“Hot” Hemp Extract- New Lawsuit Underlines Need for Clarity

Introduction

Since the Agricultural Improvement Act of 2018, Pub. L. 115-334 (Farm Bill) was enacted in December of 2018, there have been several high-profile court cases involving the wrongful seizure of hemp and hemp products. A common theme with these cases is the novelty of the issues presented. In part, this is due to the fact that hemp has been lawful to cultivate only since the enactment of the 2014 Farm Bill, a mere five years ago. Additionally, hemp’s botanical similarities to federally illegal marijuana, particularly the fact that it may lawfully contain small concentrations of tetrahydrocannabinol (THC), have created a number of unique and often complex legal issues. Under the Farm Bill, “hemp” is 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 concentration of not more than 0.3 percent on a dry weight basis.” (emphasis added)

In this article, we discuss the issue of so-called “hot hemp extract” using a recently filed federal lawsuit as the backdrop. By “hot hemp extract”, we refer to an extract of lawful hemp that contains THC concentrations in excess of 0.3% by volume. Specifically, we propose and analyze several legal theories regarding whether and when hot hemp extract is lawful. This issue is one of the biggest issues facing the industry, and it is important that it be addressed and resolved.

The Key Compounds Case

By way of introducing the issue, we point to a recently filed federal civil lawsuit, Alexander Reyter and Key Compounds LLC v. Hans Schonemann and Phasex Corporation, 6:2020 cv 680, filed on April 24, 2020 in the US District Court for the District of Oregon (“Key Compounds”). A key issue in the case, which is the subject of this article, is the legal status of hemp by-products in the intermediary processing phase, the primary subset of what we referred to above as “hot hemp extract”. Since this phrase implies illegality, which has yet to be determined, we will instead refer to intermediary extracts of lawful hemp containing THC concentrations in excess of 0.3% by volume as “Work In Progress Hemp Extract” (WIPHE). Additionally, the acronym WIPHE is useful because it captures the situation in which this issue primarily arises, namely, in the mid-stage processing link in the hemp supply chain, i.e., the post-harvest/ pre-manufacture of consumer goods. By and large, this issue does not arise in the context of consumer hemp products, which tend to contain THC levels within 0.3% of the product’s volume, because it is generally accepted that these products are not controlled substances under the federal Controlled Substances Act (CSA).

The Key Compounds civil lawsuit arose in the wake of criminal charges that were filed and subsequently dismissed in December 2019 against Plaintiffs based on a shipment of WIPHE it received from the Defendant Phasex Corporation, a Massachusetts hemp processor. Plaintiffs were charged with drug trafficking under Oregon state law after Defendant sent it a batch of WIPHE that had undergone additional refining from Plaintiffs’ “crude” extract. (Interestingly, Plaintiffs indicate that the crude hemp extract they sent Defendant for further refining also had elevated THC levels.) The batch sent by Defendant included a container of WIPHE which Plaintiffs contend should have had all of the THC remediated. Instead, it contained elevated THC levels, which is to say that it contained THC levels in excess of 0.3% by weight.

The WIPHE that Plaintiffs requested was to be used in consumer hemp products with THC concentrations that do not exceed 0.3% by volume. Generally speaking, in these types of consumer products the THC concentrations are diluted, usually by blending the WIPHE into a carrier oil or liquid. Alternately, some WIPHE is further processed to extract isolated cannabinoids, including CBD. In short, Plaintiffs sent a crude hemp extract to a Massachusetts processor for further refining. In return, it received what was determined by Oregon investigators to be an illegal controlled substance.

Ultimately, the charges, including felony drug trafficking, were dismissed. This was, at least in part, based on the Oregon Administrative Rules (OAR), which require compliance testing of hemp only prior to harvest. Under the OAR, compliance testing of processed hemp is only required prior to it being marketed to the general public. Based on the OAR, Plaintiffs’ mere possession of the WIPHE it received was not sufficient to move forward with criminal charges since it was not being marketed to consumers.

In the civil suit, Plaintiffs allege they suffered irreparable damage to their reputations from the publicity of the criminal charges and that WIPHE in the package it received resulted in its financial ruin. The lawsuit is new. Plaintiffs filed their complaint (copy below) on April 24, 2020. Defendant has not yet filed a response to the allegations.

