One of the difficult issues facing any industry is risk management. For those in the cannabis industry, risk management includes a unique blend of onerous state and local regulations, a lack of federal regulation, and a healthy illicit market. Recently, the outbreak of a mysterious lung disease allegedly caused by "vaping" created havoc in two emerging industries—cannabis and electronic nicotine delivery Systems (ENDS)—and this is only the tip of the iceberg.
Regulatory History and Current Issues
Veterans in the cannabis industry know all too well the regulatory challenges of an industry that is subject to varying regulations on a city, county, and state level. Although the industry supports and has even requested federal regulation, its opinions have fallen on deaf ears. The cannabis industry is in favor of standards and regulation for health and safety reasons and welcomes them as a means to eliminate the illicit market, which recently dominated the national news. Andrew Kline, NCIA's Safe Vaping Task Force Latest News and Recommendations, Nat'l Cannabis Industry Ass'n Policy Council (blog archive).
The legal accessibility of products coupled with increasing taxes has facilitated a healthy illicit market even in states where cannabis is legal. In California, for example, only a minority of counties and cities allow licensed commercial cannabis activity, which has led to what some refer to as "cannabis deserts." Nick Kovacevich, Cannabis Black Market Thriving Despite Legalization, Forbes (Mar. 13, 2019). At least 20 percent of legal users in California save money by frequenting illicit sources, which not only undermines legitimate businesses by diverting revenue, but also puts the general public at risk for potential harm caused by the consumption of unsafe and unregulated illicit-market products. Id. Personal injuries arising from substandard products are propelling the cannabis industry into the litigation arena.
Spotlight on the Illicit Market
No one in the cannabis industry will forget the outbreak of mysterious lung injuries beginning in the summer of 2019. Various opponents of the ENDS and cannabis industries lined up to blame both industries, but no one immediately focused on the illicit market. A few months later, we saw the arrests of illicit-drug manufacturers in multiple states who decided to use vitamin E acetate as a cutting agent for THC-containing vaping products. Julie Bosman & Matt Richtel, Vaping Bad: Were 2 Wisconsin Brothers the Walter Whites of THC Oils?, N.Y. Times (Sept. 15, 2019). Months later, it was confirmed that a vitamin E acetate contamination was found in up to 50 percent of the illicit-market samples, while no vitamin E acetate was found in more than 200 legally sold brands of THC-containing products. Jayne O'Donnell & David Robinson, People Are Vaping a Deadly Substance Along with THC, USA Today (Nov. 15, 2019). Vitamin E acetate is used by many unregulated producers as a cutting agent to dilute the cannabis oil. Id.
Initial communications from the Centers for Disease Control and Prevention (CDC), however, failed to distinguish between vaping oil-based e-liquids, which were used in the illicit-THC cartridges that have given rise to multiple arrests in Arizona and Wisconsin and cause lipoid pneumonia, as reported by Bosman and Richtel (see above), and vaping the water/alcohol-based e-liquids, which are used in virtually all e-cigarette and non-lipid-based oils that are used in legitimate THC-containing products. As the dust settled at the end of 2019, the CDC finally publicly identified vitamin E acetate in THC-containing products as a chemical of concern. Ctrs. for Disease Control & Prevention, Outbreak of Lung Injury Associated with the Use of E-Cigarette, or Vaping, Products (updated Jan. 16, 2020).
In the midst of the "public hysteria," however, the cannabis industry suddenly found itself battling in court against regulations imposed by executive orders. For example, in Massachusetts, despite particularly stringent requirements that every cannabis product be tested by a state-approved lab, the cannabis industry nevertheless was forced to seek judicial intervention to stay an executive order issued by the governor that banned all vaping products for four months. The legitimate cannabis industry was forced into courtroom battles to defend against the regulations that the executive orders would impose because of problems caused by the larger illicit market, not legitimate products. Fortunately for the cannabis industry, the court in Massachusetts refused to enforce the ban for legitimate THC-containing products; however, the ban was allowed to continue for nicotine containing e-liquid.
The Vaping Future
The recent "epidemic" of lung injuries has highlighted several emerging issues for the cannabis industry.
First, the illicit market is very real and very prolific. Some estimate that the illicit market is three times bigger than the legitimate market for THC-containing products. O'Donnell & Robinson, supra. The latest illicit-market experience with vitamin E acetate has left many people injured and concerned over product safety, especially since many of the people who became ill had no idea that the products were contaminated with vitamin E acetate.
Second, the latest illicit-market experience has demonstrated that due to the lack of federal regulation, there was no (1) access to a system to address an issue on a national level, or (2) national registry of products with ingredients. Due to the illegality of the illicit market, many were hesitant to report accurately the substances that they used.
Third, the industry is not only subject to varying legislation; it also is subject to emergency executive orders that are difficult and expensive to address.
Finally, the legitimate cannabis industry is now subject to personal injury and consumer claims caused by the illicit market.
In September 2019, the first lung injury case was filed against multiple companies in Washington. Charles Wilcoxson v. Canna Brand Solutions LLC et al., No. 19-2-10995 (Wash. Super. Ct., Pierce Cnty. filed Sept. 23, 2019). Wilcoxson alleged that he developed lipoid pneumonia caused by vaping products manufactured by Conscious Cannabis, Rainbow's Aloft, Leafwerx, MFused, and Jane's Garden. All of these products, allegedly purchased in retail stores, gave the impression that none were illicit-market products. Interestingly, however, none of the products identified in the lawsuit were actually listed on the CDC's website; they were all found to be counterfeit THC-containing products with vitamin E acetate. Ctrs. for Disease Control & Prevention, Outbreak of Lung Injury, supra.
Thus, the legitimate manufacturers and distributors of THC-containing products are now left defending themselves against what is most likely illicit-market products, given that more than one brand has been counterfeited. Adding to the difficulty of the defense is that many vaping devices are designed and sold with empty cartridges, which allows the user to fill his or her own cartridges. These do-it-yourself users can purchase nicotine-containing e-liquid, CBD e-liquid, THC oil, or other substance that they desire to vape.
Determining the vitamin E acetate culprit may be difficult if not impossible. If this fact pattern were not already complicated enough, add to it that Wilcoxson also sued the manufacturer of the vaping device. Most of the vaping devices available can be used to vape all types of e-liquids. Given the number of lipoid lung injuries, the cannabis industry should expect more personal injury lawsuits involving THC-containing e-liquid, as should the manufacturers of vaping equipment.
Penetrating the future in this industry is hazy. As long as the illicit market remains strong, challenges will always exist for legitimate cannabis companies. With the popularity of ENDS and the increase in litigation against nicotine-containing e-liquid manufacturers, such as JUUL, there is a good probability that the cannabis industry will find itself as a co-defendant with nicotine-containing e-liquid manufacturers in other idiopathic lung injury cases. It may be some time until the smoke clears and risk management issues are better defined.
Previously published in DRI: The Voice.
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