DRUG ENFORCEMENT AGENCY INTERIM FINAL RULE ON HEMP Q&A

Bridge West CannaBlog Guest Contributor, Edward R. Culhane Esq., of Culhane Law Firm

1. What is the DEA Interim Final Rule (IFR) on Hemp?

On August 20, 2020, the United States Drug Enforcement Agency (DEA) published a notice in the federal register of an Interim Final Rule (IFR) that conforms the DEA’s existing rules to the hemp provisions of the Agricultural Improvement Act of 2018 (commonly referred to as the “Farm Bill”). The IFR specifies that hemp extracts that exceed 0.3% of delta-9 THC on a dry weight basis are a Schedule I controlled substance. Additionally, the IFR specifies that any synthetically produced tetrahydrocannabinol “remains” a Schedule I controlled substance. You can read the IFR here.

2. When was the IFR effective?

The IFR became effective and enforceable on August 21, 2020.

3. Did the IFR say hemp extracts with a delta-9 THC content over 0.3% are illegal? Does this include in-process materials?

Yes. There is no safe harbor for in-process materials. If the in-process materials exceed 0.3% of delta-9 THC, they are Schedule I controlled substances under the IFR.

4. Does the IFR affect processing of hemp grown or produced for grain (seeds to be made into food products) or fiber?

No. Typically, hemp grown for grain or fiber has such a low delta-9 THC content that there is little risk of a “hot” crop that exceeds 0.3% of delta-9 THC. Additionally, the processing of seeds and fiber into products typically does not involve concentrating THC levels. The parts of grain and fiber plants that are processed into bulk products and finished products typically contain no detectable levels of delta-9 THC.

5. Did the IFR say that hemp-derived CBD is illegal?

Technically, no. But there is (currently) no practical way to produce CBD from hemp without handling “hot” in-process extracts and, therefore, violating the IFR. Under the IFR, any hemp extract with a delta-9 THC level that exceeds 0.3% is a controlled substance. There is no exception or safe harbor in the IFR for in-process materials. As currently drafted, the IFR makes it illegal under federal law to extract hemp and process it into CBD if the in-process materials at any time exceed 0.3% delta-9 THC, even temporarily. Unfortunately, under the IFR, it does not matter whether the extracts are subsequently diluted or remediated to bring the delta-9 THC level below 0.3%.

6. Can CBD be produced without the delta-9 THC level of in-process materials temporarily exceeding 0.3%?

Not with currently technology and currently available genetic strains. Currently available strains of hemp that produce CBD in sufficiently high levels to make extraction and refinement economically feasible also express THC. Generally, the higher the CBD content, the higher the THC content. While not a one-to-one relationship, available strains of THC-free hemp plants simply don’t have enough CBD to make refinement economically feasible.

It is important to recognize that extraction processes to produce CBD do not create new or additional THC, and they do not increase the total amount of THC in the material being processed. The extraction and refinement processes simply remove unwanted parts of the plant, such as bulky plant structure and materials like chlorophyll and wax during processing. As these unwanted parts of the plant are removed, the remaining parts (like CBD and THC) constitute a higher percentage of the remaining material. Unfortunately, current technology does not allow immediate removal and destruction of THC. It is not that simple. Instead, the production of CBD involves many stages of processing the hemp to separate and remove unwanted materials. At various stages of this process of repeated extraction, separation and concentration, the cannabinoids are concentrated and the delta-9 THC concentration exceeds 0.3% on a w/w basis notwithstanding the fact that the delta-9 THC level in the initial source hemp material was at or lower than 0.3% THC.

Accordingly, producing hemp extracts necessarily involves dealing with and managing THC levels.

