Tag Archives: CSA

How Section 280E is Still Hindering the Cannabis Industry

By Jay Jerose
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The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.

Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.

What is Section 280E?

Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.

However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.

Impact of Section 280E on Businesses

 What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates. 

The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.

Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.

Legal Actions and Challenges to Section 280E

There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income

Tax Court and Section 280E

The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.

The Future of MRBs and Section 280E

All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.


Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.

Current Trends in Banking for Cannabis-Related Businesses

By Paula Durham, CFE, CCCE
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Cannabis is still federally illegal and is included on Schedule 1 of the Controlled Substances Act (CSA), along with such other substances as heroin, fentanyl and methamphetamines.1 It is a federal crime to grow, possess or sell cannabis.

Despite being federally illegal, 36 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or adult use purposes,2 and both direct and indirect cannabis-related businesses (CRBs) are growing at a rapid rate. Revenue from medical and adult use cannabis sales in the US in 2019 is estimated to have reached $10.6B-$13B and is on track to reach nearly $37B in 2024.3

Because the sale of cannabis is federally illegal, financial institutions face a dilemma when deciding to provide services to CRBs. Should they take a significant legal risk or stay out of the market and miss out on a significant revenue opportunity? So far, the vast majority of financial institutions have been unwilling to take the risk, resulting in a dearth of options for CRB’s. Until recently, cannabis business operators had few options for financial services, but times are changing.

This piece will discuss current trends in banking for cannabis-related businesses. We will cover differences in legality at state and federal levels, complexities in dealing in cash versus digital currencies, Congressional actions impacting banking and CRBs and how banking is changing. The explosion of state legalization of cannabis over the past several years has had a strong ripple effect across the US economy, touching many industries both directly and indirectly. Understanding the implications of doing business with a CRB is both challenging and necessary.

Feds Versus States

Money laundering is the process used to conceal the existence, illegal source or illegal application of funds.4 In 1986 Congress enacted the Money Laundering Control Act (MLCA), which makes it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.”5 Therefore, CRB transactions are technically illegal transactions under the MLCA.

Financial institutions therefore face a risk of violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (BSA) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.6

Federal authorities continued to aggressively enforce federal cannabis laws

In short, because cannabis is illegal at the federal level, processing funds derived from CRBs could be considered aiding and abetting criminal activity or money laundering. States, however, began legalizing cannabis in 1996, and by 2009, thirteen states had laws allowing cannabis possession and use.7 Despite this legislation, federal authorities continued to aggressively enforce federal cannabis laws.8 That changed under the Obama administration when, shortly after being elected, President Obama stated that his administration would not target legal CRB’s who were abiding by state laws.[9] In an attempt to provide clarity in this murky environment, beginning in 2009, the Department of Justice (DOJ) issued three memos designed to guide federal prosecutors in this area. However, none of the DOJ memos issued from 2009 through 2013 addressed potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis.

To assist financial institutions in navigating potential financial crime implications of banking CRBs, the Financial Crimes Enforcement Network (FinCen) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (2014 Guidance).9 According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.

The 2014 Guidance requires those who choose to provide services to CRBs to design and implement a thorough customer due diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.9 In addition, financial institutions are required to file a Suspicious Activity Report (SAR) for every transaction they process for a CRB, should they choose to accept the business.

Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law and, therefore, does not eliminate the legal risk to financial institutions.10 By its very nature, the 2014 Guidance was a temporary fix, subject to changing views of different administrations, evidenced by the fact that all three of the DOJ guidance documents noted above were rescinded by then Attorney General Jeff Sessions on January 4, 2018.12 The DOJ enforcement posture could change once again in a Biden administration. Biden is on record as favoring decriminalization, and Attorney General candidate Merrick Garland has stated that if confirmed he will deprioritize enforcement of low-level cannabis crimes. Garland also believes using limited government resources to pursue prosecution of cannabis crimes states where cannabis is legal does not make sense.12

Because of the uncertainty and high risk, most banks remain unwilling to serve CRBs. Those that do serve CRBs charge exorbitant fees (fees of $750-$1,000 or more per account per month are not uncommon), pricing many smaller operators out of the financial services market.

Cash is King – Or Is It?

Cannabis operators have discovered the old adage “cash is king” is not necessarily true when it comes to the cannabis space. Bank-less CRBs are forced to utilize cash to pay business expenses, which can be particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the providers that are difficult, if not impossible, to pay in cash. For example, cannabis operators have been turned away from IRS offices when attempting to pay large federal tax obligations in cash. Likewise, cannabis operators have been unable to utilize payroll processing companies to administer payroll and benefits for their businesses because the processors won’t take cash. CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.

Because dealing in cash is so difficult, CRB operators look for workarounds such as using personal credit/debit cards to purchase business equipment and supplies. This doesn’t eliminate the cash problem, however, because the credit card holder will likely have to accept cash as reimbursement. Such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.

CRBs often have large sums of money onsite

Some bank-less CRBs try to skirt the system by obtaining bank accounts in the name of management companies or other entities one step removed from the actual business. While operators often choose this route in an effort to streamline business and operate out of the shadows, it again runs afoul of banking laws. Transferring cannabis related financial transactions to another entity is actually the very definition of money laundering – which, as noted above, is defined as the process used to conceal the existence or source of “illegal” funds.

In addition to the difficulties in making payments or purchasing business supplies, operating in a cash-heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and transport large sums of cash when purchasing product or paying bills, making them a target for robbery. In 2017, there was a spate of dispensary robberies across the Phoenix Metro area, including one at Bloom Dispensary that took place during operating hours.13

Managing all that cash increases the cost of doing business as well, in the form of increased labor, insurance, and security costs. Cash must be counted and double counted, which can be time consuming for staff, not to mention the time it takes to deliver physical cash payments to hither and yon. Ironically, lack of banking significantly decreases transparency and clouds the waters of compliance, as operating strictly in cash makes it easier to manipulate reported financial results.

Potential Congressional Solutions

In recent years Congress has undertaken several efforts to pass legislation designed to address the state/federal divide on cannabis, which would likely clear the way for financial institutions to provide services to CRBs, including:

  • R. 1595 – Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”);
  • 1028 & H.R. 2093 – Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act); and
  • 2227 – Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act).

The climate in Washington DC, however, did not allow any of these initiatives to pass both houses of congress. Had any been sent to the White House, President Trump was unlikely to sign them into law.

The cannabis industry has new reason to believe reform is on the horizon with shift in political leadership in the White House and Senate. Newly anointed Senate Majority Leader Chuck Schumer recently committed to making federal cannabis reform a priority, and President Biden appears committed to decriminalization, reviving the hope of passage of one of these pieces of legislation.

The Changing Banking Landscape

Even though there is little in the way of formal protections for financial institutions, and with the timeline for a legislative fix unknown, an increasing number of banks are working with cannabis operators.

According to FinCen statistics, there were approximately 695 financial institutions actively involved with CRBs as of June 30, 2020. It is important to note that these statistics are based on SAR filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer.

Number of Depository Institutions Actively Banking
Cannabis-Related Businesses in the United States
(Reported in SARS)14

There are arguably more banking institutions offering services to CRBs than ever before. The challenges for CRBs are (1) finding an institution that is willing to offer services; (2) building/maintaining a compliance regime that will be acceptable to that institution; and (3) cost, given the high fees associated with these types of accounts. 

How CRBs Get Accepted by Banks

The gap between CRBs’ need for banking and the financial services providers’ sparse and expensive offerings to the sector has created an opportunity for third-party firms to intervene and provide a compliance structure that will satisfy the needs of the financial institutions, making it easier for the CRB to find a bank.

These third-party firms perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following FinCen guidance required to receive banking services. After the completion of due diligence, they connect the CRBs with financial institutions that are willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These firms often provide additional services such as armored car and cash vaulting services. Some of these firms also offer vendor screening, pre-approving vendors before any payments can be made.

One such firm, Safe Harbor Private Banking, started as a project implemented by the CEO of Partners Credit Union in Denver, Colorado, who set out to design a cannabis banking program that would allow Partners to do business with Colorado CRBs.15 The program was successful and has since expanded into other states who have legalized cannabis. Other operators include Dama Financial and NaturePay.

While these services offer hope for many CRBs, the downside is cost. These services perform the operations necessary to find, open, and maintain a compliant bank account; however, the costs of compliance are still high, pricing some small operators out of the market.

Is Digital Currency an Answer?

 Digital currency is also making its way into the cannabis world. Digital currency, or cryptocurrency, is a medium of exchange that utilizes a decentralized ledger to record transactions, otherwise known as a blockchain. One of the largest benefits of blockchain is that it is a secure, incorruptible digital ledger used for, among other things, financial transactions.16 Blockchain technology offers CRBs a transparent and immutable audit trail for business and financial transactions. Several cannabis-specific cryptocurrencies have sprung up in the past several years, including PotCoin, CannabisCoin, and DopeCoin, to name a few.

