Company Faces RICO Lawsuit Over “Falsely Advertised” CBD Product after Employee Tests Positive for THC and Loses his Job

Public support for cannabis reform – whether to legalize medical or adult use marijuana or hemp and hemp-derived products – is at an all-time high. While marijuana reform is moving slowly at the federal level, the federal government legalized hemp and its derivatives as part of the 2018 Farm Bill.

Now, companies from Martha Stewart to Walmart are seizing the opportunity to enter the hemp-derived CBD market. And, while CBD (Cannabidiol) may be the most well-known hemp derivative, this nascent, emerging industry still lacks consistent regulatory oversight, making it sometimes difficult for consumers to verify the contents of hemp-derived products.

Legalization of marijuana and hemp have also inevitably meant increased work-related issues for applicants and employees who use these products, as evidenced by the Western District of New York case Horn v. Medical Marijuana, Inc. One of the named Plaintiffs in the case, Douglas Horn, had been a professional over-the-road hazmat commercial truck driver for 29 years. As such, Horn has attested in court documents that he was acutely aware that he was subject to regular and random drug-test screenings, and that he could not smoke marijuana or take any product containing THC (the intoxicating compound in cannabis). After seeing an ad for the Defendant’s CBD oil, which represented the product had a 0% concentration of THC, Douglass bought and consumed the CBD oil. He was later summoned for a random Department of Transportation urinalysis drug test required by his employer, informed that he had tested positive for marijuana at almost double the concentration limit, and was terminated shortly thereafter. 

Horn and his wife sued the seller of the CBD oil, asserting claims for deceptive business practices, fraudulent inducement, racketeering, products liability, negligence, and intentional infliction of emotional distress. The Court recently granted summary judgment to the defendants on most of Horn’s claims, but ordered both the fraudulent inducement and civil racketeering claims to proceed to trial.

Given the rapid and unpredictable developments in this area of the law and industry, employers should continue to act thoughtfully when making decisions regarding applicants and employees who use marijuana or CBD. 

Attorney Tom Haren Quoted in Crain’s Cleveland Business Article

“Marijuana’s Branding Problem”

Crain’s Cleveland Business 

October 12, 2019 

Excerpt from the article: 

“As markets continue to expand and new companies enter different markets, you want to be able to distinguish yourself in the marketplace, and the ability to brand a product is one of the most important parts of being in a consumer-facing industry,” said Tom Haren, a lawyer with Frantz Ward. “The opportunity to come in and establish in a new market in marijuana is enormous. But you’ve got to have a protected brand, just like any other industry.” 

Class Actions Come for Cannabis

The cannabis industry in the United States is relatively new. But a series of class actions filed within the last month alleging deceptive labelling of cannabidiol (“CBD”) products demonstrate that some of the legal issues the industry faces are not.

The first case, Gaddis v. Just Brands USA, Inc., S.D. Fla. No.  0:19-cv-62067 (Aug. 16, 2019), alleges that the labelling and packaging of JUSTCBD-branded CBD products overstates the amount of CBD in the products, and that some of the products contained no CBD whatsoever. The complaint also alleged that the company’s website misrepresented the amount of CBD in various products, including gummies, tinctures, vaping cartridges, and food products. The plaintiff is seeking to certify a nationwide class of consumers asserting claims for breach of warranty, fraud, and unjust enrichment, and a statewide class asserting a claim under a New York consumer protection statute. 

Another potential class action against a CBD manufacturer was filed in the Southern District of Florida last week. Potter v. Potnetwork Holdings, Inc., S.D. Fla. No. 1:19-cv-24017 (Sept. 27, 2019) involves allegations that the labelling and packaging of defendants’ CBD products, including “CBD Oil,” “CBD Edibles,” “CBD Capsules,” “CBD Drinks,” “CBD Vape Oil,” as well as “Bath & Body” and “Cosmetics,” misrepresents the amount of CBD in those products. Comparing the CBD industry to the “Wild West,” the plaintiff accuses the defendants of “cheating every consumer who buys the Products” containing less than the represented amount of CBD. The plaintiff seeks to certify a nationwide class of consumers alleging an unjust enrichment claim, and a statewide class asserting a claim under a Florida consumer protection statute.

The same week, yet another class action was filed against a CBD manufacturer in the District of Massachusetts. Ahumada v. Global Widget LLC, D. Mass. No. 1:19-cv-12005 (Sept. 24, 2019), alleges that the defendants’  “Hemp Bomb” products, which include “CBD Gummies,” “CBD E-Liquid,” “CBD Oil,” “CBD Capsules,” “CBD Pain Freeze,” “CBD Lollipops,” “CBD Syrup,” “CBD Vape Products,” “Pet CBD Products,” and “CBD Shot,” also contain less CBD than represented in the products advertising and labelling. The plaintiff seeks to certify a nationwide class of consumers alleging breach of warranty claims, and a statewide class alleging a Massachusetts common law warranty claim. 

