United States: Navigating CBD Risks When Legal Pathway To Marketing Is Anything But Clear

Last Updated: May 10 2019
Article by Ian A. Stewart

The Food and Drug Administration (FDA) has signaled a willingness to consider a potential easing of restrictions on cannabidiol (CBD) as a result of significant pressure by industry groups and members of Congress; but until the legal pathway is clear, companies that market most CBD products must tread carefully.

A May 31 public hearing will cover a range of CBD-related topics, including health and safety, manufacturing and product quality, and marketing/ labeling/sales.

The 2018 Farm Bill, signed into 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 public confusion 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.

Advising companies on CBD risk management is challenging due to the rapid pace of developments and frequent confusion caused by often false or misleading online information. The following outlines critical CBD legal and risk management issues to watch.

Definition of CBD Product Under 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.

Pursuant to the FDCA's drug exclusion rule, FDA has consistently taken the position since at least 2015 that certain cannabinoids, including CBD, are impermissible additives that adulterate food and dietary supplements for both humans and animals.

Cosmetics are generally less heavily regulated by FDA than food or drugs. In early April 2019, FDA announced that although certain cosmetic ingredients are prohibited or restricted by regulation, "currently that is not the case for any cannabis or cannabis-derived ingredients." FDA nevertheless cautions that a product may be considered both a cosmetic and an unapproved 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."

Approval Could Take Years

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 the approval process for use of CBD in foods or supplements will take years. There is precedent for Congress to issue legislation in the context of a single ingredient, similar to prior legislation for human growth hormone.

One idea under discussion is potential 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.

Acting FDA Commissioner Ned Sharpless has recently taken the helm from former Commissioner Scott Gottlieb. Some have expressed concern over how Sharpless will approach CBD because he is a former cancer drug researcher and National Cancer Institute Director who has less experience with the dietary supplement and food regulation side of FDA's mandate.

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.

Outgoing FDA Commissioner Scott 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 assertions 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."

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, Michigan, North Carolina, Ohio and New York City, have banned CBD-infused food products under state and local laws.

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 several 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. CBD product labels must be reviewed carefully for compliance under both federal and state law.

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 might be considered adulterated, contaminated or mislabeled under federal and state law, which 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.

To this end, it also is important for any company that markets and sells CBD products to conduct an insurance coverage review with an attorney and broker who understand the nuances of the CBD insurance market. Although insurance coverage for hemp-derived products is expanding rapidly, problematic endorsements and exclusions remain 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.

This article was originally published in Bloomberg Law on April 24, 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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