In July 2019, Arizona approved cryptocurrency startup ALTA to offer services to the state’s medical cannabis operators.17 ALTA describes itself as a “digital payment club where cash-intensive businesses pay each other using digital tokens instead of cash.”18 ALTA members purchase digital tokens that are used to pay other members using a proprietary blockchain based system. The tokens are redeemable for US dollars at a stable rate of 1:1, and CRBs do not need a bank account to participate in the ALTA program.

ALTA proposes to pick up members’ cash and exchanges it for tokens, which are then used to pay other members for goods and services. Tokens may be redeemed for cash at any time.18 The company has been approved by the Arizona State Attorney General, and one of the first members they hope to enlist is the Arizona Department of Revenue (ADOR). Enlisting ADOR into the program would allow dispensary members to pay state taxes digitally rather than hauling large amounts of cash to ADOR offices.

Similarly, Nevada recently contracted with Multichain Ventures to supply a digital currency solution to the Nevada cannabis industry. Nevada Assembly Bill 466 requires the state create a pilot program to design a “closed loop” system like Venmo in an effort to reduce cash transactions in the cannabis sector. Like ALTA, Nevada’s proposed system will convert cash to tokens which can then be transacted between system participants.19

While both proposals are promising for Arizona and Nevada CRBs, the timeline as to when, or if, these offerings will come online is unknown. Action on cannabis reform at the federal level may render these options moot.

Looking to the Future

Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier to accessing the financial services market for CRBs. While most banks are still reluctant to offer services to this rapidly growing industry, there are more banks than ever before willing to participate in the cannabis industry. Recent changes in leadership in Washington DC offer a positive outlook for cannabis reform at the federal level.

As the “green rush” continues to envelop the country, financial services options available to CRBs are slowly growing. Many new options are now available to help CRBs find a bank, develop compliance programs, and manage the cash related problems encountered by most CRBs. However, these solutions may be out of reach for the budget-conscious small operator. Also, there are a number of cryptocurrency solutions designed specifically for CRBs; however, when, or if, these solutions will gain significant traction is still unknown.


References

  1. Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812.
  2. “State Marijuana Laws”; National Conference of State Legislatures, February 19, 2021.
  3. “Exclusive: US Retail Marijuana Sales On Pace to Rise 40% in 2020, near $37B by 2024”. Marijuana Business Daily, June 30, 2020.
  4. Kaufman, Irving. “The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering”. Interim Report to the President, October 1984.
  5. S. Code § 1956 – Laundering of Monetary Instruments.
  6. Rowe, Robert. “Compliance and the Cannabis Conundrum.” ABA Banking Journal, September 11, 2016.
  7. “History of Marijuana as a Medicine – 2900 BC to Present”. ProCon.org, December 4, 2020.
  8. Truble, Sarah and Kasai, Nathan. “The Past – and Future – of Federal Marijuana Enforcement”. org, May 12, 2017.
  9. FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
  10. Cannabis Banking Coalition Statement.
  11. Sessions, Jefferson B. “Memorandum for All United States Attorneys”. January 4, 2018.
  12. “Attorney General Nominee Garland Signals Friendlier Marijuana Stance”. Marijuana Business Daily, February 22, 2021.
  13. Stern, Ray. “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The Phoenix New Times, April 11, 2017.
  14. FinCen Marijuana Banking Update, June 30, 2020.
  15. Mandelbaum, Robb. “Where Pot Entrepreneurs Go When the Banks Just Say No.” The New York Times, January 4, 2018.
  16. Rosic, Ameer. “What is Blockchain Technology? A Step-by-Step Guide for Beginners.” com, 2016.
  17. Emem, Mark. “Marijuana Stablecoin Asked to Play in Arizona Fintech Sandbox.” CCN.com, October 25, 2019.
  18. http:\\Whatisalta.com\
  19. Wagner, Michael, CFA. “Multichain Ventures Secures Public Sector Contract with Nevada to Supply Tokenized Financial Ecosystem for the Legal Cannabis Industry”, January 26, 2021.

Could 2021 Be the Year of Federal Cannabis Legalization?

By Bryan Johnson
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The legalization of cannabis in the U.S. has been long in the making. Back in the early 1970s, states such as Oregon, Texas and Colorado began the process of decriminalizing small amounts of cannabis. Fast forward 50 years or thereabouts, and the momentum toward legalization is undeniable.

True, cannabis remains illegal at the federal level, but state after state is legalizing the substance for medical and adult use. California was the first to do so for medical usage in 1996. Since then, several others have jumped on the medical cannabis bandwagon, and a total of 19 states have legalized cannabis for adult use. It seems, then, that it’s just a matter of time before the federal government follows suit.

A Bit of Background 

There are two key federal laws concerning cannabis that criminalize its use: the Comprehensive Drug Abuse Prevention and Control Act (CDAPCA) and the Controlled Substances Act (CSA), which is part of the CDAPCA. The CSA became effective in 1971 and grouped cannabis along with heroin, LSD and cocaine as Schedule I drugs that are tightly regulated and deemed illegal by the federal government. For its part, the CDAPCA, also enacted in the 70s, was an element of the U.S. “War on Drugs,” and served to significantly restrict manufacturing and distribution of cannabis, among other substances, and amp up related security laws.

Times have certainly changed over the decades, and so has public sentiment about cannabis use. In fact, over 91% of U.S. adults say that cannabis should be legal for adult use or medical use—this according to the Pew Research Center. Clearly, more and more states are hearing this message loud and clear given the uptick in jurisdictions legalizing the substance, be it for medical or adult use purposes.

The Booming Legal Cannabis Market

The legal cannabis business is on fire, with recent estimates suggesting that the size of the global market will climb to $84 billion by 2028. This is a staggering number that spells opportunity for budding (pun intended) entrepreneurs in the U.S. and beyond, not to mention tax authorities. It gets even better when taking into account the popularity of CBD products. CBD, which is derived from the cannabis plant but does not contain THC and is legal in the U.S., has become an integral part of the wellness industry. Experts predict that the global CBD market is on its way to reaching a value of $55 billion in years to come.

What This All Means for the Future of Cannabis at the Federal Level

No doubt about it, legal cannabis is big business. But that business is being thwarted by the failure of the federal government to change course and legalize the substance. With cannabis still considered a Schedule I drug, federal banks are unable to provide access to financial services for companies selling cannabis-related products. As otherwise stated, because federal law makes cannabis illegal, banks cannot do business with cannabis companies, which is problematic for so many reasons.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act

But good news could be on the horizon. The SAFE Banking Act of 2021, which would provide a safe harbor for banking institutions providing services to cannabis clients, was passed in the U.S. House of Representatives and referred to committee. Whether the legislation passes in its current form is anyone’s guess, though our federal legislature does seem to be nearing the relaxation of existing cannabis restrictions.

This is evidenced as well in the U.S. Senate, where the Cannabis Administration and Opportunity Act was recently introduced and is currently pending. That legislation would, among other things, remove cannabis from the CSA, introduce regulations to tax cannabis products, expunge prior convictions, and maintain the authority of states to set their own cannabis policies.

Of course, there’s no certainty that 2021 will be the year when cannabis is finally legalized (or at the very least, decriminalized) federally. Still, we’re closer to that eventuality than ever before.

GMPs & Cannabis Manufacturing

By Kathleen May
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Editor’s Note: While CIJ typically omits the word “marijuana” where possible due to antiquated nomenclature and prejudicial connotations, we understand the legal distinction between cannabis containing THC and hemp requires the use of the word when referencing federal government policies and legislative language.


Despite the rapid evolution of the cannabis industry, the assurance of safe manufacturing practices remains unclear.Both the Food and Drug Administration (FDA) and the Drug Enforcement Administration (DEA) have imposed significant hurdles for cannabis operators to remain on the “right side of the law.” Therefore, manufacturers of both hemp and marijuana products have been left to figure things out on their own, or choose to ignore existing guidance because the lack of federal oversight allows them to do so. Inconsistent regulation on manufacturing, packaging, labeling and testing of cannabis products offers the potential for unsubstantiated, non-scientific and often times blatantly false claims on product safety and efficacy.

Science vs. Law

Hemp and marijuana are both species of the Cannabis family, Cannabaceae. Genetically they are identical but are arbitrarily defined by the presence of delta-9 tetrahydrocannabinol (THC). While science does not differentiate between hemp and marijuana, the law does.

The hemp industry declared a small victory with the passing of the Agricultural Act of 2014 (2014 Farm Bill). Under this bill universities and state agriculture departments were allowed to grow hemp under state law. Additionally, “industrial hemp” was officially defined by establishing the legal limit of THC at 0.3% on a dry weight basis. The Agricultural Improvement Act of 2018 (2018 Farm Bill), under the guidance of the United States Department of Agriculture (USDA), took things a few steps further by authorizing the cultivation of hemp and removed hemp and hemp seeds from the CSA. The bill however provides no language that mandates the safe manufacture of hemp-derived consumer goods. The 2018 version also preserved the FDA’s authority to regulate products containing cannabis and cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act (FD&C Act). To the surprise of most, listing cannabidiol (CBD), even hemp-derived, as an ingredient on consumer product labels remains illegal under the bill. Furthermore, CBD product manufacturers are not protected under the current regulations. Since 2015 the FDA has issued warning letters to firms marketing CBD products as dietary supplements and/or foods, and in December 2018, FDA declared it illegal to introduce food containing CBD (or THC) into interstate commerce, regardless if it is derived from hemp. To date, the only FDA approved CBD product is GW Pharmaceutical’s Epidiolex.