7. How can you measure hemp extracts like crude oil and distillate “on a dry weight basis” anyway?

The Farm Bill establishes the definition of “hemp” and removes hemp from the federal Controlled Substances Act. Under the Farm Bill, “hemp” means:

“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 concentration of not more than 0.3 percent on a dry weight basis.” (emphasis added)

At the risk of getting technical, “dry” is not the same thing as “wet.” Clearly, crude oil and distillate oil is not “dry” and cannot be measured “on a dry weight basis.” Which leads many people, and apparently the DEA, to test the THC content in hemp extracts that are wet on a weight to weight basis (w/w). But that is not what the Farm Bill says, it says dry weight basis. The only honest way to approach this “dry weight basis” drafting ambiguity in the Farm Bill is to acknowledge that Congress intended to impose a THC limit on hemp and hemp products, while allowing for the legal production of hemp “extracts,” an item Congress expressly legalized in the Farm Bill and expressly removed from the federal Controlled Substances Act.

The USDA and DEA could resolve this ambiguity by promulgating rules that provide a safe harbor and regulate in-process materials. Instead, the USDA has declined to regulate extraction and processing of hemp, and the DEA took the position that any extract over 0.3% is a Schedule I controlled substance.

A safe harbor rule regulating in-process hemp materials while requiring remediation or dilution of delta-9 THC to 0.3% or lower in consumer products would respect the Congressional intent of facilitating a hemp industry that can produce “extracts” while keeping intoxicating hemp products out of the hands of consumers.

8. Since the IFR is a federal law, do you have to ship across a state border to trigger application of the IRF?

No. At the risk of oversimplification, the concept of “interstate commerce,” which is the basis for federal jurisdiction of the Controlled substances Act, is much broader than simply crossing a state line. Manufacturing products that “affect” interstate commerce triggers the Commerce Clause of the United States Constitution, and therefore federal jurisdiction of the IFR, even if the products never leave the state in which they are produced.

Additionally, there is no safe harbor under the IFR. In-process materials with a delta-9 THC level exceeding 0.3% are a Schedule I controlled substance under the IFR. It does not matter whether the extracts leave the facility, though risk of enforcement or seizure by law enforcement is higher while transporting hot extracts. And if history is our guide, some states are much more hostile to hemp shipments than other states. So, if you are shipping hot extracts (not recommended), plan your route and understand the enforcement environment along that route.

9. Did the IFR say Delta-8 THC is illegal?

First things first. Delta-8 THC is not listed as a controlled substance under the federal Controlled Substances Act. However, each state has adopted variations of the federal Controlled Substances Act that may or may not list delta-8 as a controlled substance, and care should be taken to review state law on this topic.

According to the IFR, all synthetically produced tetrahydrocannabinols “remain” Schedule I controlled substances under the federal Controlled Substances Act. While the IFR did not specifically identify delta-8 THC, most methods of producing commercial quantities of delta-8 involve converting CBD isolate into delta-8, which conversion process might be considered a process of “synthesis” resulting in a synthetically-produced tetrahydrocannabinol.

However, there is a strong argument that the IFR’s position on hemp-derived synthetic tetrahydrocannabinols is simply not valid. The Farm Bill is clear that “hemp,” including hemp extracts, are not a controlled substance if the delta-9 THC level does not exceed 0.3%. Accordingly, delta-8 THC produced from lawful hemp is still “hemp” under the Farm Bill, even if it is synthetically produced. This is because the language of the Farm Bill created a broad exception from the federal Controlled Substances Act for hemp and its extracts and defined that exception only by delta-9 THC content, and nothing else.

Be aware, however, delta-8 THC is likely to draw law enforcement attention because it is an intoxicating substance derived from cannabis. One other possible avenue for enforcement is to treat delta-8 THC as an “analog” to delta-9 THC, and therefore a controlled substance. As of the date of this article, I am not aware of any instances or federal or state authorities deeming delta-8 THC to be an “analog” of delta-9 THC. While there are several valid and good faith arguments to be made as to why delta-8 is not an analog to delta-9, that enforcement position is a possibility.

While delta-8 THC is an exciting new product, it involves risk. Consult competent legal counsel and proceed with informed caution.

10. Who enforces the IFR?

The DEA’s IFR is a federal regulation that is primarily enforced by federal law enforcement authorities such as the DEA. Local law enforcement is generally not authorized to independently enforce or prosecute the federal Controlled Substances Act, including the IFR. However, local law enforcement may enforce the IFR, in conjunction with the DEA, as part of a regional or local multi-jurisdictional drug task force. Whether participation in a multi-jurisdictional drug task force will result in aggressive enforcement by local officials has yet to be seen but is not out of the realm of possibility.