We do not represent any of the parties in the Key Compounds case and do not take any position on the merits of the case. We bring attention to the Key Compounds case because it appears to be one of the first cases in the country in which the issue of WIPHE has been raised (though that term has not yet been used in the filings). We do not yet know what weight or attention the court will give it; however, we will be watching. In the meantime, we aim to raise, analyze, and present reasonable paths for resolving the WIPHE issue. This article will be the first in a series.

WIPHE- A Summary of the Issue

In the criminal case against Key Compounds, the OAR played a critical role and resulted in dismissal of the charges. However, the OAR is specific to Oregon. In most states and under federal law, the legal status of WIPHE remains an undecided and controversial issue. The primary reason that the issue exists is that the Farm Bill is essentially silent on WIPHE. While the Farm Bill is unequivocal about expanding the category of legal hemp to include “extracts”, it does not specify an acceptable upper THC concentration limit, nor explicitly allow or disallow for remediation of WIPHE through removal and destruction of some, or all, of the THC it contains.

Under the Farm Bill, the 0.3% THC limit for hemp is a “dry-weight” measurement, which cannot rationally apply to hemp extract, which takes the form of a “wet” oil or other liquid. We contend that the best unit of measurement would be a percentage by volume, not dry weight, since extracts are not “dry”. Moreover, the USDA’s Interim Final Rule (IFR) only requires that the testing standard be applied to pre-harvest hemp. It is silent as to post-harvest hemp, including extracts. This was confirmed when Rod asked the USDA’s Hemp Chief, Bill Richmond, about this issue at the February Hemp Summit in Danville, VA. Mr. Richmond clarified that the USDA regulates production and does not regulate or have a position on WIPHE since it arises post-cultivation. Richmond “punted” the issue to the FDA, which has issued no policies or statements whatsoever regarding WIPHE.

The lack of clear testing guidelines for extracts, combined with the expanded definition of hemp to include “extracts”, creates a serious dilemma in determining the legal status of WIPHE. Below, we explore several different theories as to how this inconsistency could be resolved. We will use the plain language of the Farm Bill and the CSA provisions regarding THC in hemp, and our best assessment of Congressional intent, combined with a practical view of how the hemp industry actually operates in practice.

Legal Arguments Regarding WIPHE

There are several ways the WIPHE issue could be viewed and resolved based on an interpretation of the Farm Bill. Below are three. As you will see, we find the second and third views most persuasive. It is important to remember that this issue has yet to be resolved by Congress or the courts.

1. Did Congress intend for individual states to sort out the WIPHE issue? One view is that Congress intended for the permissible concentration of THC in extracts to be determined by individual states under their hemp plans, subject to approval by the USDA. States are free to authorize excess THC in cannabis extracts, as marijuana legalization in a majority of states has shown; however, absent USDA approval their authorizations may be irrelevant regarding whether a hemp extract is federally lawful or not. A state that allows THC limits to exceed 0.3% without USDA approval may simply be enacting watered-down marijuana legislation.

This “States’ Rights” view is at least plausible, and some states have already applied percentage/volume standards to extracts under their Pilot Programs. For example, Oregon’s rules regarding compliance testing for hemp extracts played a deciding role in the criminal case against Key Compounds. However, we will not know whether alternative THC standards for extracts will be used at the state level until the USDA reviews and accepts or denies such a plan that contains an alternative THC standard. We do not know whether the USDA will approve a plan that expressly authorizes WIPHE. The USDA does not have much to guide it since there are no express standard for extracts in the text of the Farm Bill other than the 0.3% THC dry-weight limit. As we discuss in this article, the “dry-weight” requirement is impossible to apply to hemp extracts.

Having this issue sorted out solely on a state by state basis would wreak havoc, as an extract that is lawful in one state may be deemed unlawful in another and possibly illegal at the federal level. Consequently, we contend that leaving this up to the individual states is reckless and against public policy.

2. Are all hemp extracts lawful, regardless of their THC concentrations? Another view assumes that since the Farm Bill did not expressly apply a THC limit to hemp extracts, that WIPHE is lawful regardless of its THC content, provided that it is derived from a compliant hemp plant. Under this view, hemp extracts may contain elevated concentrations of THC and remain legal.