Marijuana remains classified as a Schedule I controlled substance under the CSA. Thirty-six (36) states have approved comprehensive, publicly available medical marijuana programs, and now 14 states have approved adult use programs, with New Jersey passing legislation on February 22, 2021. However, the industry has seen minimal movement toward mandating GMP requirements in the marijuana market. Only a handful of medical programs require manufacturers to follow GMP. Furthermore, the requirements are inconsistent between states and the language in the regulations on how to approach GMP implementation is vague and disjointed. This fragmented guidance supports the complexity and difficulty of enforcing a coherent, standardized and reliable approach to safe manufacturing practices.

What is GMP and Why Should You Care?

Good Manufacturing Practices (GMPs) are a system for ensuring that products are consistently manufactured and controlled according to quality standards and regulatory guidelines. The implementation of a GMP compliant program ensures consumer health and safety, allows manufacturers to understand the intended use of their products, allows manufacturers to defend product specifications as being appropriate, considers the risks to vulnerable populations and minimizes overall business risk. In a nutshell, GMP equals product safety and quality, and defines the responsibilities of the manufacturer to ensure consumers are protected from the distribution of unsafe and ineffective products. Currently, the GMP “landscape” in the cannabis space is complicated. The various “flavors” (food, dietary supplements, cosmetics and drugs/devices) of GMP leave many confused and frustrated when making the decision to implement GMP. Confusion is a result of unclear regulatory requirements as well as operators not fully understanding how to classify or designate the end use of their product(s). Implementing an effective GMP program requires proper planning (both short and long term), financial commitment and qualified resources.

Where Should You Start?

As the regulatory landscape continues to evolve and mature in the cannabis space, your business model must consider GMP implementation if you wish to remain successful and sustainable.

Intended Use

Before you can implement GMP you must first understand what GMP regulations apply to the intended use of your product(s). Are you manufacturing food, beverages or dietary supplements? Get acquainted with the FDA Code of Federal Regulations (CFRs) on GMP. 

Conduct a Gap Assessment

A gap assessment allows you to determine your deficiencies in relation to GMP compliance. The assessment should include, but is not limited to facility design, equipment design, supply chain, risk management and employee training.

Develop an Action Plan

Once the gap assessment is complete a comprehensive action plan will be developed to map out the steps required to achieve GMP compliance. The action plan should follow the SMART Goal principles:

  • Specific (simple, well-defined)
  • Measurable (meaningful)
  • Attainable (achievable, agreed upon)
  • Relevant (resource-based, reasonable and realistic)
  • Timely (time-based, defined due dates)

The plan will include prioritized deliverables, due dates and allocated resources in order to strategically plan and execute and complete the required tasks.

Schedule a Mock GMP Inspection

A mock inspection verifies that the action plan was adequately executed. Hire an experienced resource familiar with related GMPs and QMS to conduct the inspection. A successful mock inspection is a perfect litmus test if the end goal is to achieve GMP certification.

Cannabis manufacturers that ignore the obvious progression toward an FDA-like industry will not survive the long game. Those that embrace the momentum and properly plan to mitigate product and business risk – those who demonstrate integrity and are truly in this space to ensure safe, effective and quality products to consumers will come out on top, gain credibility and secure brand recognition.


References:

  • 21 CFR Part 111, Current Good Manufacturing Practice in Manufacturing, Packaging, Labeling, or Holding Operations for Dietary Supplements.
  • 21 CFR Part 117, Current Good Manufacturing Practice, Hazard Analysis, and Risk-Based Preventive Controls for Human Food and the Food Safety Modernization Act (FSMA).
  • 21 CFR Part 210, Current Good Manufacturing Practice in Manufacturing, Processing, Packing, or Holding of Drugs; General.
  • 21 CFR Part 211, Current Good Manufacturing Practice for Finished Pharmaceuticals.
  • 21 CFR Part 700, Subchapter G-Cosmetics.
  • 21 CFR Part 820, Subchapter H-Medical Devices; Quality System Regulation
  • Congressional Research Service, FDA Regulation of Cannabidiol (CBD) Products, June 12, 2019.
  • United States Food and Drug Administration-Warning Letters, Current Content as of 02/19/2021.

Links:

How GW Pharma Won CBD

By Cathleen Rocco
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As of this writing, the United States Food and Drug Administration (FDA) has approved GW Pharma’s CBD drug Epidiolex for treating profound refractory pediatric epilepsy syndromes (Dravet syndrome and Lennox Gastaut syndrome) as well as for treating seizures associated with tuberous sclerosis complex (TSC) in patients one year of age or older. The product is a very simple, orally-administered formulation comprised of 100mg/ml cannabidiol (CBD), dehydrated alcohol, sesame seed oil, strawberry flavor and sucralose – basically, an alcohol-based solution with sesame seed oil to help solubilize the CBD oil, flavoring and sweetener.

GW logo-2On April 6th, 2020 GW Pharma performed a regulatory miracle when they succeeded in convincing the Drug Enforcement Administration (DEA) to deschedule Epidiolex (i.e., remove it from the Schedule 1 and Schedule 5 lists of substances that the agency regulates due to concerns regarding safety, potential for abuse or both) for all indications – including indications for which it has not yet been approved by the FDA.1 The benefit to GW of having their product descheduled is incalculable. This status change removed potential barriers to insurance reimbursement and made the need to set up and administer an expensive REMS2 drug safety program less likely. In part because of this regulatory coup d’état, the drug recently posted yearly earnings of nearly $300 million.

It is important to note that the DEA descheduled the Epidiolex formulation and not cannabis-derived CBD itself. Thus, GW Pharma is now in the enviable position of being the only company that can legally sell cannabis-derived CBD. More importantly, because the DEA descheduled the formulation and not the active ingredient, other companies who wish to market cannabis-derived CBD pharmaceutical formulations will have to repeat whatever it is that GW did to get Epidiolex descheduled.3 The DEA effectively gave the company a huge head start with respect to competitors who are developing other cannabis-derived CBD formulations that would compete with Epidiolex. That advantage will remain in place unless and until cannabis-derived CBD itself is descheduled or cannabis is legalized at the federal level.

GW Pharma’s CBD drug Epidiolex, which is FDA-approved to treat profound refractory pediatric epilepsy syndromes

GW Pharma’s attorneys demonstrated considerable virtuosity in devising this approach. However, there is another aspect of the GW Pharma story – one that could have profound implications for the exploding CBD consumer packaged goods (CPG) industry. The Federal Food, Drug, and Cosmetics Act4 (FFDCA) prohibits the introduction into interstate commerce of any food to which has been added an approved drug or a drug for which substantial clinical investigations have been instituted and made public.5 Because CBD was and is still the subject of clinical trials run by GW Pharma and others, even hemp-derived CBD is currently illegal to use as a food additive or dietary supplement under the FDCA

The FDA has recently re-started the public commentary stage of a long process that will hopefully result in the creation of a regulatory pathway for CBD to be used as a food additive – something that would seemingly be a straightforward matter given the copious amounts of safety data being generated from all of GW Pharma’s clinical trials. However, as long as the FDA continues to drag its feet in providing a regulatory pathway for CBD CPG products, CBD, regardless of its source, will remain illegal to use as a food additive or supplement under either the CSA or the FFDCA despite the existence of safety data obtained through the Epidiolex clinical trials. If, as many people in the industry anticipate, the agency decides to begin enforcement action, this could have a hugely negative impact on the industry.

In addition to the potentially disastrous effect that federal law could have on an important new industry, the federal regulatory scheme introduces unnecessary regulatory complexity and cost by imposing two different regulatory schemes depending on the source of the CBD. CBD derived from hemp is chemically identical to CBD derived from cannabis. Despite that identity, the 2018 Farm Bill nonsensically exempts only hemp-derived CBD from the Controlled Substances Act. If a regulatory pathway is created for hemp-derived CBD, but the DEA insists on maintaining cannabis-derived CBD as a schedule 1 substance, then the same molecule will be subject to two different regulatory schemes. This scenario would require tracking and certifying CBD sources and thereby impose regulatory and economic burdens that are entirely unnecessary from a public health point of view.

FDAlogoAn alternative, economically disastrous scenario: given the pharmaceutical industry’s formidable lobbying power, it is entirely possible that the FDA could decide to limit the use of CBD exclusively in prescription drug formulations. This could kill the entire US hemp CBD CPG industry, currently estimated to reach $22 billion by 2022.6

Overall, the current state of affairs is unfair, expensive, uncertain and entirely unworkable over the long term. The CSA must be amended, ideally to deschedule both hemp and cannabis entirely, but at least in the short term, to deschedule CBD and preferably all non-THC cannabinoids regardless of their source. Further, the FDA must provide a regulatory pathway to allow the use of low doses of cannabinoids shown to be safe, either by existing clinical trial data or future testing pursuant to the NDIN submission process.