Consumer class actions are only one peril facing manufacturers of CBD products. Deceptive marketing claims by competitors are also possible under the federal Lanham Act and analogous state statues. So, it is vitally important that manufacturers of CBD products make sure, and be able to document, that the information on their labels and websites is consistent with what is in their products.

Ohio Legislature Passes Bill Legalizing Hemp and Hemp-Derived CBD Products

Yesterday the Ohio General Assembly sent Senate Bill 57 – the bill to legalize the cultivation, processing, and sale of hemp and hemp-derived products – to the desk of Governor Mike DeWine for signature. Like most states, State Bill 57 delegates authority to the Ohio Department of Agriculture to create a framework for the licensure and regulation of hemp cultivation and processing. It will likely be six months or more before licensing regulations are in place. But even then, it should ensure that Ohio farmers are able to plant hemp for the 2020 growing season.

Importantly, State Bill 57 includes an emergency clause which allows for the immediate implementation of the law, which would immediately permit any person or business to sell imported hemp or hemp products (such as hemp-derived CBD oil). This change should eliminate confusion created when the Ohio Board of Pharmacy determined that hemp-derived CBD oil could only be sold in Ohio medical marijuana dispensaries.

Frantz Ward attorneys Pat Haggerty and Tom Haren, who are Board members of the Ohio Hemp Association, worked with policy makers in Columbus on Senate Bill 57 for months. Now that it has been passed, Governor DeWine has 10 days to sign the bill into law. All indications are that he will do so.

Administrative Control Lessens as New Amendments Take Shape

On July 23, 2019 at 1:00 p.m. in the West B & C Room, 31st Floor, Riffe Building, 77 South High Street, Columbus, Ohio 43215, there will be a public hearing concerning the Ohio Department of Commerce’s (“DOC”) proposed updates to the regulations of the Ohio Medical Marijuana Control Program. The updates consist of six proposed amendments to existing rules and one proposal for a new rule. With these amendments and new rule, State regulators appear to be lessening administrative controls over some aspects concerning the operations of medical marijuana facilities.

The first amendment is to the cultivator certificate of operation rule. The proposed amendment provides that the cultivation of marijuana is not “agriculture” for the purposes of R.C. 3781.061, which provides exemptions for agricultural buildings from certain buildings standards. The intent of the amendment is to establish a more uniform safety standard under the relevant building code. Although this is a codification of the existing practice, it may result in increased costs for cultivators in order to become compliant with applicable building and fire codes.

The next three proposed amendments remove the option of disposal by surrender that resulted in the DOC taking possession of and destroying medical marijuana waste material. The DOC does not have the appropriate means to dispose of the waste and this amendment would give sole authority to the licensees to dispose their waste. Additionally, the amendments to the cultivator, processor, and testing laboratory waste disposal rules would expand the types of employees who can supervise the disposal of waste from only Type 1 Key Employees, to any Type 1 Employee. The DOC expects these amendments to decrease the costs of disposal by relaxing the requirements for waste disposal and granting more autonomy to the facilities. 

The next proposed amendment revises the rule for employee identification cards. Specifically, the amendment removes the following requirements for submission: a copy of the applicant’s social security card, documentation verifying the applicant’s principal place of residence, a sworn statement that the applicant has not been convicted of a disqualifying offense, verification that the background check has been conducted, and verification that the applicant had not been convicted of a qualifying offense. The mandated initial background check already provides much of this information, so these requirements were burdensome and duplicative. The DOC believes that the amendment will decrease the costs associated with application, although the $100 application fee, costs of the background check, and administrative costs are still required.

The last proposed removes the requirement that information obtained by the DOC is only disclosed to its employees, law enforcement, or any person deemed necessary, and language regarding the potential discipline to DOC employees if they violated this requirement. The intent of this is to harmonize the management of information from applicants and licensees with Ohio’s public records laws by narrowing the scope of confidentiality. The only costs that could result from this change would be the costs of investigation, enforcement, and legal action against a licensee for noncompliance.

The proposed new rule grants the DOC the authority to grant variances from the rules of the Medical Marijuana Control Program. The rule is limited to instances in which the variance is in the interest of the public, the provision is not statutorily mandated, and the rule from which variance would be granted is not unreasonable or unnecessarily burdensome. The proposal appears to be in response to issues that the DOC has encountered with provisional licensees and entities who have received certificates of operation. Given that this is a new industry, the DOC found this rule to be necessary in order to address unforeseen issues that are contrary to the intent of the Program.

