Appeals Court Dismisses Petition Challenging DEA’s Marijuana Extract Rule

In a setback for the hemp industry, a federal appeals court this week denied a petition to review a marijuana extract rule adopted by DEA.

The petition was largely denied for procedural reasons based on principles of administrative law, and the April 30 decision by the U.S. Court of Appeals for the Ninth Circuit carries no precedent except for limited circumstances under the court’s rules.

The Hemp Industries Association (HIA), Centuria Natural Foods Inc. and R.M.H. Holdings Inc. are weighing their options, which include a request for a rehearing within 45 days.

The petitioners said DEA’s rule has resulted in interference with lawful activities carried out under the 2014 U.S. Farm Bill signed into law by former President Barack Obama.

“Given the pervasive confusion and irreconcilable conflicts of the law that have led to product seizures, arrests and criminal charges against those involved in the lawful hemp industry, the petitioners believe that the final rule must be invalidated, absent the court clarifying and further resolving these conflicts and their severe consequences,” attorney Bob Hoban, managing partner of Hoban Law Group in Denver who represented the hemp industry in the lawsuit, said in a statement.

Representatives for DEA and the Department of Justice declined to comment on the Ninth Circuit’s ruling.

The petitioners argued DEA scheduled marijuana extract under the Controlled Substances Act (CSA) without conducting a proper scheduling action or making specific findings required under the CSA. They also maintained the marijuana extract rule violated several other federal laws, including the Information Quality Act, Regulatory Flexibility Act and Congressional Review Act.

Because the issues were not raised before DEA during its rulemaking proceeding, petitioners “waived their arguments relating to the scheduling of a new substance and those Acts,” the Ninth Circuit held. Petitioners did not participate during the notice and comment period, nor did other commentators raise petitioners’ arguments, the court observed.

“There are no exceptional circumstances to excuse the waiver,” the Ninth Circuit determined.

Jim Prochnow, a regulatory lawyer in Denver who has advised clients on the use of cannabidiol (CBD) oil, said in an interview that he was not surprised by the court’s April 30 decision “because of the historical adherence to administrative rules and procedures by all courts, including the liberal Ninth Circuit.”

The Ninth Circuit noted its decision was “not appropriate for publication and is not precedent,” except as provided in one of its rules. Ninth Circuit Rule 36-3 says unpublished decisions have no precedent except under some narrow legal principles.

“Basically, what that means is the discussion, which accompanied this decision, is of little, if any value,” Prochnow explained.

Jonathan Miller, general counsel to the U.S. Hemp Roundtable, a coalition of hemp companies, downplayed the significance of the court ruling. In an email to members of the hemp industry, he noted the decision was not binding on other courts, and he maintained it was “decided on procedural grounds, not on any matter of substance.”

“The Ninth Circuit ruled that the HIA had failed to meet a widely accepted principal of federal law: Before you challenge a federal agency in court, you must first exhaust all of your administrative remedies,” Miller wrote, “and in this case, the HIA had not participated in the DEA’s earlier public notice and comment period.”

The three-judge panel, however, addressed the substance of certain arguments raised by the hemp industry. The Ninth Circuit determined petitioners didn’t waive their arguments that DEA’s marijuana extract rule conflicted with a portion of the Agricultural Act of 2014 and the Consolidated Appropriations Act of 2016 since the laws were adopted after DEA’s notice-and-comment period. Nonetheless, the three-judge panel held the petitioners’ arguments failed “on the merits.”

“The Agricultural Act contemplates potential conflict between the Controlled Substances Act and pre-empts it,” the appeals court stated. “The final rule, therefore, does not violate the Agricultural Act.”

The hemp industry also unsuccessfully argued DEA’s rule violated the Consolidated Appropriations Act of 2016. The law barred the use of federal funds “to prohibit the transportation, processing, sale or use of industrial hemp that is grown or cultivated in accordance with … section 7606 of the Agricultural Act of 2014, within or outside the state in which the industrial hemp is grown or cultivated.”

