Has the DEA painted itself into a corner on hemp based CBD? A legal analysis of the DEA’s current position.

As many of you know, the Hemp Industries Association, along with Centuria Natural Foods, Inc. and RMH Holdings, LLC (the Petitioners), are suing the DEA over the recently enacted Marihuana Extract Rule (the Rule). The case is pending before the 9th Circuit Court of Appeals in San Francisco and the outcome- good or bad- will impact the hemp and CBD industries. I’ve written about the Rule here and discussed the DEA’s clarification of it here. Kudos to attorneys Bob Hoban, Patrick Goggin, and Garrett Graff of the Hoban Law Group for their hard work and diligent efforts representing the Petitioners. I discussed the case with Bob Hoban before it was filed (one of my domestic CBD clients was nearly a participant in the case), and with all three attorneys individually after it was filed. As I will describe, I am cautiously optimistic that the Court will enter a favorable ruling. Certainly, the case is in good hands. That being said, it is important to understand the DEA’s current position, which it has now articulated in the brief it filed on June 2, 2017. In this post I will discuss pertinent parts of the brief, primarily focusing on the DEA’s legal position, and conclude with my view that the DEA has painted itself into a legal corner.

In particular, I intend to discuss a few things. First of all, and perhaps most importantly, I’m going to talk about how the DEA lent further support to the “source theory” of CBD legality that I have articulated in the past. The source theory is simply the notion that CBD is legal, or not, based on its source. I believe that the DEA’s recognition of this in a legal brief is an unqualifiedly good thing and I want to underline and bring attention to it. Secondly, the the DEA engages in circular reasoning in its brief. This is obviously a bad thing in and of itself, particularly if it gets traction with the Court. But it also belies the absence of a strong legal position. I don’t intend to get overly worked up about this tactic; however, I believe it’s important to understand the DEA’s obfuscation strategy because it’s also being employed by some other powerful parties (read Big Pharma), but that’s for a future post. Finally, I don’t intend for this to be a comprehensive “blow by blow” of all the DEA’s arguments. There are some very interesting legal issues presented by the case regarding Treaties with foreign countries, legal standing to sue, administrative rule making procedure, etc. These are mostly procedural in nature and not much interest to nonlawyers. Certainly, it’s possible that the case could turn on one of these issues, but none of them address hemp or cannabinoids directly. So I’m not going to discuss them in this post.

That being said, I think it’s important to begin by addressing, very generally, a few overarching procedural issues that I think will clarify things for the non-lawyers reading this blog. I’ll be brief. The case was brought in Federal Court. Specifically, it was filed in the 9th Circuit Court of Appeals, located in San Francisco. This Court, along with the other 12 Circuit Courts throughout the country, are one level below the Supreme Court. The case was brought before the 9th Circuit because, among other reasons, the Petitioners (ie, the Hemp Industries Association and its co-parties) are asking the Court to hold the DEA in contempt of a prior injunction it issued that prohibited “enforcement of [a Final Rule regarding hemp] with respect to non-psychoactive hemp or products containing it.” In other words, the Court ordered the DEA not to enforce its Rule against non-psychoactive hemp and its products. That case was Hemp Industries Ass’n, et al v. DEA, 357 F.3d 1012 (9th Cir. 2004). The new case is really an extension of that old one. The Petitioners sued the DEA (the Respondent) primarily seeking a Court order striking down the Rule. The Petitioners filed their brief, “Petition for Review of Rules of Drug Enforcement Administration” on April 3, 2017. You can read it by clicking here. The DEA responded by filing a response brief on June 2, 2017. You can read it by clicking here. The DEA’s response brief is the most recent thing to have occurred in the case and is what I’m discussing in this post. The Petitioners have until June 16, 2017 to file a reply brief. This is the current “procedural posture” of the case. Once the briefs have all been filed the Court may schedule a hearing so that the attorneys can argue their positions before the Court. Alternately, the Court has the authority to issue a ruling without a hearing based on the briefs.

