United States: Wild West or New Frontier? Global Cannabis Market Spurs Legal Spend Across All Sectors

There is no doubt that the legal landscape around cannabis-related products is confusing. Its legalization in the United States has occurred on a patchwork basis and the regulations that are emerging state-by-state have implications for manufacturers and retailers across all economic sectors, but especially for those in the food and beverage, health and wellness, and consumer product industries.

But, with one recent study by Cowen & Co. indicating that the cannabidiol (CBD) market alone could reach $16 billion by 2025i, the possibilities across the cannabis spectrum are great—as is the need to get a handle on the conflicting legislation making it difficult for American businesses to protect their own assets, reduce liability and take advantage of the fertile economic landscape.

Looking ahead to the evolution of this new global market, ALM conducted a survey in Spring 2019 on behalf of Shook, Hardy & Bacon to gauge where in-house counsel anticipate the greatest need for legal services pertaining to the introduction of cannabis-related products into commerce. The survey results reveal that 56% of respondents think their need for legal services in this sphere will increase over the next two years, with a significant growth in litigation threats anticipated over the next decade.

Staking a Claim: IP Gold Rush Gives Way to Liability Concerns

It's no surprise that many survey respondents— particularly those in the life science, health and wellness, and personal-care product space—are already navigating complex regulatory and employment questions around the cannabis sector, while also seeking to protect their assets and investments. But legal departments already predict that, when it comes to cannabis-related issues, the share of their legal budgets devoted to intellectual property matters will slightly decline over the next two years, even as other concerns around labeling and liability come to the fore.

In particular, Shook, Hardy & Bacon/ALM survey respondents expect increased legal spend over the next two years in the areas of Food and Drug Administration (FDA)/regulatory guidance (58%) and employment litigation and policy (40%), but also product labeling (32%) and product liability (31%). By comparison, only 15% of counsel said they are actively fielding product liability issues and only 10% are fielding labeling issues. In addition, they expect to increase their public policy work over coming years as the market matures.

"Articles and comments from industry players (and its detractors) often invoke images of the wild wild West, and that might be a fair assessment in that the legal landscape for these products remains unclear," explains Katie Gates Calderon, co-chair of Shook, Hardy & Bacon's Cannabis Law Practice. "The various state laws and limited federal resources to enforce, for example, FDA's prohibition against CBD in food or dietary supplements, create confusion and have resulted in larger, more recognizable companies only reluctantly dipping their toes into the market, while smaller companies and startups with less to lose are executing cannonballs into the deep end with the optimistic view that federal regulations and state laws will ultimately catch up with consumer demands."

Posting a Litigation Lookout: Consumer Class Actions Just Around the Bend?

Considering that the only certainty at the moment is uncertainty, it makes sense that "government investigations and enforcement" was identified by survey respondents as the primary litigation threat surrounding the introduction of industrial hemp, CBD and other cannabis products into commerce; it was chosen 33% of the time, more than twice the amount of any other response (the next highest, at 15% each, were "employment litigation" and "consumer class actions").

"When contracting in this uncertain market, it is even more important to look around the corner and explicitly contract for a number of possibilities rather than using boilerplate," says Shook Business Litigation Partner Mike Barnett. "It's just as important, however, to understand there are certain risks that are part of operating in a still-developing industry. More practically, market participants should consider a level of due diligence within their supply chain to ensure the products are represented both accurately and in line with the varying and developing guidance provided from regulatory bodies. We have reviewed websites, social media and other market representations to advise whether claims made by a business partner could potentially harm our client. We view this issue—market participants promising health benefits that are not supported by established science—as a major risk factor for the future of the industry. The work we do from due diligence through contracting may minimize this risk for our clients."

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