Federal Government Sets Guidelines for Hemp Production

On October 31, 2019, the U.S. Department of Agriculture published in the Federal Register its interim final rule, effective as of the same date, regulating domestic hemp production.

The Interim Rule provides that hemp may be grown domestically pursuant to a hemp production program administered by a state or tribal authority and approved by the USDA (or, if a state or tribal authority declines to implement such a program, by the USDA directly). Growers, extractors, manufacturers, laboratory operators and other hemp industry professionals should be aware of the material aspects of the Interim Rule because they may need to formulate plans or make operational changes to comply with the Interim Rule’s requirements, or they may wish to comment on the Interim Rule. The USDA is currently accepting comments on the Interim Rule until December 28, 2019. The Interim Rule will remain in effect for up to two years before it is replaced with a final rule.

Key Takeaways for Hemp Industry Professionals.

• Licensing. If you are a grower, you will need to apply for and obtain a hemp production license from either the USDA or, if your state has submitted to the USDA a draft hemp production plan, your state. The USDA hemp production plan and the new state hemp production plans will replace the pilot programs that were implemented by states pursuant to the 2014 Farm Bill. The USDA will begin accepting hemp production license applications on November 28, 2019. License applications should be submitted without delay, as growing hemp without a license will constitute a violation of the Interim Rule. Licenses must be renewed every three years. Applications will need to include detailed information about the applicant (or owner or officer thereof), including a recent criminal background check. If an applicant (or owner or officer thereof) has been convicted of a disqualifying felony, the license will be denied. If a licensee (or owner or officer thereof) is subsequently convicted of a disqualifying felony, then that person can no longer participate in the program. Accordingly, to protect a licensee’s hemp production license, careful attention must be paid to drafting growers’ operating agreements and employment agreements to ensure that any person who is convicted of a disqualifying felony can be removed from the business in an efficient manner.
• Sampling and Testing. All hemp must be sampled by a USDA-approved sampling agent and tested for delta-9 tetrahydrocannabinol ("THC") content (which cannot exceed 0.3%) by a U.S. Drug Enforcement Agency (“DEA”)-approved laboratory in accordance with USDA sampling and testing procedures. The testing procedures now allow for a measure of uncertainty —so long as the 0.3% threshold falls within the margin of error, the THC level will be deemed acceptable for purposes of compliance with the Interim Rule. However, the margin for error remains razor-thin. Test results must be determined and reported on a dry weight basis, i.e., the percentage of THC, by weight, in a cannabis sample, after excluding moisture from the sample. Purchasers of hemp should require that their suppliers provide them with certificates of analysis to verify the THC content of the product, and ensure that their hemp purchase agreements contain appropriate representations and warranties (and corresponding indemnification protections) relating to the hemp production process, including that the grower is duly licensed to grow hemp in the applicable jurisdiction, and that the hemp produced complies with all applicable regulatory requirements.
• Disposal of Non-Compliant Product. If test results conclude that THC levels exceed the 0.3% in a representative sample, the lot from which the sample was obtained must be disposed of by a person authorized under the Controlled Substances Act to handle marijuana, such as a DEA-registered reverse distributor, or a duly authorized law enforcement officer. In addition, extractors and processors should be aware that the definition of “hemp” includes “all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a [THC] concentration of not more than 0.3% on a dry-weight basis.” Accordingly, if THC concentrations exceed the applicable threshold during the extraction process, a risk exists that such product could be deemed non-compliant.
• Audits. The USDA may conduct randomized audits of licensees to verify compliance with applicable law and regulatory requirements. These audits may take the form of a “desk audit” (wherein the USDA requests and reviews records), or a site visit to the licensee’s facility. Licensees must strictly cooperate with USDA audits. All licensees will be audited at least once every three years. Licensees must maintain records and files relating to hemp production for a minimum of three years.
• Enforcement Actions. Licensees will be punished for “negligent” or more culpable violations. The USDA deems a negligent violation to have occurred if testing determines that each sample of five plants from distinct lots has THC levels in excess of 0.5%, under the theory that THC levels may exceed 0.3% even if a grower takes reasonable precautions to avoid that result (though the hemp must still be destroyed if THC levels exceed 0.3%). If the USDA determines that a violation has occurred, it will issue a notice of violation to the licensee, which will include a corrective action plan. Growing hemp without a license also constitutes a violation. Repeated negligent violations may result in the suspension or exclusion of a producer from participation in the hemp production program, but will not be subject to criminal enforcement. Knowing or intentional violations, however, could result in criminal enforcement.

The Interim Rule does not address the marketing of cannabidiol or other help extracts, isolates, distillates or derivatives. That issue will be addressed in the forthcoming regulatory guidance to be issued by the Food and Drug Administration.