Now, on to the meaty stuff. First of all, as I mentioned above, the DEA acknowledged the source theory in its brief. Of course, it didn’t call it the “Source Theory” or even state its premise very plainly. (This is part of the circularity I’m going to address below.) But it did base the core of its argument on it. In fact, the DEA’s brief cannot be read without assuming that the source theory forms the basis of its argument. Take this quote, for instance: “To the extent that a product consisting solely of exempt parts of the cannabis plant contained trace amounts of cannabinoids, such product would not be included in the new drug code.” (P.27) Two pages prior to that, in footnote, the DEA states: “DEA’s Rule does not control cannabinoids in their own right.” On page 29 it states: “DEA is not seeking to schedule cannabinoids.” In other words, what the DEA is saying is that cannabinoids (except THC) are not illegal substances in and of themselves and a product consisting solely of exempt parts of the cannabis plant (read ‘hemp oil’) containing trace amounts of cannabinoids is not illegal.

But, wait. What about the “trace amount” language? It’s all fine and good for the DEA to acknowledge the source theory, but what good is a cannabinoid hemp oil if it only contains “trace” amounts of CBD? Taken alone, without reference to the Agricultural Act of 2014 (the “Farm Act”) (7 U.S. Code § 5940 – Legitimacy of Industrial Hemp Research) that I’m about to discuss, this acknowledgement of the source theory by the DEA would be a pyrrhic victory- totally unhelpful. But, let’s think about this for a second before moving to the Farm Act piece of this issue because it’s arguably the cornerstone of the case and the future of cannabinoid hemp oil. The DEA specifically said that cannabinoids (except THC) are not part of the Rule in and of themselves. This is a stunning retreat from its initial position that cannabinoids are governed by the Rule. The Rule itself actually incorporates cannabinoids into the very definition of “marihuana extract”. As written, the mere presence of even one cannabinoid in a cannabis extract brings it within the purview of the Rule. The DEA was explicit about this in its defense of the Rule. As recently as December, 2016, DEA acting Administrator Chuck Rosenberg stated: “[I]f it were possible to produce from the cannabis plant an extract that contained only CBD and no other cannabinoids, such an extract would fall within the new drug code and therefore remain federally illegal.” Then, a mere three months later, the DEA backed off and modified its position with a Clarification that accepted the source theory for the first time. The DEA admitted in its clarification that non-THC cannabinoids sourced from the exempt parts of the cannabis plant weren’t illegal. It stated: ” If a product consisted solely of parts of the cannabis plant excluded from the CSA definition of marijuana, such product would not be included in the new drug code (7350) or in the drug code for marijuana (7360).” I discuss the DEA’s abrupt turnabout here.

No one knows why the DEA changed its position and accepted the source theory. It was a huge, if largely overlooked, victory for the CBD and cannabinoid industry. My guess is that the DEA changed its position because of the Petitioners’ case. Once you realize that (a) cannabinoids are not independently scheduled illegal substances (except THC), and (b) there are parts of the cannabis plant that are specifically excluded from the definition of cannabis (ie, that are lawful) that contain cannabinoids, then you cannot maintain a coherent argument that a cannabinoid is an illegal substance in and of itself. It just doesn’t work. As Supreme Court justices sometimes say, the argument “won’t write”. (There’s a phenomenon that occurs where a Justice will sometimes decide in advance how she is going to rule on a case but when she sits down to write the legal opinion the decision cannot be maintained because the argument is flawed. It won’t “write” and requires the decision to be revisited.) I think that’s what happened to the DEA. Its argument was flawed so it had to concede and accept the source theory.

Now, back to the trace amounts issue. I can already hear people saying that you can’t derive but trace amounts of cannabinoids from the excluded parts of the plant (the mature stalks and non-germinating seeds). That may be true. In fact, from a botanical perspective it’s probably true and it’s exactly what the DEA said. While admitting that CBD was lawful if derived from the excluded part of the plant, it went to pains to explain that CBD is not present in these parts of the plant. In fact, that has become its primary argument. The DEA’s revised position, set forth in its brief at pages 26 and 27, is that: (a) the Rule applies to extracts containing one or more cannabinoids derived from cannabis; and (b) cannabinoids are found in the parts of the plant that are illegal (ie, not excluded from the definition of marijuana); and (c) cannabinoids are not found in the parts of the plant that are lawful (ie, excluded from the definition of marijuana) except in trace amounts; thus (d) cannabinoids are illegal. Actually, it never quite goes that far. It leaves the obvious logical conclusion (that cannabinoids are illegal) hanging. It subtly implies the conclusion. But it never just states directly that cannabinoids are illegal. The reason it doesn’t is because it admitted in its clarification that cannabinoids are lawful if derived from the excluded parts of the plant. But, according to the DEA the excluded parts of the plant don’t contain cannabinoids; only the illegal parts of the plant contain them. So, they must be illegal. But, they’re not illegal if they’re from the excluded parts of the plant. And so on and so forth. It’s a classic circular argument. The DEA would love to say that cannabinoids are illegal, but it can’t. So, instead, it tacitly admits that they’re legal in a highly specific and limited way, so limited, in fact, that the scenario in which they’re legal doesn’t actually exist. Thus, the implication is that they are, in fact, illegal. It’s as if my son asked me to buy him a Ferrari and I said no. And he said, but what if you had a billion dollars, would you then buy me one? And I said, “sure son, if I had a billion dollars I’d buy you a Ferrari. But, I’m never going to have a billion dollars so you can’t have a Ferrari.” I have just agreed that he can have a Ferrari. It’s never going to happen, but from a purely logical, legal standpoint, I’ve agreed to it.