A 2019 Gallup poll found that 14% of Americans – 1 in 7 – use CBD products.7 The demand is there, the industry is thriving, and adequate safety data exists to justify a regulatory system that allows low-dose over the counter CBD products provided those products are produced using Current Good Manufacturing Practices (CGMPs) for food and dietary supplement manufacturing prescribed by the FDA and that such products undergo regular testing that demonstrates they are safe, unadulterated and accurately labeled. It is time for the industry to collectively fund a New Dietary Ingredient Notification (NDIN) submission that would provide safety data sufficiently compelling to force the FDA to either recognize CBD and other non-THC cannabinoids as being GRAS substances regardless of their source, or in the alternative create a regulatory path for CPG products containing low-doses of CBD and other non-THC cannabinoids.

Editor’s Note: The opinions expressed in this publication are those of its author. They do not purport to reflect the opinions or views of the Cannabis Industry Journal, its editorial staff or its employees.


References

  1. Clincialtrials.gov lists 256 different clinical trials in which Epidiolex has been, is being or will be tested for a wide variety of other indications, including but not limited to opioid use disorder, several types of prostate cancer, alcohol use disorder, musculoskeletal pain, and a host of others.
  2. REMS – risk evaluation and mitigation strategy – are drug safety programs that the FDA requires in cases where mediations pose serious safety concerns with respect to potential abuse and other adverse effects.
  3. Exactly what they did isn’t clear, and won’t be for a long while given the snail’s pace at which FOIA requests are filled.
  4. Title 21 United States Code Chapter 9
  5. Title 21 United States Cod Chapter 9, Sections 331(ll), 342(a)(1) and Section 342(d)(f)(1)
  6. “Exclusive: New Report Predicts CBD Market Will Hit $22 Billion by 2022” Rolling Stone Magazine, September 11, 2018, citing cannabis industry analysis from the Brightfield Group.
  7. Gallup poll on American CBD product usage

Cannabis Businesses Remain Ineligible To Receive Federal Financial Assistance

By Steve Levine, Megan Herr
1 Comment

In our previous post, we touched on the fact that state-legal medical and recreational cannabis businesses (including indirect cannabis businesses) could not receive federal financial assistance due to the continued Schedule I status of cannabis under the Controlled Substances Act (CSA). While state-legal medical and recreational cannabis businesses have been adversely affected due to government imposed shelter-in-place restrictions across the United States, they are unable to take advantage of the multi-trillion dollar stimulus packages that are designed to help small businesses because they are engaged in “federally illegal” activities. As described below, applicants applying for federal loans must certify, under penalty of perjury, that they are not engaged in “illegal” activity.

While it is our view that state-legal medical and recreational cannabis businesses should be entitled to assistance as they are hurting like every other business, we explain why such businesses cannot receive financial assistance under the Paycheck Protection Program and the SBA’s Economic Injury Disaster Loan Program due to the facts that these businesses do not comply with federal law.

CARES Act

As previously discussed, Section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the “Act”) directed $349 billion to the Small Business Administration (SBA) to administer to small businesses harmed by COVID-19. As a result, businesses can apply for Paycheck Protection Program (PPP) loans and other SBA financial assistance, including Economic Injury Disaster Loans (EIDLs), traditional 7(a) loans, 504 loans, and microloans, and can also receive investment capital from the Small Business Investment Company program.

Paycheck Protection Program (PPP)

Generally, the following businesses are eligible to receive loans under the PPP:

  • Any business, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization or Tribal business with not more than 500 employees whose principal place of residence is in the United States;
  • Any business that meets the SBA employee-based size standards for the industry in which it operates (if applicable);
  • Any business that is a “small business concern” as defined in Section 3 of the Small Business Act, 15 U.S.C. 632, and meets the SBA employee-based or revenue-based size standards corresponding to its primary industry; or
  • Any business that is a “small business concern” under the SBA’s “alternative size standard” as of March 27, 2020, which standard is met if the business has not more than:
    • (i) maximum tangible net worth of $15 million, and
    • (ii) an average net income of $5 million (after Federal income taxes, excluding any carry-over losses) for 2 full fiscal years before the date of application.

Importantly, to apply for PPP, an applicant must make a good faith certification that the applicant is eligible to receive a PPP loan. An applicant must certify, under penalty of perjury, that it “is not engaged in any activity that is illegal under federal, state or local law.” (Borrower Application Form, page 2).

Consequently, because state-legal marijuana businesses (including indirect marijuana businesses) are operating in violation of federal law, applicants cannot make such certification, they remain ineligible to participate in the PPP.

 Economic Injury Disaster Loans (EIDLs)

 The CARES Act also provided a slew of changes to the SBA’s pre-existing EIDL program, which provides small businesses with working capital loans of up to $2 million to assist to help overcome the temporary loss of revenue as the result of a declared disaster.

The Act set out new rules making it easier for small businesses harmed by COVID-19 to receive loans quickly and efficiently; the Act added $30 billion to the EIDL loan fund, with an additional $10 billion added for the EIDL Grants connected to the EIDL loans.

The CARES Act also expanded eligibility to include businesses with no more than 500 employees, any individual operating as a sole proprietor or an independent contractor, and tribal businesses, cooperatives and ESOPs with no more than 500 employees. Small business concerns and small agricultural cooperatives who meet the SBA’s applicable size standards are also eligible, as well as most nonprofits.

However, to receive an EIDL loan, applicants must make a good faith certification that the applicant is eligible to receive an EIDL. An applicant must certify, under penalty of perjury, that it “is not engaged in any illegal activity (as defined by Federal guidelines).” (COVID-19 Economic Injury Disaster Loan Application).

The SBA has clarified that the limitation on applicants “engaged in any illegal activity” (13 CFR § 120.110 (h)) refers to all applicants engaged in “illegal activity under federal, state, or local law.”

In a Statement of Position issued on April 1, 2019 (the SOP), the SBA clarified that “illegal activity” includes “[a]pplicants that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market.” (SOP 50 10 5(K))

The SOP indicated that both (i) Direct Marijuana Businesses1 and (ii) Indirect Marijuana Businesses2 cannot receive SBA assistance due to the limitation on applicants “engaged in any illegal activity.”

It is the SBA’s position that, “because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.”

Consequently, because state-legal cannabis businesses (including indirect marijuana businesses) are operating in violation of federal law, applicants cannot certify that they are “not engaged in any illegal activity,” they are not eligible to receive EIDLs.


  1.  “Direct Marijuana Business” mean “a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to recreational use and medical use even if the business is legal under local or state law where the applicant business is or will be located.”
  2. “Indirect Marijuana Business” means “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana. Examples of Indirect Marijuana Businesses include businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/ accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business. However … [the] SBA does not consider a plumber who fixes a sink for a Direct Marijuana Business or a tech support company that repairs a laptop for such a business to be aiding in the use, growth, enhancement or other development of marijuana. Indirect Marijuana Businesses also include businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use.”

CARES Act – Stimulus Package Won’t Aid the Cannabis Industry

By Steve Levine, Megan Herr
3 Comments

On Wednesday, March 25, the United States Senate approved an estimated $2-trillion stimulus package in response to the economic impact of the COVID-19 outbreak. The legislation, formally known as the “Coronavirus Aid, Relief, and Economic Security Act” (or the CARES Act), was approved by the Senate 96-0 following days of negotiations. One of the most highly anticipated provisions of the CARES Act, the “recovery rebates” for individuals, will provide a one-time cash payment up to $1,200 per qualifying individual ($2,400 in the case of eligible individuals filing a joint return) plus an additional $500 for qualifying children (§6428.2020(a)). The CARES Act, which remains subject to House approval, also prescribes an additional $500 billon in corporate aid, $100 billion to health-care providers, $150 billion to state and local governments and $349 billion in small business loans in an effort to provide continued employment and stabilize the economy. The legislation further provides billions of dollars in debt relief on existing loans.

CARES Act – Paycheck Protection Program 

Under the CARES Act, small businesses who participate in the “Paycheck Protection Program” can receive loans to cover payroll expenses, group health care benefits, employee salaries, interest on mortgage obligations, rent, and utilities (§1102(F)(i)). To qualify for these small business loans, businesses must employ 500 employees or less, including all full-time and part-time employees (§1102(D)). Eligible recipients must also submit the following as part of their loan application: (i) documentation verifying the number of full-time equivalent employees on payroll and applicable pay rates; (ii) documentation verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; and (iii) a certification that the documentation presented is true and the amounts requested will be used to retain employees and make necessary payments (§1106(e)). The CARES Act delegates authority to depository institutions, insured credit unions, institutions of the Farm Credit System and other lenders to provide loans under this program (§1109(b)). The Treasury Department will be tasked with establishing all interest rates, loan maturity dates, and all other necessary terms and conditions. Prior to issuing these loans, lenders will consider whether the business (i) was in operation as of February 15, 2020, (ii) had employees for whom the business paid salaries and payroll, or (iii) aid independent contractors as reported on a Form 1099-MISC (§1102(F)(ii)(II)).