Petitioners’ “suggestion that the ‘promulgation of the final rule likely required use of extensive DEA resources’ is not sufficient grounds to invalidate the final rule,” the Ninth Circuit concluded.

At the heart of the hemp industry’s petition: Section 7606 of the Agricultural Act of 2014—otherwise known as the 2014 Farm Bill. The law authorized higher education institutions and state agricultural departments to cultivate the plant if “the industrial hemp is grown or cultivated for purposes of research conducted under an agricultural pilot program or other agricultural or academic research,” and the latter activities are authorized under state law.

In part, the law defined an “agricultural pilot program” as a “pilot program to study the growth, cultivation or marketing of industrial hemp.” The scope of the “marketing” activities authorized by Section 7606—and whether DEA’s marijuana extract rule conflicted with the 2014 Farm Bill—has been the subject of confusion and debate.

“Though the court finding in favor of the DEA could be seen as initially disconcerting, the court's ruling actually finds that the Farm Bill pre-empts or supersedes the Controlled Substances Act and the DEA's authority,” said Garrett Graff, an associate attorney with Hoban Law Group, in an emailed statement. “DEA's final rule would then only restrictively apply to those handling controlled substances, but not Farm Bill operators, as this court validates and confirms—as did 29 bipartisan members of Congress—that industrial hemp, and its derivatives, are not subject to the CSA, when grown pursuant to the Farm Bill.”

Patrick Goggin, a senior attorney at Hoban Law Group based in San Francisco, said the ruling included some positive news. In an emailed statement, he said the appeals court confirmed “hemp extract products made pursuant to the Farm Bill's hemp amendment are not controlled substances.”

Attorney Todd Harrison is an expert on FDA dietary supplement regulations and the Federal Food, Drug & Cosmetic Act (FDCA).

At first glance, the Ninth Circuit’s decision “may appear to be good news that would allow CBD and hemp supplements to be marketed lawfully,” Harrison, a partner in Washington with the law firm Venable LLP, observed in an emailed statement. “Unfortunately, the [Ninth] Circuit narrowly construed in a cursory manner that a limited pre-emption exists for the cultivation of hemp under a state agricultural department or a university for research purposes only. There is no reference to further commercialization.”

Even if the Ninth Circuit "were to find commercialization could be considered research (doubtful but possible), all activity would have to occur within that state," Harrison said. "In other words, the hemp and/or hemp product could not cross state lines. Thus, while the language is very awkward, we believe the only way to read this case is that the only activity authorized under the [Agricultural Act of 2014] is for research purposes only."

DEA’s final rule defined marijuana extract as “an extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, other than the separated resin (whether crude or purified) obtained from the plant."

In a clarification of its new drug code for marijuana extract, DEA explained the final rule does not include materials excluded from the definition of marijuana in the CSA. However, the agency noted cannabinoids such as CBD “are found in the parts of the cannabis plant that fall within the CSA definition of marijuana, such as the flowering tops, resin and leaves.”

Since 2014, DEA has taken a position that CBD oil falls within the definition of marijuana under federal law and is a Schedule I controlled substance under the CSA. CBD oil has been illegally produced and marketed in the United States in violation of the CSA and the FDCA, DEA declared in a statement issued four years ago.

The statement referenced CBD oil generically and a specific brand (Charlotte’s Web) manufactured by CW Hemp.

“It is important to correct a misconception that some have about the effect of the Agricultural Act of 2014 (which some refer to as the ‘farm bill’) on the legal status of ‘Charlotte's Web’/CBD oil,” DEA asserted in its 2014 statement. “Section 7606 of the Agricultural Act of 2014 authorizes institutions of higher education (e.g., universities) and state Departments of Agriculture to grow and cultivate ‘industrial hemp’ (defined under the Act as marijuana with a tetrahydrocannabinol [THC] content of 0.3 percent or less) for agricultural research purposes where permitted under state law. However, the Agricultural Act of 2014 does not permit such entities, or anyone else, to produce non-FDA-approved drug products made from cannabis. Thus, the CSA and FDCA restrictions mentioned above remain in effect with respect to the production of ‘Charlotte's Web’/CBD oil for human consumption.”