So, what’s the point? If my son isn’t going to get a Ferrari unless I have a billion dollars and I’m never going to have a billion dollars, then why would I give it a second thought? If CBD is legal only in situations that never occur in real life, then it’s actually illegal, at least from a practical standpoint, right? Well, the point is that there is an entirely other scenario, totally downplayed by the DEA, in which significant quantities of cannabinoids can be derived from cannabis that is excluded from the definition of marijuana. Of course, I’m talking about industrial hemp.

Industrial hemp, lawfully grown in accordance with a State’s pilot research program that is itself compliant with the Farm Act, is excluded from the definition of marijuana. There is no question that cannabinoids can be sourced from the flowers and leaves of the lawfully cultivated industrial hemp plant (which I’m going to call “hemp” for brevity). And there’s no question that hemp is legal. And, the DEA admitted in both its clarification and brief that cannabinoids from an excluded part of the plant are lawful. Thus, the only logical conclusion that can be drawn is that cannabinoids (other than THC) sourced from hemp are lawful. Crucially, this doesn’t fit into the DEA’s circular argument. And the DEA knows it. It makes no effort in its brief to argue that hemp based cannabinoids are illegal. In fact, it quickly disposes of this issue by stating that “Where the Agricultural Act provision applies, it expressly overrides contrary provisions of the CSA” (referring to the Controlled Substances Act). It clearly wants to sweep this under the proverbial rug and move on. In fact, the DEA completely rolls over on this issue. For good reason, though. It has no valid argument that cannabinoids from hemp are illegal.

So that leaves things in an interesting place. It’s conceivable that the Court will strike down the Rule. And that’s an obvious victory- a home run that accomplishes the primary purpose for filing the case. However, the Court could also uphold the Rule. This is because the DEA’s argument is that the Rule does not apply to the Farm Bill. And, it has admitted that cannabinoids derived from lawful sources are themselves lawful. The DEA is essentially arguing that the Rule shouldn’t be declared void because it does not interfere with the activities that the Petitioners are complaining about. According to the DEA the Rule isn’t the result of an unconstitutional overreach into the realm of lawmaking. The Rule is simply an administrative function to better categorize activities that were already illegal. It doesn’t interfere with the Petitioner’s legal activities. The Court may take the DEA at face value on that assertion and uphold the Rule. However, and importantly, if it does so it seems likely that it will clarify when cannabinoid mixtures are lawful. Presumably, it will take the DEA’s word that they are lawful when they come from an excluded part of the plant, including hemp. If the Court takes this route it will be the first time that a Circuit Court has stated specifically that cannabinoids are lawful when derived from hemp. In other words, this will be the first time that a Federal Court has articulated the source theory. That is arguably a bigger victory than having the Rule dismissed outright. Given that I’ve heard of an uptick in raids and prosecutions of CBD retail shops by local (ie, non-Federal) authorities recently, almost all of whom contend that they’re upholding Federal law, a Federal Circuit Court case stating that hemp-based CBD oil is legal would be a dream come true.

Of course, the case could take an alternate turn. But, it seems as though the DEA has painted itself into a corner and that we’re likely to have a positive result, one way or the other. My fingers are crossed.

Rod Kight is a lawyer based in Asheville, NC. He is licensed in North Carolina and Oregon and represents legal cannabis businesses. You can contact him by clicking here.

Posted 6-10-2017.