What Does This Mean for Cannabis Businesses?

Due to the continued Schedule I status of cannabis (excluding hemp) under the Controlled Substances Act (CSA), cannabis businesses are not eligible to participate in the Paycheck Protection Program intended to keep “small businesses” afloat during the current economic crisis. Because federal law still prohibits banks from supporting marijuana businesses, financial institutions remain hesitant to service the industry, as anti-money laundering concerns and Bank Secrecy Act requirements (31 U.S.C. 5311 et seq.) are ever-present. As a result, even if cannabis businesses technically qualify to receive federal assistance under the Paycheck Protection Program, they will face an uphill battle in actually obtaining such loans.

Cannabis Businesses Are Also Precluded from “Disaster” Assistance

Moreover, the conflict between state and federal law continues to prevent cannabis business from receiving assistance from the U.S. Small Business Administration (SBA) under the Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6201). In light of the COVID-19 outbreak, the SBA revised its “Disaster Loan” process to provide low-interest “Disaster Loans” to eligible small businesses. To qualify for these loans, a state must submit documented business losses for at least five businesses per county. The problem, however, is that the SBA still refuses to assist state-legal cannabis businesses in equal need of small business loans. Specifically, in a 2018 Policy Notice, the SBA reaffirmed that cannabis businesses – and even some non “plant-touching” firms who service the cannabis industry – cannot receive aid in the form of federally backed loans, as “financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity.” The 2018 Policy Notice clarified that the following business are ineligible to receive SBA loans:

(a) “Direct Marijuana Business” — a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to personal use and medical use even if the business is legal under local or state law where the applicant business is or will be located.

 (b) “Indirect Marijuana Business” — a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to support the use, growth, enhancement or other development of marijuana. Examples include businesses that provide testing services, or sell grow lights or hydroponic equipment, to one or more Direct Marijuana Businesses. In addition, businesses that sell smoking devices, pipes, bongs, inhalants, or other products that may be used in connection with marijuana are ineligible if the products are primarily intended or designed for such use or if the business markets the products for such use.

More recently, the SBA provided further clarification that cannabis businesses are not entitled to receive a cut of the federal dollars being appropriated for disaster relief because of the CSA’s continued prohibition of the sale and distribution of cannabis. Last week, the SBA reiterated that:

“With the exception of businesses that produce or sell hemp and hemp-derived products [federally legalized under the 2018 Farm Bill], marijuana related businesses are not eligible for SBA-funded services.” (@SBAPacificNW)

Consequently, because of the continued Schedule I status of cannabis under federal law, cannabis businesses will not be entitled to receive Disaster Loans from the SBA, regardless of whether they qualify as a struggling small business.

Resolving the Issue

While the federal government has been considering legislation, such as SAFE Banking and the STATES Act, to create a more rational federal cannabis policy, neither of these bills are likely to pass any time soon given the current COVID-19 pandemic.

At the end of the day, until Congress passes some form of federal cannabis legalization, these small businesses will remain plagued by the inability to receive financial assistance, as evinced by the Paycheck Protection Program.

The Ultimate Guide to Intellectual Property Protection for Cannabis Businesses

By Roger Bora
4 Comments

As of this writing, one cannot register trademarks with the U.S. Patent and Trademark Office (USPTO) for cannabis products and services that “touch” the cannabis plant (i.e., cultivate, manufacture or dispense cannabis products), with the recent exception for certain hemp-based products and services, because use of trademarks must be lawful under federal law for federal trademark registration eligibility. Brand owners may, however, secure federal trademark registration protection for their brand names for certain cannabis-related products and services that are currently legal under federal law in advance of what could be the full legalization of cannabis at the state and federal levels.

Federal trademark registration provides brand owners with valuable benefits beyond common law (unregistered) and state registered trademark rights, including the preservation of national expansion rights and presumption of trademark ownership and validity. For those reasons, securing federal trademark registration protection for trademarks is a prudent business strategy.

This article summarizes certain laws and regulations for securing federal trademark registration protection for cannabis products (including cannabidiol (CBD) products) and services. It also identifies other forms of intellectual property protection for  cannabis businesses.

What Are Cannabis, Marijuana, Hemp and CBD?

  • Cannabis is a plant of the Cannabaceae family and contains many biologically active chemical compounds, including the well-known delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD) compounds.
  • Parts of the Cannabis sativa plant are controlled under the Controlled Substances Act (CSA) under the drug class “marijuana.” The CSA is a federal law that regulates drug policy for the manufacture, importation, possession, use and distribution of certain substances. Marijuana is currently listed as an illegal Schedule I drug under the CSA, along with cocaine and heroin, due to its high potential for abuse, which is attributable mainly to the psychoactive effects of THC and the absence of a currently accepted medical use in the United States.
  • Marijuana, a term the CSA uses, is the dried leaves of the cannabis plant. It is derived from the cannabis sativa and cannabis indica species and is used primarily as a psychoactive drug.
  • Hemp is derived only from the cannabis sativa species and has historically been grown primarily for its strong fibers used for industrial purposes, including for making fabrics, clothing and rope.
  • There is a significant difference between marijuana and hemp with respect to their concentration of THC, which gives the plant its psychoactive effect. While marijuana can reach THC levels of 30%, THC levels in hemp are typically 0.3% or less.
  • The low level of THC in hemp is a reason why federal authorities recently removed it from the legal definition of marijuana, which means that cannabis plants and derivatives such as CBD derived from hemp that contain 0.3% or less of THC on a dry-weight basis are no longer considered controlled substances under the CSA.
  • Cannabidiol (CBD) is an active ingredient in the cannabis plant and is derived primarily from the hemp plant. CBD has been touted for its many health benefits, including for the treatment of insomnia, pain and anxiety, and it has become a widely used ingredient in many types of products, including foods, cosmetics, building materials, industrial oils, plastics and textiles.

Relevant Laws and Regulations

Controlled Substances Act (CSA)

Under the CSA, the drug class marijuana is defined as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin” (subject to certain exceptions). 21 U.S.C. §802(16).

The CSA prohibits, among other things, manufacturing, distributing, dispensing or possessing cannabis that meets the definition of marijuana, including CBD derived from marijuana.

2018 Farm Bill Removes Hemp from the Definition of Marijuana

The 2018 Farm Bill signed into law on December 20, 2018, amended the Agricultural Marketing Act of 1946 and changed certain federal laws and regulations concerning the production and marketing of “hemp,” defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”

  • Those changes included removing hemp from the CSA’s definition of marijuana, which means that hemp and its derivatives, such as CBD derived from hemp, that contain no more than 0.3% THC on a dry-weight basis, are no longer controlled substances under the CSA.
  • The recent change in the classification of hemp allows brand owners that legally manufacture and sell certain hemp-based products, including certain hemp-derived CBD products, to federally register their associated trademarks.
  • However, the 2018 Farm Bill explicitly preserved FDA’s authority to regulate certain products containing cannabis or cannabis-derived compounds, even if derived from hemp, including CBD derived from hemp. Thus, federal laws, including FDA regulations, must still be considered for product legality before introducing products into commerce.

Food and Drug Administration (FDA)

Even with the removal of hemp from the CSA’s definition of marijuana, not all hemp-derived products are lawful following passage of the 2018 Farm Bill because certain products may still violate the Federal Food, Drug, and Cosmetic Act. For example, certain hemp-derived CBD products, including human foods, beverages, dietary supplements and animal foods, still violate FDA laws absent FDA approval.

The FDA monitors and investigates the sale of products that violate FDA laws, including CBD products promoted for therapeutic uses and treating diseases. When the FDA detects such violations, it may send warning letters to the violating parties as a first step in the enforcement process.

On December 20, 2018, the then FDA Commissioner Scott Gottlieb, M.D. made the following statement on that point:

“We’ll take enforcement action needed to protect public health against companies illegally selling cannabis and cannabis-derived products that can put consumers at risk and are being marketed in violation of the FDA’s authorities. The FDA has sent warning letters in the past to companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer. Some of these products were in further violation of the FD&C Act because they were marketed as dietary supplements or because they involved the addition of CBD to food.”

Furthermore, in a recent letter to a company selling CBD products, the FTC sent a joint letter with the FDA, and that letter included the following statements and warnings:

  • “The FTC strongly urges you to review all claims for your products and ensure that those claims are supported by competent and reliable scientific evidence.  Violations of the FTC Act may result in legal action seeking a Federal District Court injunction or Administrative Cease and Desist Order.  An order also may require that you pay back money to consumers.

  • You should take prompt action to correct the violations cited in this letter. Failure to promptly correct violations may result in legal action without further notice, including, without limitation, seizure and/or injunction.”