In an email Wednesday, Barbara Carreno, a DEA spokeswoman, said her agency’s statement still applies “until such time as the FDA may approve CBD as a medicine.” FDA is reviewing a new drug application filed by GW Pharmaceuticals for a CBD medicine (Epidiolex) to treat severe forms of epilepsy.

If Epidiolex is approved by FDA, DEA would move it into one of the four medical schedules under the CSA, such as a Schedule II controlled substance, which would place it alongside such drugs as codeine, oxycodone and fentanyl.

According to the petitioners and nearly 30 members of Congress in an amicus brief filed in January 2018 with the Ninth Circuit, cannabinoids like CBD don’t fall within the CSA—even if the compounds are sourced from the flowers of the hemp plant—so long as the activities are carried out under Section 7606 of the Farm Bill; and the plant contains no more than 0.3 percent THC, the psychoactive compound in marijuana.

“While the DEA clearly believes that all extracts of the cannabis flower fall under the definition of controlled substances, such an assertion blatantly subverts the Farm Bill, which explicitly permits any part of the cannabis plant, including the flower, with ‘not more than 0.3 percent’ THC, from being deemed permissible industrial hemp under an approved pilot program,” the bipartisan group of lawmakers wrote in their amicus brief. “The DEA is wrong to treat cannabinoids as evidence that a compound was derived from marijuana since legal cannabinoids also come from the flower of the plant.”

In his email to the hemp industry, Miller of the U.S. Hemp Roundtable commented on the Ninth Circuit’s decision, concluding, “In short, the DEA’s ‘marijuana extract rule’ does not apply to hemp or derivative products such as hemp-derived CBD. Period.”

Prochnow offered a different assessment. In a follow-up email, the regulatory lawyer said “the text of the actual DEA regulation (final rule) does not exclude hemp from its reach.”

In his opinion, Prochnow added, the impact or reach of the definition of marijuana extract in DEA’s rule “does not cut down or reduce the carefully defined hemp provisions of the 2014 Agricultural Act.”

He asserted, “[I]t is fruitless to compare the 2014 Agricultural Act (an apple) to the 2017 DEA regulation (an orange) because they were intended to and do address different objectives.”

Some in the hemp industry interpret Section 7606 as encompassing “commercial production, transportation and sale” of industrial hemp, but “that’s not what that Agricultural Act says,” explained Prochnow, a partner with the law firm Greenberg Traurig LLP.

The CSA, Prochnow maintained, governs the commercial production of hemp.

“What part of the plant did it come from? That’s the basic question,” Prochnow said. “Now, if it came from the flowers, technically speaking, its [subject] to the Controlled Substances Act. If it has no THC in it, great. That still doesn’t exempt it from the Controlled Substances Act.”

However, he added, “Unless there is a major switch in policy for or against marijuana in the Congress or in the executive office, the DEA is going to continue its process of prosecutorial discretion.”

Miller acknowledged the Ninth Circuit’s “ruling will generate further concern about DEA’s enforcement intentions,” underscoring the importance of passing into law the Hemp Farming Act of 2018 (Senate Bill 2667).

If the bill is passed into law, the controversy over DEA’s marijuana extract rule could become a nonissue. Several sources lobbying for passage of SB 2667 said the bill would clearly convey DEA has no authority over hemp.

“It would take DEA out of the picture,” Miller proclaimed in a recent interview. “For any hemp crops or products that are less than [0.3 percent] THC, they would no longer be subject to the Controlled Substances Act or the involvement of the Drug Enforcement Administration.”