Frankly, we do not find many problems with this argument when interpreting the plain language of the Farm Bill, particularly since the CSA was amended in conjunction with the Farm Bill to exempt THC “in hemp”. In other words, THC in hemp is not a controlled substance. Moreover, the Farm Bill’s definition of “hemp” includes “extracts”. So, THC in a hemp extract is, by definition, not a controlled substance. So far, so good. But, what about the 0.3% limit that the statute applies to hemp THC concentrations on a dry weight basis? Does it apply to extracts and, if so, how?

A “dry-weight” standard implies that what is being weighed could be either wet or dry. This applies most rationally to raw hemp biomass and flower, which can be dried prior to measuring THC concentrations. But it cannot apply to a hemp extract which, by definition, is “wet” in the form of an oil or liquid. Does the 0.3% standard apply to extracts? Currently, there is no answer to this question. On the one hand, applying the standard seems to square with the Farm Bill’s intent to limit THC concentrations in hemp. On the other hand, it directly conflicts with the CSA’s exemption of THC “in hemp” and the dry weight standard is inapplicable to wet extract. To date, this issue has not been resolved by Congress or the courts.

3. Does the 2018 Farm Bill actually contemplate WIPHE? Another interpretation of the Farm Bill, and the one we find most persuasive, is that Congress explicitly accounted for WIPHE. This position assumes that Congress was aware (a big assumption) that the dry-weight standard can only rationally apply to dried raw hemp biomass. It also does not conflict with the plain text of the Farm Bill, which states that extracts from a lawful hemp plant are also lawful. According to the statute, hemp extracts are, in fact, “hemp”.

Congress could not have simultaneously held the intent to legalize hemp extracts, while also applying the 0.3% dry-weight standard to them. This is because it is difficult, if not impossible, to derive an extract from hemp in which the THC levels are not elevated. Since the 2018 Farm Bill’s definition of hemp is based on dry weight, most any form of processing, from simple trimming to complex cannabinoid extraction, results in a THC “spike” relative to the post-processing weight of the extract. This is because removing the portions of the plant that do not contain meaningful concentrations of THC, such as the seeds and stalks, increases the THC concentrations relative to the weight of the sample while not increasing the actual levels of THC. Since seeds and stalks are the heaviest parts of the plant, the consequent spike of cannabinoids when they are removed, including THC, can be significant. Most forms of processing, and all forms of extraction, remove these portions of the plant in order to create an extract.

The theory we present, namely that the Farm Bill accounts for WIPHE, resolves this issue. Congress updated the definition of hemp to include “extracts” but said nothing about the application of the 0.3% THC limit to these extracts. It is reasonable to assume that Congress intended for extracts to be produced and that such production will necessarily result in a stage during the processing phase when the extract contains THC concentrations in excess of 0.3%. In other words, Congress impliedly contemplated the existence of WIPHE. Otherwise, lawful “hemp” would necessarily go through a stage of being a controlled substance before finally reaching a finished product stage where it was again lawful. The statute does not expressly create such a bizarre regime and there is no indication that Congress intended to create one.

Under this analysis, WIPHE is lawful notwithstanding that it may contain concentrated levels of THC beyond the 0.3% limit as a result of the processing and extraction process. Remediation of the THC in an extract, through removal and/or blending, can turn a WIPHE into an end-use consumer product with compliant THC levels. This position confirms Congress’ intent that hemp extracts are legal, solves for the WIPHE problem, and is supported by the plain language of the Farm Bill. To be clear, this is only a legal position that has never been tested in court. However, we believe that it is the proper interpretation given the plain language of the statute and the actual nature of processing hemp into extracts.

Conclusion

Ideally, Congress would pass a bill explicitly defining and legalizing WIPHE under certain circumstances and allowing for it to be transported throughout the country (i.e., Legal Theory #3, above). Better yet, it would simply confirm that once a hemp plant is deemed compliant, any and all extracts and derivatives from it are lawful, notwithstanding their THC concentrations (i.e., legal theory #2, above). We do not anticipate either will happen soon. Congress is occupied on other matters, and this issue does not appear to be on its radar. Whether or not it was improper for the Defendant in the Key Compounds case to send the WIPHE back to the grower remains to be seen, and it is unclear whether possession of WIPHE with elevated THC content, or the act of remediating the THC from it, is illegal. To read more on the WIPHE issue, click here, and read Section 2.

Here is a copy of the Key Compounds complaint:

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June 8, 2020

This article was written by Kight Law attorneys Kamran Aryah and Rod Kight. Kight Law represents hemp and CBD businesses throughout the US and the world. Click here to schedule a consultation.