What about using hulled hemp seed, hemp seed protein powder and hemp seed oil in human food?

  • In December 2018, the FDA generally recognized as safe (GRAS) hulled hemp seed, hemp seed protein powder and hemp seed oil. Accordingly, the FDA’s current position suggests that those products may legally be marketed in human foods for the uses described in the notices, provided they comply with all other requirements. To date, the FDA has not received any GRAS notices for the use of hemp-derived ingredients in animal food.
  • Hemp seeds are the seeds of the Cannabis sativa plant. They do not naturally contain THC or CBD. The hemp seed-derived ingredients that are the subjects of the GRAS notices contain only trace amounts of CBD and THC. The FDA has reported that “[c]onsumption of these hemp seed-derived ingredients is not capable of making consumers ‘high.’”
  • Those GRAS conclusions do not affect the FDA’s position on the addition of CBD and THC to food.

U.S. Trademark Registration Eligibility

Trademarks Must Be Used for Lawful Activities

A trademark’s use must be lawful under federal law for federal trademark registration eligibility. Whether activities associated with cannabis and/or cannabis-related goods or services are lawful under federal law requires review of various federal laws, including the Federal Food, Drug, and Cosmetic Act.

Federal law controls federal trademark registration eligibility, period.

If a trademark application is filed for goods or services that violate federal laws, including for marijuana products and/or services or certain products that feature CBD, such as foods and nutritional supplements, the USPTO Examiner should refuse the application. Furthermore, filing an “intent-to-use” trademark application cannot obviate that refusal.

What does that mean? It means that filing a trademark application based on an “intent to use” the trademark “in the future” in anticipation of federal law legalizing cannabis still violates current law (the law as of the application filing date), and thus the application should be rejected because the applicant does not and cannot have a “bona fide intent” to use the applied-for mark for a legal purpose.

The USPTO Examination Guide 1-19 for examining cannabis marks states that:

“[r]egistration of marks for foods, beverages, dietary supplements, or pet treats containing CBD will still be refused as unlawful under the FDCA, even if derived from hemp, as such goods may not be introduced lawfully into interstate commerce.”

The following is an excerpt from an issued Trademark Office action refusing registration of a mark on the basis the listed cannabis goods are unlawful:

“Registration is refused because applicant does not have a bona fide intent to lawfully use the applied-for mark in commerce.

To qualify for federal trademark/service mark registration, the use of a mark in commerce must be lawful. Gray v. Daffy Dan’s Bargaintown, 823 F.2d 522, 526, 3 USPQ2d 1306, 1308 (Fed. Cir. 1987) (stating that “[a] valid application cannot be filed at all for registration of a mark without ‘lawful use in commerce’”); TMEP §907; see In re Stellar Int’l, Inc., 159 USPQ 48, 50-51 (TTAB 1968); Coahoma Chemical Co., Inc. v. Smith, 113 USPQ 413 (Com’r Pat. & Trademarks 1957) (concluding that “use of a mark in connection with unlawful shipments in interstate commerce is not use of a mark in commerce which the [Office] may recognize.”). Thus, the goods and/or services to which the mark is applied must comply with all applicable federal laws. See In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016) (citing In re Midwest Tennis & Track Co., 29 USPQ2d 1386, 1386 n.2 (TTAB 1993) (noting that “[i]t is settled that the Trademark Act’s requirement of ‘use in commerce,’ means a ‘lawful use in commerce’”)); In re Pepcom Indus., Inc., 192 USPQ 400, 401 (TTAB 1976); TMEP §907.

Here, the items or activities to which the proposed mark will be applied are unlawful under the federal Controlled Substances Act (CSA), 21 U.S.C. §§801-971.”

USPTO Guidelines for Marijuana and Hemp Products: Key Takeaways

  • Trademark registrations for marijuana and marijuana by-products, including CBD derived from marijuana, are still unavailable.
  • Trademark registrations for certain hemp products are available. If an applicant’s goods are derived from hemp, as defined in the 2018 Farm Bill, the identification of goods must specify that they are derived from hemp and that the products contain less than 0.3% THC. Thus, the scope of the resulting registration will be limited to goods compliant with federal law.
  • Trademark applications covering certain CBD infused products, including foods, beverages, dietary supplements and pet foods, are still refused, even if derived from hemp, because such goods may not be introduced lawfully into commerce without FDA approval.
  • The USPTO is currently approving trademarks for skin care preparations and cosmetics that feature hemp ingredients, including CBD derived from hemp, as long as the application complies with the 2018 Farm Bill and USPTO filing requirements.
  • If a pending application’s filing date is prior to December 20, 2018 (the effective date of the 2018 Farm Bill), the applicant must amend the filing date to a date later than December 20, 2018 before the application may proceed. Once the date has been amended, a new search is conducted for any prior pending confusingly similar marks.
  • Trademark applications for hemp cultivation and production, if allowed, will require proof of authorization and licensure in accordance with a plan approved by the U.S. Department of Agriculture.

Federal Trademark Registration Considerations and Options

Although marijuana products and services (i.e., products and services that “touch the plant”) and certain hemp-based products are currently illegal under federal law, making their associated marks ineligible for federal trademark registration protection, there are still certain cannabis-related activities that are legal and thus eligible for federal trademark registration.

Examples of legal activities include:

  • Providing informational services related to cannabis or marijuana-related goods and services.
  • Clothing, including t-shirts and hats, featuring a cannabis-related trademark.
  • Educational programs in the fields of cannabis and CBD, including for health benefits and therapeutic uses of medical cannabis and CBD.
  • Providing an internet news portal featuring links to current events, information, commentary, non-downloadable publications in the nature of brochures, articles, and non-downloadable multimedia files containing video, audio or text in the fields of cannabis or cannabis news.
  • Online journals, namely blogs featuring information about cannabis.
  • Entertainment services, namely, providing podcasts featuring medical and industry experts in the field of cannabis and medical marijuana.

If a brand owner secures federal trademark registration protection for marks for legal activities, including those listed above, those trademark registrations and rights may arguably preserve future product and service expansion under the same registered mark for “related” goods and/or services that are unlawful as of the trademark application filing date, but later become lawful, including CBD infused foods and nutritional supplements and marijuana itself.

Why? Because trademark law protects consumers from “source confusion.”

  • For example, if a brand owner adopts the trademark N-DuraRun for running shoes, another party may not adopt the same or confusingly similar mark for running pants because consumers would likely be confused as to the source of running shoes and running pants if offered under the same trademark by different parties.
    • It is not confusion as to what a consumer is buying (“I thought I was buying running shoes… instead I mistakenly purchased running pants…”). Rather, it is confusion as to the source of the products (“I purchased EnDuraRun brand running pants because I thought they were made by the same company that makes N-DuraRun brand running shoes!”).
    • A question to ask is “Would the average consumer reasonably believe that the parties’ respective goods are of the type that would originate from the same source?”
      • If the answer is “yes” and if the parties’ respective marks are confusingly similar, there may be a likelihood of consumer confusion as to the source of the parties’ respective goods.

For example, if a company provides informational services in the field of cannabis and cannabis derivatives, including CBD infused foods, and/or provides foods and nutritional supplements featuring hemp seed protein powder and hemp seed oil, and it secures federal trademark registration protection for its trademark for those goods and/or services, that existing federal trademark registration and rights may arguably preserve the brand owner’s right to use and register the same mark for “related” goods and services, which could include CBD-infused foods and nutritional supplements if/when those goods become legal. That is so because the average consumer would arguably believe that informational services about CBD infused foods and CBD infused foods themselves would originate from the same source and also believe that foods and nutritional supplements featuring hemp seed protein powder and hemp seed oil and foods and nutritional supplements featuring hemp-derived CBD would originate from the same source.

Source confusion is the crux of trademark law.

Therefore, securing federal trademark registration protection now for goods and services that are lawful can preserve future trademark rights for cannabis-related products and services that are currently unlawful and may avoid losing valuable trademark rights to third parties.

As companies prepare for the potential federal legalization of all forms of cannabis, securing federal trademark registration now for brand names for goods and services that are currently legal is vital for protecting valuable company assets, current and future business opportunities, and future growth, and it is possible as long as brand owners understand the current status of the regulatory landscape and the intricacies of trademark law.

Other Forms of Intellectual Property Protection

In addition to trademark and federal trademark registration protection, there are other intellectual property protections available for marijuana, hemp and cannabis businesses, including:

  • State trademark filings. In states that have legalized cannabis, state trademark registrations may be available.
  • Common law trademark rights. In states that have legalized cannabis, common law trademark rights may be available.
  • Patent protection. Patent protection may be secured for various inventions, including plants, such as new strains of the cannabis plant, and methods of cannabis hydration and lighting.
  • Trade secrets. Trade secrets can protect certain aspects of a business, including formulas, processes or methods, that are not generally known or reasonably ascertainable by others and that can help a business obtain an economic advantage over competitors or customers. To be eligible as trade secrets, however, a business owner must take the necessary steps to legally protect them or they will be lost.
  • Copyrights. Copyright protection may be secured for certain company creative works, including trademark logos (artwork), written materials, photographs and software.