11. What is the practical risk that the DEA will arrest processors and brokers with hot hemp extracts?

The text of the IFR specifically states that “[t]his interim final rule merely conforms the DEA’s regulations to the statutory amendments to the [federal Controlled Substances Act] that have already taken effect, and it does not add additional requirements to the regulations.” Further, subsequent news reports of communications from DEA officials suggest that the DEA does not consider hemp extracts to be an enforcement priority.

However, the IFR clearly articulates a position that hot hemp extracts are illegal, and therefore manufacturing hot hemp extracts is illegal. What was previously a gray area that received little or no law enforcement attention under the Farm Bill is now a black and white problem under the IFR. Veterans of the hemp industry remember previous actions by the DEA to wage the War on Drugs against the hemp industry and have been rightly conditioned to not trust the DEA. Only time will tell whether the DEA and its local law enforcement partners use the IFR to arrest hemp processors and brokers and/or seize their assets.

12. What are the penalties for a violation of the IRF?

The importation, cultivation, manufacture, distribution, sale, and the possession with the intent to distribute marijuana is illegal under United States federal law. It is also illegal to aid or abet such activities or to conspire or attempt to engage in such activities. The IFR specifies that hemp extracts that have a delta-9 THC content exceeding 0.3% constitute marijuana. Under the IFR, manufacturing and distributing “hot” hemp extracts is the same thing as manufacturing and distributing marijuana and subject to the same criminal penalties. Additionally, parties dealing with hot hemp extracts are at risk of civil asset forfeiture.

13. Are there ways for hemp processors and brokers to mitigate the risk of law enforcement?

Yes. Enforcement risk is a continuum. The highest risk activity is openly marketing and transporting bulk hemp materials with delta-9 levels exceeding 0.3% (commonly referred to as “hot” materials). While shipping hot products interstate is higher risk, shipping hot products intra-state may not be lower risk unless your state has specific hemp regulations allowing hot in-process hemp materials. The lowest risk on the enforcement continuum is to utilize extraction processing methods that limit handling of hot materials during extraction and processing, and to never allow hot extracts to leave your facility.

Common-sense processing procedures include labeling hot in-process materials as “IN PROCESS – NOT FOR SALE”, only storing in-process materials in large containers that are obviously unsuitable for consumer sales, and otherwise making it obvious (to a judge or jury) that your processing operation does not involve producing hot consumer products.

Additionally, you should review your website, social media feeds and marketing materials to remove references to THC levels that exceed 0.3%. Also, take down any COAs (certificates of analysis) for extracts that show a delta-9 THC level exceeding 0.3%.

14. I am a hemp processor. Will the IFR cause a problem for my bank?

Yes, you should expect your bank to scrutinize your operations and compliance policies regarding THC levels. Banks are prohibited by federal law from banking and processing funds derived from a criminal enterprise. While the impact of the IFR has yet to play out, I expect processors to have increased difficulty obtaining and maintaining banking relationships.

15. Does the IFR affect hemp farmers?

Yes, since the IFR may reduce the number of raw hemp buyers. The industry was already struggling to attain sufficient retail sales of consumer CBD products to support the volume of hemp grown in the United States. As the IFR likely suppresses hemp processing operations, it may reduce the demand from processors to acquire raw hemp, and by doing so drive down raw hemp prices even further. Additionally, there may be fewer hemp processors in the market, thereby reducing the number of hemp buyers.

Consult competent legal counsel and proceed with informed caution.

Edward R. Culhane is an experienced cannabis and hemp attorney focused primarily in the areas of venture capital, private equity, securities and mergers and acquisitions. Mr. Culhane is a cannabis and hemp industry veteran and is licensed to practice law in the states of California, Colorado, and Minnesota. You can reach him at edward@culhanelawfirm.com or (612) 483-5385. www.culhanelawfirm.com