Advising companies on CBD (cannabidiol) risk management is made challenging by the rapid pace of developments and frequent confusion caused by often false or misleading online information. This article attempts to provide a concise analysis of critical CBD legal and risk management issues.

Do Not Conflate 'Legality' Under the 2018 Farm Bill With U.S. Food and Drug Laws

The 2018 Farm Bill, which was signed in to law in December 2018, exempts hemp and hemp-derived products, including hemp-derived CBD, from the Controlled Substances Act (CSA). In the lead-up to passage of the Farm Bill, there was widespread confusion in the public as to the extent of the “legality” of hemp-derived CBD, with many commentators and even some legal experts conflating legality under the CSA with legality under the Food Drug and Cosmetics Act (FDCA) and state food and drug laws. This confusion prompted outgoing FDA Commission Scott Gottlieb to issue a public statement clarifying that Congress had explicitly preserved the FDA's authority to regulate products containing cannabis or cannabis-derived compounds under the FDCA, regardless of whether they are derived from cannabis or hemp.

Identify How the CBD Product Will Be Defined Under the FDCA

A product containing a cannabinoid could be considered a drug, food, food additive, dietary supplement or cosmetic, depending on how the product is marketed and sold. How aggressively these products are policed by FDA and state agencies depends on the nature of the product and how it is defined under the FDCA and state law.

CBD as 'Food' or 'Dietary Supplement'

FDA's position since at least 2015 is that certain cannabinoids, including CBD, are impermissible additives that adulterate food and dietary supplements for both humans and animals. Under the FDCA's drug exclusion rule, once a substance that was never previously in the food supply is (1) an active ingredient of an approved drug product or (2) an active ingredient of a product in clinical trials that have been made public, a food or supplement containing that substance cannot be shipped in interstate commerce. FDA has cited Epidiolex as an example of a clinical investigation regarding CBD that has been made public. Epidiolex was approved by FDA in June 2018 for treatment of childhood seizures associated with two rare forms of epilepsy. FDA has therefore concluded that CBD products are in fact drugs and require FDA approval under the FDCA. The new drug-approval process is exorbitantly expensive; in 2016, the Journal of Health Economics estimated the average cost per approved drug at well over $1 billion.

CBD as a 'Cosmetic'

Cosmetics are generally less heavily regulated by FDA than food or drugs, and until recently the agency has remained silent on the use of CBD in cosmetic products. On April 2, 2019, FDA provided much-needed insight, stating that although certain cosmetic ingredients are prohibited or restricted by regulation, “currently that is not the case for any cannabis or cannabis-derived ingredients.” However, FDA warned that no ingredient—including cannabis-derived ingredients—can be used in a cosmetic if “it causes the product to be adulterated or misbranded.” A cosmetic may be considered adulterated “if it bears or contains any poisonous or deleterious substance which may render it injurious to users under the conditions of use prescribed in the labeling.” FDA cautions that a product may be considered both a cosmetic and a drug, even if it affects the appearance, if it is “intended to affect the structure or function of the body, or to diagnose, cure, mitigate, treat or prevent disease.”

Several large national retailers, including CVS, Walgreens and Rite-Aid, recently announced they will begin selling CBD-infused cosmetics in certain stores.

FDA Currently Uses 'Enforcement Discretion'

Other than issuing letters to companies that sell CBD-infused oils and food products warning them to refrain from making impermissible health claims, FDA has to date taken no other visible enforcement action in that regard. Gottlieb recently testified before a Senate appropriations subcommittee that “we are using enforcement discretion right now,” and that “I will take enforcement action against CBD products that are on the market if manufacturers are making what I consider over the line claims.” This would certainly include the egregious health claims at issue in the recent warning letters, such as that CBD can cure cancer or prevent Alzheimer's disease. Gottlieb nevertheless acknowledged that FDA has not taken action against numerous products on the market given its enforcement priorities and limited resources. He cautioned, however, that FDA's lack of enforcement is “not an invitation for people to continue marketing these products.”

State Enforcement of CBD

Authorities in several states have stepped up enforcement actions, including unannounced inspections and CBD product embargos ordered by authorities in California, New York, Texas and other states. Several states and cities, including California, Maine, North Carolina, Ohio and New York City, have banned CBD-infused food products under state and local laws.

Notwithstanding this state-led crackdown, certain states are working to provide greater legal access to CBD products under state law. Lawmakers in California and Texas, for example, are working on bipartisan legislation to allow sales of CBD products in those states, notwithstanding FDA's prohibition.

