] Iowa has chosen to move more cautiously. The state attorney general and state agriculture officials met in January to determine whether CBD processed from industrial hemp should be legalized, and resulting legislation is currently pending.[15] On the other hand, not all states have reacted in tandem with the federal government. The South Dakota attorney general, for instance, confirmed that CBD products would remain illegal in the state and that the law would be enforced.[16] Although state legislators passed a bill legalizing hemp, the South Dakota governor vetoed it, and so the state’s prohibition remains in effect.[17] Participants in the industry, and financial services firms that deal with them, must be cognizant of the laws of states in which CBD products may be distributed.

Looking forward, there is ample evidence that the rules of the road regarding cannabis regulation will continue to evolve. FDA Commissioner Scott Gottlieb has stated that federal legislation addressing the divergence between state and federal law regarding marijuana is “inevitable” and will happen “soon.”[18] Several bills to this effect have already been introduced into Congress this year.[19] Further, it seems that President Trump is amenable to these changes. In June 2018, he said that he supported the STATES Act, which would protect states with legal marijuana regimes from federal interference.[20] He also nominated William Barr for attorney general, who has said that he would not go after companies that have relied on the “Cole Memorandum,” the U.S. Department of Justice guidance issued during the Obama administration directing prosecutors generally not to enforce the federal marijuana prohibition in states that have legalized marijuana (so long as those marijuana activities do not target minors or present other risks).[21] This represents a decidedly less aggressive approach than former Attorney General Jeff Sessions, who rescinded that guidance early last year.

With these federal developments looming in the background, states have continued to legalize marijuana use in different contexts. As of this writing, medical marijuana is legal in 33 states and the District of Columbia, with 10 of these and the District of Columbia also having legalized recreational marijuana. The pace of this change appears to be accelerating: 21 states considered adult-use marijuana legalization bills in 2018.[22] Voter initiatives ushered in legalization in Michigan,[23] Missouri,[24] Oklahoma,[25] and Utah.[26] For financial services companies, whether and how to engage with cannabis companies operating legally under state law will thus present a growing challenge.

Change also is evident both north and south of U.S. borders. Canada’s Cannabis Act was fully implemented as of October 18, 2018; as a result, U.S. financial institutions (and others) have been faced with how to engage with companies conducting legal cannabis business there.[27] Additionally, Mexico’s Supreme Court held in October that an absolute ban on recreational marijuana use is unconstitutional. A bill introduced by the ruling party (the National Regeneration Movement, or MORENA) in November would allow companies to grow and sell marijuana for commercial, medicinal, and recreational use.[28] However, Mexican legislators are still considering how marijuana legalization should be implemented.[29]

These shifting developments continue to pose compliance and legal challenges for financial services firms. Until a final U.S. federal resolution is reached, those challenges will remain present.


[1] 21 U.S.C. § 802(16) (2018).

[2] Agriculture Improvement Act of 2018, Pub. L. No. 115-334, sec. 12619 (2018).

[3] 7 U.S.C. § 5940 (2018).

[4] Statement of Principles on Industrial Hemp, 81 Fed. Reg. 53395 (Aug. 12, 2016).

[5] See 7 U.S.C. § 5940(a)(2); Agriculture Improvement Act of 2018, Pub. L. No. 115-334, sec. 10113, § 297A(1) (2018).

[6] Agriculture Improvement Act of 2018, Pub. L. No. 115-334, sec. 10113, § 297B(e)(3)(B) (2018).

[7] Agriculture Improvement Act of 2018, Pub. L. No. 115-334, sec. 10113, § 297D(c)(1) (2018).

[8] U.S. Food and Drug Admin., FDA and Marijuana: Questions and Answers (June 25, 2018).

[9] See, e.g., U.S. Food and Drug Admin., Warning Letter to Hemp Oil Care (Feb. 26, 2015); U.S. Food and Drug Admin., Warning Letter to Natural Organic Solutions (Feb. 26, 2015).

[10] Statement from FDA Commissioner Scott Gottlieb, M.D., on signing of the Agriculture Improvement Act and the agency’s regulation of products containing cannabis and cannabis-derived compounds (Dec. 20, 2018).

[11] Letter from Ron Wyden & Jeffrey A. Merkley, U.S. Senators, to Scott Gottlieb, FDA Commissioner (Jan. 15, 2019).

[12] See supra note 11.

[13] Agriculture Improvement Act of 2018, Pub. L. No. 115-334, sec. 10113, § 297B(a)(3) (2018).

[14] Office of the Alabama Attorney General, Guidance on Alabama Law Regarding the Possession, Use, Sale, or Distribution of CBD (Dec. 12, 2018).

[15] Associated Press, Iowa Lawmakers To Weigh Hemp Regulations, Keloland Media Group, Jan. 3, 2019.

[16] Christopher Vondracek, South Dakota unlikely to allow CBD oil even though it's in farm bill, Rapid City J., Dec. 16, 2018.

[17] Lisa Kaczke, What’s South Dakota missing without legal industrial hemp?, Argus Leader, March 22, 2019.

[18] Kyle Jaeger, Federal Marijuana Action Is An 'Inevitability,' Trump FDA Chief Says, Marijuana Moment, Nov. 19, 2018.

[19] See, e.g., Regulate Marijuana Like Alcohol Act, H.R. 420, 116th Cong. (2019); Strengthening the Tenth Amendment Through Entrusting States Act, S. 3032, 115th Cong. (2018).

[20] Eileen Sullivan, Trump Says He's Likely to Back Marijuana Bill, in Apparent Break With Sessions, N.Y. Times, June 8, 2018.

[21] Sarah N. Lynch, U.S. attorney general nominee will not target law-abiding marijuana businesses, Reuters, Jan. 15, 2019.

[22] National Conference of State Legislators, Marijuana Overview (Dec. 14, 2018).

[23] Michigan Proposal 1, Marijuana Legalization Initiative (2018) (recreational).

[24] Missouri Amendment 2, Medical Marijuana and Veteran Healthcare Services Initiative (2018) (medical).

[25] Oklahoma State Question 788, Medical Marijuana Legalization Initiative (2018) (medical).

[26] Utah Proposition 2, Medical Marijuana Initiative (2018) (medical).

[27] Cannabis Act, S.C. 2018, c. 16 (2018) (Can.).

[28] Carrie Kahn, Mexico Looks To Be Next To Legalize Marijuana, NPR, Nov. 14, 2018.

[29] Chris Roberts, Mexican Lawmakers Reach Across Party Lines to Launch Marijuana Reform Process, Marijuana Moment, March 15, 2019.

ABOUT THE AUTHORS

Satish Kini

Satish Kini is Chair of Debevoise & Plimpton’s Banking Group. He advises on a wide range of regulatory and transactional banking issues, ranging from the Volcker Rule to affiliate transactions,…

Paul Rubin

Paul Rubin is a corporate partner of Debevoise & Plimpton based in the Washington, D.C. office and a member of the Healthcare Group. He represents FDA-regulated drug, device and consumer product…

Meryl Holt Silverman

Meryl Holt Silverman is a litigation associate and a member of the White Collar & Regulatory Defense Group of Debevoise & Plimpton. Her practice focuses on internal investigations, regulatory…

Andrew Field

Andrew Field is a corporate associate and a member of the Financial Institutions Group of Debevoise & Plimpton.

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