This new rule on granting variances may result in a need for further clarification to determine what is in the “interest of the public” regarding the medical marijuana industry, and what constitutes unreasonable or unnecessarily burdensome regulations. The language may give the Department of Commerce the leeway that it wants in justifying the granting or denial of potential variances from the regulations.

A package with these rules had been sent to the Common Sense Initiative Office (“CSIO”) on March 8, 2019, when the comment period began. After the comment period closed, the CSIO concluded that it did not have any changes to the proposed rules. Now, the DOC has filed the notice of public hearing with amended rules and new rule with the Joint Committee on Agency Rule Review (“JCARR”). Before these amendments and new rule are adopted, they, along with the public notice, must be in front of JCARR for at least 65 days. JCARR may not invalidate rules, but may report to the General Assembly that the rules do not meet certain criteria. If JCARR approves, then the DOC must file the rules in the Electronic Rule Filing System (“ERF”). The rules’ effective date must be at least 10 days from the final filing date in the ERF.  Even if everything moves along, these amendments and new rule would not become effective until September 3, 2019.

Hemp Legislation Introduced in the Ohio Senate

Over the past several months, we have been meeting with Ohio policymakers to assist in the development of sound hemp policy in Ohio. This work is starting to bear fruit. We predicted last week that legislation would be introduced soon in the General Assembly, and that has now happened. A new bill to legalize and regulate hemp in Ohio was introduced in the Ohio Senate this morning.

We are reviewing and analyzing this formal draft, but even after a brief review it is apparent that the goal is to take a free market approach to hemp in Ohio, legalizing not only hemp cultivation but also the extraction and distribution of CBD and other hemp extracts in the Buckeye State. 

To read the draft hemp legislation, please click here. We will post another update with a more detailed analysis in the coming days.

Hemp in Ohio

As we’ve written about in the past, the recent passage of the Farm Bill is a watershed moment for hemp. The Farm Bill removed Hemp from the federal Controlled Substances Act and made the plant and its derivatives legal under federal law.  Thus, under federal law, marijuana and hemp are treated separately: marijuana remains illegal while hemp is now legal.

Things are less clear under Ohio law, where state agencies have taken the position that hemp still falls under the same definition as marijuana. Therefore, they treat hemp the same and regulate it under the provisions of the medical marijuana law. They argue that the use of hemp or its derivatives (think CBD) outside these regulations violates Ohio law, and have begun cracking down on CBD sales in the state

This situation has created significant uncertainty for all. The more we look for ways to address and resolve the uncertainty, the more we see just how confused people are concerning marijuana and hemp, and the confusion often centers on the nomenclature we use to talk about hemp.

Both hemp and marijuana belong to the cannabis genus. The Farm Bill, and state laws mirroring the Farm Bill, make a distinction between the two based only on THC content. Hemp is generally defined as a cannabis plant that contains less than 0.3% THC, while marijuana is a cannabis plant that contains higher levels of THC.

Importantly, though, both marijuana and hemp can contain CBD. In some states, for example, it can be legal under state law to purchase and sell hemp-derived CBD products but illegal to purchase and sell marijuana-derived CBD products.

There is no question that there is a market for CBD and other hemp-derived products, especially given the interest in CBD to manage pain, anxiety, insomnia, and even childhood epilepsy syndromes. But there remains a need for additional research to gauge the efficacy of CBD to treat these and other ailments.

Given the market for CBD and other hemp products in Ohio, it’s clear that Ohio law needs to change to accommodate this evolving industry – and the Ohio legislature is positioning itself to do just that. We told Crain’s Cleveland Business last year that we were working on hemp legislation and that we expected action in Ohio in 2019, and it’s looking like that next step is going to come very soon through the introduction of hemp legislation in the General Assembly.

If legislation is passed in 2019 – as we expect it will – then Ohio farmers should be able to begin cultivating hemp outdoors in the 2020 growing season. This will permit them to compete with farmers in other states, including those who will be growing thousands of acres’ worth of hemp in Kentucky this year.

We’ll continue to follow this issue closely and will provide regular updates on our efforts to develop and craft good hemp policy in Ohio. Stay tuned.

Seller Beware: State Agencies Starting to “Embargo” Ohio CBD Products

The confusion surrounding the treatment of CBD products in Ohio is causing disruption to businesses.

Under federal law, hemp and its derivatives (like hemp-derived CBD) are no longer included in the definition of marijuana under the Controlled Substances Act. As such, these products can be marketed without violating federal law.  In Ohio, though, the Board of Pharmacy  declared in 2018 that “[a]ll marijuana products, including CBD oil, can only be dispensed in a licensed Medical marijuana Control Program dispensary.”