CBD's Pathway to Legality

As a result of significant pressure by industry groups and members of Congress, FDA has signaled a willingness to consider a potential easing of restrictions on CBD. On April 2, 2019, FDA issued a press release that announced new steps for advancing the potential regulatory pathways for CBD products. The press release explains that FDA primarily is concerned that permitting widespread commercial availability of CBD products negatively impacts research that may otherwise be performed to support regulatory approval through FDA's drug review process. Similarly, FDA does not want to incentivize patients to forgo appropriate medical treatment by substituting unapproved products for FDA-approved medicines. Also of concern is the potential for liver injury and cumulative exposure to CBD if accessed by consumers across a range of products.

Notwithstanding the intense pressure on FDA to fast-track the CBD approval process, without congressional action that exempts CBD from FDA's regular rulemaking process, it is likely that the approval process for use of CBD in foods or supplements will take years. In Gottlieb's recent Senate testimony, he explained that “we don't have a clear route to allow [CBD] to be lawfully marketed short of promulgating new regulations.” He noted, however, that there is precedent for Congress to issue legislation in the context of a single ingredient, similar to prior legislation for human growth hormone. Gottlieb also has appeared to embrace the idea of legislation that classifies CBD according to defined concentration levels, whereby CBD would be classified as a dietary supplement up to a defined concentration threshold, above which it would be considered a pharmaceutical drug. This is similar to the way fish oil has been regulated.

A public hearing scheduled to take place on May 31, 2019, will cover a range of CBD-related topics, including (1) health and safety, (2) manufacturing and product quality and (3) marketing/labeling/sales. FDA is encouraging public comments and participation at the hearing.

By the time of the hearing, acting FDA Commissioner Ned Sharpless will be leading the agency. Some have expressed concern over how Sharpless will approach CBD because Sharpless is a former cancer drug researcher who has less experience with the dietary supplement and food regulation side of FDA's mandate. According to a recent interview with former associate FDA Commissioner Peter Pitts, Sharpless is expected to manage the process already in place with respect to CBD for the time being. How much attention Sharpless will give to CBD issues in the future “depends on the priorities and the new commissioner's stomach for battle.”

CBD Risk Management … in the Meantime

Until the legal pathway for CBD is clear, companies that market most CBD products must tread carefully. Some, such as the large national retailers that recently announced the sale of CBD products, are focused on safer cosmetic products. Others choose to market and sell CBD-infused foods and supplements based on a higher appetite for risk and a “safety in numbers” assessment in the face of no visible FDA enforcement.

No matter how a company chooses to participate in the CBD industry, it must be counseled on FDA regulatory risk based on the product type in addition to the risks of marketing and selling CBD products on a state-by-state basis. Because the legality of CBD products varies widely by state and is changing so rapidly, providing accurate counsel can be a challenge. In addition, CBD product labels must be carefully reviewed for compliance under both federal and state law. Some states have specific and onerous labeling requirements for CBD products.

Although many companies tend to downplay the risk and potential financial severity of regulatory enforcement by federal or state agencies when it comes to CBD, they ignore at their own peril the risk presented by potential civil tort exposure. CBD products may be considered adulterated, contaminated or mislabeled under federal and state law. This may give rise to financially ruinous lawsuits, including consumer class actions or competitor suits that allege false advertising or unfair competition under state consumer protection statutes. It is essential for every CBD company to have a solid grasp of both the CBD regulatory risks and the unfair competition laws to fairly compete in the new CBD marketplace, and to avoid unwittingly being named as a defendant in an expensive and potentially company ending lawsuit.

To this end, it is also important for any company that markets and sells CBD products to conduct an insurance coverage review with an attorney and broker that understand the nuances of the CBD insurance market. With passage of the 2018 Farm Bill, insurance coverage for hemp-derived products, including CBD, is expanding rapidly. Problematic endorsements and exclusions remain, however, with respect to limitations on coverage as a result of regulatory penalties, product seizures, resulting business interruption and tort damages premised on violations of law.

Most importantly, CBD risk management requires constant education and vigilance to stay abreast of an area of the law changing more rapidly than any other in recent history.

Ian Stewart is a partner in the Los Angeles office of Wilson Elser Moskowitz Edelman & Dicker and is co-founder and chair of the Wilson Elser Cannabis Law practice. Ian uses his 20 years of legal experience to help clients navigate the legalities around cannabis, CBD and hemp, and works with licensed cannabis operators, financial institutions, and insurance companies to comply with their obligations under the law.