As the laws governing the cannabis industry continue to evolve, including trademark, FDA and banking laws and regulations, all interested parties, including cannabis business owners, law firms and investors, must stay abreast of the rapidly changing legal landscape to maximize business growth opportunities, ensure proper legal and regulatory compliance, and avoid having their businesses go up in smoke.


Notice: This article is for educational purposes only, is not legal advice and should not be substituted for retaining an attorney.

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Medical Cannabis in Georgia: Federal Policy Effects on State Industries

By Reggie Snyder
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Under the U.S. Drug Enforcement Administration’s (DEA) Controlled Substance Act (CSA), drugs are classified into five distinct schedules depending upon their acceptable medical use and their overall potential for abuse or dependency. The DEA currently lists cannabis as a Schedule I drug, which the CSA defines as drugs having no currently accepted medical use and a high potential for abuse. It appears, however, that the DEA may soon reconsider its current Schedule I classification of cannabis.

This article considers how the DEA’s potential reclassification of cannabis potentially could affect Georgia’s medical cannabis industry. Specifically, the article discusses: (1) how Georgia medical cannabis distributors would operate within this new regulatory framework; (2) how this change would affect registered Georgia patients who are either currently purchasing medical cannabis or are planning to do so; and (3) whether this reclassification would cause big pharmaceutical companies to enter Georgia’s medical cannabis market, and if so, how.

The DEA’s Reclassification of Cannabis Would Likely Affect the Regulatory Framework of Georgia’s Medical Cannabis Industry

On April 2, 2019, Georgia became the 34th U.S. state to legalize cannabis for medicinal use when the Georgia Legislature passed House Bill 324 (“HB 324”), which recently took effect on Monday, July 1, 2019. In Georgia, medical cannabis is defined as a “low-THC oil” that contains 5% or less of tetrahydrocannabinol (THC)—the psychoactive chemical in cannabis that causes a “high.”

Georgia State Flag

If the DEA reclassifies cannabis, the regulatory framework of Georgia’s medical cannabis industry under HB 324 would likely be affected. For instance, depending on how the DEA elects to reclassify cannabis, low-THC oil products manufactured and sold in Georgia could become subject to the U.S. Food and Drug Administration’s (FDA) costly, complicated and time-consuming drug approval process. Then, any low THC oil products that the FDA approves will be subject to federally mandated quality, efficacy and potency standards for FDA-approved drugs. Also, any federal standards that stem from the DEA’s reclassification of cannabis will trump any conflicting provisions in HB 324 or any other conflicting rules, regulations or procedures established by the Georgia Access to Medical Cannabis Commission (GAMCC), the seven member state agency responsible for promulgating and implementing the state-based rules, regulations and procedures necessary to produce and distribute low-THC oil in Georgia, and the Georgia State Board of Pharmacy (Pharmacy Board). However, even if the DEA reclassifies cannabis, the following state regulatory framework established by HB 324 will remain unaffected:

  • The GAMCC will likely continue to oversee the state’s medical cannabis industry.
  • The following two different types of dispensary licenses issued under the legislation will still likely remain: retail outlets (issued by the GAMCC) and pharmacies (issued by the Pharmacy Board).
  • Licensed dispensaries will still likely not be located within a 1,000-foot radius of a school or church, and licensed production facilities will still not be located within a 3,000-foot radius of a school or church.
  • Pharmacists who dispense low-THC oil will still likely have to review each registered patient’s information on the state’s Prescription Drug Monitoring Program (PDMP) database to confirm that they have been diagnosed with one or more of the 17 approved conditions and diseases. The legislation does not require retail outlet dispensaries to review patient information on the PDMP database or employ a pharmacist to dispense the drug.
  • Registered patients will still likely be prohibited from vaping low-THC oil or inhaling it by any other electronic means. The legislation does not expressly prohibit the use of other, non-electronic delivery methods of low THC oil such as pills or nasal spray.
  • All licensed dispensaries (and all licensed production companies) will still likely be subject to an “on-demand” inspection when requested by the Georgia Bureau of Investigation (GBI), the GAMCC, the four-member Medical Cannabis Commission Oversight Committee (MCCOC), or local law enforcement. The GAMCC and the Georgia Drugs and Narcotics Agency (GDNA) will also still likely be able to conduct one, annual inspection of dispensary locations. And, upon request, licensed dispensaries will still likely be required to immediately provide a sample of their low-THC oil for laboratory testing to the GBI, GAMCC, MCCOC, GDNA or local law enforcement.
  • All licensed dispensaries (and all licensed production facilities) will still likely be required to utilize a GAMCC-approved seed-to-sale tracking software.
  • All licensed dispensaries (and all licensed production companies) will still likely be prohibited from advertising or marketing their low-THC oil products to registered patients or the public. However, they will still likely be allowed to provide information about their products directly to physicians, and upon request, physicians will still likely be allowed to furnish the names of licensed dispensaries (and licensed production companies) to registered patients or their caregivers.

The DEA’s Reclassification of Cannabis Would Likely Affect the Availability of Low THC Oil

To date, approximately 9,500 Georgians are registered with the state’s Low-THC Registry, which allows them to purchase low-THC oil from licensed dispensaries. Since the legislation’s passage, the number of registered patients has increased significantly and continues to steadily rise. If the DEA reclassifies marijuana, this patient number will likely increase at an even faster rate because the public will likely perceive reclassification as an acknowledgement by the federal government that marijuana possesses health and medicinal benefits. If that occurs, statewide demand for low THC oil could quickly outstrip the supply.

Georgia Gov. Brian Kemp
Image: Georgia National Guard, Flickr

Under HB 324, the GAMCC is tasked with ensuring that the state has a sufficient number of retail outlet dispensaries across the state to meet patient demand but is limited to issuing only six production licenses. As the number of registered patients continues to grow, the GAMCC may be forced to recommend amendments to the statute allowing it to issue additional production licenses to increase the state’s supply of low THC oil, and depending on how many additional patients are added to the state’s Low-THC Registry, the GAMCC may also have to issue additional dispensary licenses to keep up with patient demand by relaxing the geographic limitations on locating dispensaries.

Thus, the DEA’s reclassification of cannabis likely would affect the amount of low THC oil available to registered patients in Georgia.

The DEA’s Reclassification of Cannabis Would Likely Cause Large Pharmaceutical Companies to Enter Georgia’s Medical Cannabis Market

Large pharmaceutical companies typically manufacture, market, sell and ship their products on a national and international scale. Given cannabis’ current status as a Schedule I drug under the CSA, these companies have largely steered clear of the burgeoning medical marijuana industry because of the inherent risk of violating federal law. If the DEA reclassifies cannabis, that risk will be diminished greatly, and the companies therefore will likely decide to enter the market by acquiring existing medical marijuana companies with established national or state-level medical cannabis brands.

If the DEA reclassifies cannabis, Georgia’s medical cannabis market will likely be affected in multiple ways.Depending on how the DEA reclassifies cannabis, low-THC oil in Georgia could be subject to stringent federal standards, including the FDA’s complex and expensive drug approval process. Georgia medical cannabis companies will likely not be accustomed to complying with such federal regulations. Large pharmaceutical companies, on the other hand, are very accustomed to dealing with the federal government, including FDA drug approval. So, if the DEA reclassifies marijuana, pharmaceutical companies will likely view reclassification as a tremendous opportunity to enter the Georgia market by leveraging their experience and institutional knowledge dealing with federal law to acquire or partner with a licensed Georgia cannabis company that has an established brand of low -HC oil.

Entering Georgia’s medical cannabis market won’t be easy, however, because HB 324 prohibits licensees from transferring their licenses for five years and requires that the original licensee be a Georgia business. But, HB 324 does not prohibit them from selling their businesses, which necessarily includes any licenses the business owns. Purchasing a licensed Georgia medical cannabis company requires payment of a production license business transfer fee. The fee for the first sale of a business with a Class 1 production license is $100,000 and the fee for a Class 2 license is $12,500. The fee for the second sale is $150,000 for a Class 1 production license, and $62,500 for a Class 2 license. The fee for the third and fourth sales is $200,000 for a Class 1 production license, and $112,500 for a Class 2 license.

Conclusion

If the DEA reclassifies cannabis, Georgia’s medical cannabis market will likely be affected in multiple ways. Specifically, depending on how the drug is reclassified, the regulatory framework for medical cannabis companies likely will change to include both state and federal requirements, potentially including the FDA’s complex drug approval process. Also, the amount of low-THC oil available for registered patients to purchase likely will be diminished precipitating the need for the GAMCC to modify the statute to allow for issuing additional production licenses and relaxing the geographic limitations on locating dispensaries. Finally, large pharmaceutical companies likely will attempt to enter Georgia’s medical cannabis market by purchasing existing, licensed Georgia companies that have established low-THC oil brands.