For months, the Board took the position that its clarification was “informational” in nature. However, it stated that it would reassess if it continued “to be illegally sold.” Now, it appears that some jurisdictions in Ohio have already decided to take a more aggressive approach to CBD enforcement.

For example, a Mansfield man is facing felony drug charges for reportedly possessing a bottle of CBD oil. His attorney has filed a motion to dismiss the case, and a hearing is scheduled for February 13. In addition, the Cincinnati Enquirer is reporting that the Ohio Department of Agriculture is working with law enforcement agencies throughout the state to “embargo” CBD products at local retailers.

Ohio has not yet changed its own laws to legalize hemp at the state level – though Ohio law will likely change later this year.  Until that happens, businesses should proceed carefully and make sure they understand the evolving legal landscape.

If you have questions about hemp or CBD products, please do not hesitate to contact one of Frantz Ward’s Cannabis Attorneys.

Ohio Banks Take a Closer Look at Cannabis

The Ohio medical marijuana industry is ready to go live, with most of the pieces in place to complete the regulatory structure passed by the Ohio General Assembly in September of 2016. However, like the medical marijuana industry in general, the Ohio market will have a difficult time accessing banking services. This is because while marijuana may be legal under state law, it is still illegal under federal law, and thus banks are reluctant to offer banking services to the industry for fear of violating federal banking laws and rules to which the banks are subject.

However, there are signs in Ohio that banks may be beginning to give the medical marijuana industry a fresh look. Recently, Wright-Patt Credit Union in Dayton, through its board of directors, gave approval for the credit union to begin offering limited services to the medical marijuana industry. At this point, the nature of the services and what they might include have not been specified. Additionally, the Ohio Department of Commerce, through its Division of Financial Institutions, recently issued guidance for banks contemplating getting into the industry.

The decision by Wright-Patt, while isolated in Ohio, reflects a national trend in the industry. By the end of March 2018, 411 banks and credit unions in the U.S. were “actively” operating accounts for marijuana businesses, according to a report prepared by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). That’s up more than 20% from when President Trump took office.

The business reasons for the timing of the announcement are not entirely clear. Banks and credit unions in other states, mostly state chartered, have quietly served the industry to varying degrees for years. Some banks do increased due diligence on their marijuana clients to ensure compliance with a FinCEN memo of February 2014, while other banks may turn a blind eye. What is becoming clear is that as more states pass laws legalizing marijuana and the federal climate for rescheduling marijuana under the Controlled Substances Act and re-examining cannabis related issues continues to improve, many financial institutions want to be ready to jump into a large and growing marketplace that is woefully underserved.

Attorneys Pat Haggerty and Tom Haren were quoted in Crain’s article on Federal legalization of the hemp industry

“Federal legalization could pave way for Ohio hemp market, but uncertainties remain”
Crain’s Cleveland Business 
December 16, 2018

Excerpt from the article:

There are probably 25,000 acres across the U.S. dedicated to hemp farming today, said Pat Haggerty and Tom Haren, who are both with Frantz Wards cannabis law and policy group.

The 2018 Farm Bill means hemp will “explode into huge amounts of interest,” Haggerty said.

“Those 25,000 acres will go into hundreds of thousands, if not millions,” he said.

But like Kepford, Haggerty points out that excitement about cashing in on hemp — which has a laundry list of uses ranging from CBD extracts to cosmetics, construction materials, paper and clothing — is balanced against a cloud of uncertainty.

Haggerty and Haren are working with state lawmakers to draft statutes for a state-regulated hemp industry. That’s something even more legally complicated in the Buckeye State, where medical marijuana is tightly controlled via a rigorous licensing process for growers, processors, testers and retailers. The state has been applying federal rules to hemp, classifying it as marijuana.

That makes hemp effectively illegal to grow and sell under current state laws, which don’t automatically change along with federal legalization. Even hemp-derived CBD is only allowed to be sold legally in Ohio through licensed dispensaries that are opening in the coming weeks (the state hasn’t really devoted resources to enforcing that, creating additional confusion in the public about which retailers are allowed to sell CBD products).

“It’s not clear yet how that conflict between a federal hemp program, where the Department of Agriculture can step in and license folks themselves, works in a state with no hemp program,” Haren noted.

“All this cries out for Ohio to have its own legislation,” Haggerty added.

“But there is real momentum in the general assembly to enact legislation that will legalize and regulate hemp at the state level,” Haren said. “And I’m really hopeful that sometime next year we will have a committed hemp program in Ohio.”

Many hope those laws could be in place in time for a spring planting season.

“We want consistency between state and federal laws because confusion is bad for business,” Haren said.

While hemp legalization feels like a step in that direction, marijuana legalization is still likely a few years away

“I do think this is a huge step forward,” Haggerty said, “but I wouldn’t see the federal government taking another big step in, say, the next two years.”