As societal attitudes have become more accepting of marijuana and many states have legalized it in some form, the cannabis industry is seen by many as an increasingly attractive business opportunity. In particular, cannabidiol (CBD), a cannabis derivative, has become progressively more popular for its perceived health benefits, including pain and stress relief, acne treatment, and even a treatment for cancer and seizures. CBD can be found in an array of products from edibles to face creams, vaping pens, and topical oils.

Recent developments in federal law have removed major obstacles to the CBD industry, and all expectations are that the industry is set to experience exponential growth. Indeed, some estimate that it will be a $22 billion industry by 2020. Brightfield Group, Profitable Insights into the CBD and Cannabis Industry (2018).

The rapid pace by which CBD is being introduced to the consuming public is not free of regulatory and litigation risk. Federal and state regulators, as well as consumers and the plaintiff's bar, are paying increased attention to how CBD is being incorporated into products and how it is being marketed to the public. It would behoove any company seeking to enter the CBD business to be aware of existing regulatory regimes and the potential for civil litigation related to the marketing and sale of products containing CBD. For a market that is poised to explode, there may be growing pains that even CBD itself cannot alleviate.

Status of CBD Under Federal Law

The legal status of cannabis and its derivatives, including CBD, depends on the particular type of cannabis being cultivated and used. The term “cannabis” has no formal legal definition or legal significance, but marijuana and hemp are two types of the cannabis sativa L. plant. This distinction is important for understanding the legal landscape of cannabis in the United States.

The Controlled Substances Act (CSA) makes it a crime to cultivate, distribute, possess, or dispense marijuana. The CSA defines marijuana to include virtually all parts of the cannabis sativa L. plant with very limited exceptions. 21 U.S.C. §802(16).

This changed with the passage of the Agricultural Improvement Act of 2018, colloquially known as the 2018 Farm Bill, which was signed into law on Dec. 20, 2018. Section 12619 (B) of the Farm Bill exempted industrial hemp, which is defined as cannabis with a tetrahydrocannabinol (THC) concentration of 0.3 percent of less, from the CSA's definition of marijuana. Accordingly, hemp and its derivatives are no longer considered marijuana and therefore no longer classified as Schedule 1 controlled substances under the CSA; the growing and selling of hemp and hemp-derived products through interstate commerce is now legal. Nonetheless, in this space, the superiority of federal law involving interstate commerce over existing state laws is still a work in progress as demonstrated by recent developments such as the seizure by Idaho State Police of industrial hemp being trucked from Oregon to Colorado on the basis that Idaho state law classifies a product containing any amount of THC as a controlled substance.

The cannabis plant contains hundreds of compounds of which CBD and THC are two of the most commonly occurring. THC is a psychoactive compound found primarily in marijuana plants and is the chemical that produces a high. CBD, on the other hand, is a non-psychoactive compound found in both hemp and marijuana plants. Prior to the passage of the Farm Bill, CBD of any kind was considered a controlled substance. See Drug Enforcement Administration, Clarification of New Drug Code (7350) for Marijuana Extract (March 9, 2017).

However, now that hemp has been removed from the scope of the CSA, CBD that is derived from hemp is similarly excluded. See, e.g., Drug Enforcement Administration, DEA Internal Directive Regarding the Presence of Cannabinoids in Products and Materials Made From the Cannabis Plant, (May 22, 2018). Marijuana-derived CBD and CBD derived from hemp plants containing a THC concentration of greater than 0.3 percent, however, is still illegal under federal law.

With the removal of a major impediment to growth—criminal liability—the Farm Bill will be seen as a watershed moment for the CBD industry. However, simply because the possession, sale, and marketing of CBD is no longer considered a crime under the CSA, does not mean that the industry should move forward at breakneck speed without taking stock of other regulations or state statutes that might be implicated by the sale of CBD. While a full treatment of such laws is beyond the scope of this article, considerations of the Food and Drug Administration (FDA), as well as the potential implications of federal and state consumer protection regimes, are particularly relevant to the CBD market.

Food and Drug Administration Regulation of CBD

The FDA has increased the attention it pays to the CBD industry. On the same day the Farm Bill was passed, the FDA Commissioner issued a sweeping press statement that specifically noted that the Farm Bill did nothing to change FDA authority to regulate products containing CBD. FDA Press Release, Statement from FDA Commissioner Scott Gottlieb M.D., on Signing the Agricultural Improvement Act and the Agency's Regulation of Products Containing Cannabis and Cannabis-derived Compounds (Dec. 20, 2018).

Specifically, the Commissioner noted that the FDA will “closely scrutinize products” containing CBD and where the FDA “believe[s] consumers are being put at risk, the FDA will warn consumers and take enforcement actions.” Id. The FDA warned that any claims that a CBD product has therapeutic benefits must be approved by the FDA for its intended use before the product can be sold in interstate commerce. Id. It also stated that it is unlawful to add CBD to food and dietary supplements. Id. A quick Internet search will reveal a vast array of consumable CBD-related products, many of which tout the health benefits derived from the CBD contained within.

While the FDA has approved Epidiolex, a CBD-containing drug used to treat severe forms of epilepsy, it has also issued warning letters to a number of CBD companies stating that their representations made about certain CBD products violate the Food, Drug, and Cosmetic Act. Moreover, state and city health officials have also begun demanding CBD retailers remove certain products from their shelves because they are not FDA-approved products. For example, Maine, California and New York City have all demanded that companies remove from their shelves certain food products that contain CBD, as well as CBD products that make non-FDA approved statements about the therapeutic benefits of CBD.

Consumer Protection Regimes and CBD

In addition to FDA enforcement actions, the CBD industry may be susceptible to enforcement actions and civil litigation related to state consumer protection statutes. Many states have robust statutory schemes for protecting consumers from false advertising and unfair trade practices. In New York, for example, §349(a) of the General Business Law prohibits any “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.”

Laws like these generally have broad applicability and cover virtually all economic transactions. Claims brought pursuant to state consumer protection laws generally allow for significant statutory damages, and they are often brought on a class action basis. The plaintiff's class action bar is very active in bringing cases relating to “natural” products, products offering health maintenance benefits, and other claims of products with false and misleading labels. In addition to private litigation, these state laws can be enforced by state attorneys general. In addition, the Federal Trade Commission (FTC) can enforce an analogous federal consumer protection statute, the FTC Act, which empowers the FTC to “prevent persons, partnerships, or corporations … from using unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. §45.

To the extent CBD products are advertised as promising certain health benefits, companies can expect entrepreneurial plaintiffs to test the veracity of those health claims. Consumers may bring deceptive trade practices or false advertising claims against CBD companies, to the extent that they make representations that are not factually accurate. For instance, if it is determined that CBD does not act as an analgesic, companies touting the pain-relieving qualities of CBD may find themselves having to prove the science underlying their advertisements in a class action lawsuit.

CBD companies should be mindful of the federal government's current position with respect to CBD advertising and the use of CBD in food, as well as any new regulations that may emerge in the aftermath of the Farm Bill. Moreover, companies should also carefully look at CBD advertising material and make sure that any claims pertaining to the therapeutic qualities and health benefits of CBD are well-founded and documented. While CBD regulation may now be outside the purview of the Drug Enforcement Administration, the FDA, the FTC, state regulators, and consumers will swiftly fill the regulatory vacuum left in the wake of the Farm Bill.

The CBD industry is off to an impressive start and holds great promise. Undoubtedly, there will be legal and regulatory bumps along the road before fully realizing that promise.

Greg Kaufman and Meghana Shah are partners, and Brittany Cambre is an associate, at Eversheds Sutherland.