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Hemp: A Growing Market Ripe for Protection

By David Holt, Whitt Steineker
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With recent changes in federal and state law, and growing consumer awareness, the long-dormant hemp industry may finally be able to take heed of George Washington’s advice, “Make the most you can of [India Hemp] … The Hemp may be sown anywhere.”1

Hemp has a long and varied history in the United States. Throughout his lifetime, George Washington cultivated hemp at his Mount Vernon Estate, and, for a time, Washington even considered replacing tobacco with hemp as the Estate’s primary cash crop.2 Like Washington, Thomas Jefferson grew hemp at Monticello and his lesser-known Poplar Forest plantation.3 Both Founding Fathers primarily used the hemp cultivated on their property for making household items like clothing, rope, and fishing nets.

From the colonial era until 1970, hemp was routinely cultivated across the United States for industrial use. But, with the passage of the Controlled Substances Act (“CSA”) in 1970, U.S. hemp production ceased.4 The CSA banned cannabis of any kind, eliminating any distinction between hemp and other types of cannabis. As a result, hemp production became illegal in the United States.

A wide variety of hemp products can be found throughout the Untied States markets. Image courtesy of Direct Cannabis Network

More recently, the U.S. government finally began to ease restrictions on hemp cultivation and production. The 2014 Farm Bill introduced the USDA Hemp Production Program.5 Under the Program, universities and state departments of agriculture are allowed to cultivate hemp if:

  1. The industrial hemp is grown or cultivated for purposes of research conducted under an agricultural pilot program or other agricultural or academic research; and
  2. The growing or cultivating of industrial hemp is allowed under the laws of the state in which such institution of higher education or state department of agriculture is located and such research occurs.

The 2014 Farm Bill did not remove hemp from the auspices of the CSA, nor did it address the continuing application of federal drug control statutes to the growth, cultivation, manufacture, and distribution of hemp products.

The 2018 Farm Bill built upon the deregulation that began in 2014.6 Although both the 2014 and 2018 bills define hemp as the plant Cannabis sativa L. and any part of that plant that has a delta-9 THC concentration of 0.3% or less by dry weight,7 the 2018 Farm Bill took the additional step of removing hemp from the federal list of controlled substances and categorized it as an agricultural product. As a result, the production of hemp is now subject to USDA licensure and regulation. However, until the USDA completes its rulemaking process for implementing hemp regulation, hemp production remains illegal unless done in compliance with the terms of the earlier 2014 bill.8 For the time being, legal cultivation of hemp still must occur in a state that has authorized hemp research9 and the researcher must be either an institute of higher education or a state department of agriculture (or its designee).

With the increasingly favorable changes to federal and state law allowing for the expanded cultivation and production of hemp in the United States, the market is expected to grow significantly in the coming years. In 2014, the U.S. industrial hemp market was estimated at approximately $504 million.10 In only one year after the passage of the 2014 Farm Bill, the industrial hemp market was estimated to have increased by over $95 million to almost $600 million. By 2017, the worldwide market for industrial hemp was estimated to be $3.9 billion and growing at a compound annual growth rate (CAGR) of 14%.

In addition to favorable changes in U.S. law, the hemp market is benefiting from growing consumer awareness and demand for hemp-based food products.11 High in omega-3 and omega-6, amino acids and protein, hemp is growing in popularity as a cooking oil, dairy substitute, flour source and bakery ingredient. Among other things, hemp is considered by some to provide positive health effects for those seeking help with insulin balance, cardiac function, mood stability, and skin and joint health.

Although hemp cultivation is now allowed in the U.S.—at least for research purposes—and the market is forecasted to rise steadily under growing demand for hemp-based products, broad access to viable, legal seeds continues to present a challenge for researchers and commercial growers. In order to legally implement authorized cultivation programs and take economic advantage of a swiftly growing market, farmers must have access to seeds that can be guaranteed to consistently produce plants that fall under the legal definition of hemp. In an attempt to alleviate the problem, several states, including California, Indiana, Maine and Oregon, have implemented programs to license or certify compliant seed distributors and producers.

The importance of hemp seed availability and development has also been recognized on the federal level. On April 24, 2019, the USDA Agricultural Marketing Service published a Notice to Trade announcing that the USDA’s Plant Variety Protection Office (“PVPO”) is now accepting applications of seed-propagated hemp for protection under the Plant Variety Protection Act (“PVPA”). Among other things, the PVPA provides intellectual property protection to breeders who have developed new varieties of seed-propagated plants. Under the new guidance, breeders of new hemp varieties can now secure protection pursuant to the PVPA. Those holding a certificate of protection from the PVPO can exclude others from marketing or selling a registered hemp variety and manage how other breeders and growers use their protected variety.

The process for requesting protection under the PVPA is fairly straightforward. Breeders, or their attorneys, must complete all application forms, pay the required fees,12 submit a distinct plant variety name, and provide a deposit of at least 3,000 viable and untreated seeds of the variety (or 3,000 seeds of each parent variety for a hybrid). One required form for a completed PVPA application is the Objective Description of Variety form.13 This form provides a series of questions that identify the distinct aspects of the variety in question, including, among other things, plant and leaf characteristics, seed properties and anticipated uses. Upon receipt of the completed application and fees, the PVPO examines the application to determine whether the listed plant variety is new, distinct, uniform, and stable. If the PVPO determines that the requirements are satisfied, it will issue a certificate of protection granting the owner exclusive rights to the registered variety for a period of 20 years.Now is the time for farmers, researchers, and hobbyists alike to take advantage of the expanded opportunities available for protecting intellectual property for proprietary hemp varieties.

Although hemp has traditionally been used in the textile and fiber industries, the estimated 17.1% CAGR in the hemp seed segment is being driven by the increase in demand for hemp oil, seedcakes, and other food and nutraceutical products. These products are primarily derived from the hemp seed as opposed to its fibers. Presently, hemp seeds contain approximately 30-35% oil, of which approximately 80% is essential fatty acids, and 25% crude protein.14 Under the new PVPA guidelines, if a breeder is able to cultivate a sustainable plant that increases the plant’s production of the desirable compounds, he or she could achieve a significant position in the growing market.

The protection provided by the newly expanded PVPA builds upon other avenues of intellectual property protection now available to hemp breeders and growers. In addition to the PVPA, plants meeting certain criteria may also be protectable under a plant patent or a utility patent, both of which are administered by the U.S. Patent and Trademark office. Generally speaking, PVPA protection may be available for seeds and tubers, plant patent protection applies to asexually propagated plants, and utility patent protection may be available for genes, traits, methods, plant parts and varieties.15

With a market that is expected to grow substantially in the near future, and with the passing of increasingly friendly federal and state legislation, the hemp industry is on the cusp of significant expansion. Now is the time for farmers, researchers, and hobbyists alike to take advantage of the expanded opportunities available for protecting intellectual property for proprietary hemp varieties.


  1. George Washington to William Pearce, 24 February 1794.
  2. George Washington and Agriculture, https://www.mountvernon.org/library/digitalhistory/digital-encyclopedia/article/george-washington-and-agriculture, last visited May 14, 2019.
  3. Hemp, Thomas Jefferson Encyclopedia, https://www.monticello.org/site/research-and-collections/hemp, last visited May 14, 2019.
  4. Controlled Substances Act, Pub.L. 91-513, 84 Stat. 1236.
  5. Agricultural Act of 2014, Pub.L. 113-79.
  6. Agriculture Improvement Act of 2018, Pub.L. 115-334.
  7. Any plant having a THC content in excess of 0.3% is considered marijuana and remains illegal as a controlled substance under the CSA.
  8. See, e.g., https://www.ams.usda.gov/rules-regulations/farmbill-hemp.
  9. To date, at least 41 states have passed legislation authorizing hemp cultivation and production programs consistent with federal law. As of the date of this article, those states that have not enacted legislation allowing the cultivation of hemp for commercial, research, or pilot purposes include: Connecticut, Georgia, Idaho, Iowa, Louisiana, Mississippi, Ohio, South Dakota, Texas, and the District of Columbia.
  10. Industrial Hemp Market – Market Estimates and Forecasts to 2025, Grand View Research, https://www.grandviewresearch.com/industry-analysis/industrial-hemp-market, last visited May 14, 2019.
  11. Currently, the Food and Drug Administration prohibits hemp-based CBD in food and beverages. However, the FDA has set a public hearing to discussing the legalization of CBD in food and beverages for May 31, 2019.
  12. The PVPA application fee is currently $4,382 with an additional fee of $768 due upon issuance of a certificate of registration.
  13. The Objective Description of Variety form for Hemp (Cannabis sativa L.) can be found at https://www.ams.usda.gov/sites/default/files/media/113HempST470.pdf.
  14. Hemp Seed (Cannabis sativa L.) Proteins: Composition, Structure, Enzymatic Modification, and Functional or Bioactive Properties,Sustainable Protein Sources (Ch. 7), R.E. Aluko (2017).
  15. Regulations are currently under consideration that could expand or otherwise modify the scope of protection available under each of the enumerated intellectual property protection schemes. Consult a licensed attorney for questions regarding the specific program that may apply to a particular set of circumstances.