A CBD Oil Business Case Study

Mr. Jones and Ms. Smith have just read how the CBD market is booming. Every state they visit seems to be selling CBD oils, lotions, edibles, and other products. The business practicalities seem simple enough – find suppliers, upgrade the products to meet consumer demands, check to see what licenses you need, create a marketing plan, build a website, lease a storefront, and begin selling.

If only the issues were that simple.

Ms. Smith and Mr. Jones need to do a lot more work before they can even begin to think about a business plan. Their first step must be to consult with a California CBD lawyer who understands what CBD strains are legal, which products can be developed, how and for whom the CBD can be used, and many other issues.

The purpose of the CBD oil venture

A CBD lawyer will begin any review by discussing how Smith and Jones plan to use their product. Some uses may be permitted. Others are illegal in California. The legal uses do depend on which strain of CBD is being developed. The two main uses of CBD oil are for medicinal use and adult recreational use. The two main strains of CBD are hemp-based CBD and CBD derived from marijuana. Marijuana and hemp both also have a THC component. The THC component is considered more dangerous because of its psychotic effects.

CBD can be used in many different types of products. As we wrote previously, CBD products are created in one of two ways – either through a CBD extract or through an isolate. It is from these two different forms, that many marketable products such as beauty products, drinks, edibles, suppositories, vapes, and other CBD products are made:

• CBD Extract. CBD extract can be sold as a standalone product or as an ingredient in other products. When sold as a standalone, a syringe or similar product is usually included. The syringe is used to measure the dosage. Extracts are oily substances that contain cannabinoids, terpenoids, and fatty acids. Packaging of extracts and syringes must comply with FDA labeling requirements. When a CBD extract is used as a standalone product it is often placed under the tongue “via sublingual application” or it is swallowed. In standalone form, the main use is medicinal.
• CBD Isolate. Isolate means the CBD is isolated. The crystalline substance comes in either slab form or white powder form and contains 99%+ potency of the single cannabinoid compound. Many people find comfort in isolates because they contain no THC which prevents any potential drug testing issues. The federal Farm Bill, passed in 2018, doesn’t legalize all CBD products. The Farm Bill generally legalizes CBD products with less than .3 percent THC. As with all laws, there are exceptions. The general benefits of the isolate form, in addition to having no THC, are that it has many uses and is generally less expensive to make than the extract form.

CBD for medical marijuana in California

California, like many states, has approved the use of medical marijuana. Medical marijuana is often used to help patients cope with different types of pain – from cancer, arthritis, and other diseases and disorders.

• The Medical Marijuana Regulation and Safety Act (MMRSA) was passed in 2015. This law created a framework for the licensing of cannabis/marijuana.
• It was amended in 2016 when California passed the Medical Cannabis Regulation and Safety Act (MCRSA).
• In 2018, California unified the medical marijuana laws with the adult usage laws in a law called – the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) effective January 1, 2018. MMRSA and MCRSA were repealed. The Adult Usage of Marijuana Act (AUMA) was not repealed.

If Mr. Jones and Ms. Smith want to develop medical marijuana products they will need to understand the licensing requirements that a skilled healthcare lawyer can explain. Since the THC and not the CBD oil is the key component of medical marijuana, Smith and Jones will need to review other federal and state legal and regulatory issues for any CBD-based products.

CBD for adult usage

On November 8, 2016, California passed the Adult Use of Marijuana Act, Prop 64 – known as AUMA. This law was passed through a public election. The key parts of the Adult Use of Marijuana Act are:

“Adults 21 year-of-age and up can possess or give away (not sell, just give away) up to an ounce of marijuana or eight grams of concentrated cannabis. These adults can also cultivate up to six live plants which they can possess, harvest, process and dry – for their own person use. AUMA was modified and update by the 2018 MAUCRSA law.”

Generally, the power to cultivate marijuana can be regulated by local governments.

The US Farm Bill and the production of CBD products derived from hemp

As we wrote in a prior article, the US Farm Bill was enacted in 2018. The new law makes it legal to grow, transport and produce industrial hemp. Essentially, it removes hemp from the list of controlled substances. The Farm Bill now defines hemp as an agricultural substance. That means that scientific researchers can now study hemp.

This would appear to be good news for Ms. Smith and Mr. Jones but there are still many other issues that need to be considered. For starters, using CBD from marijuana/cannabis is still illegal. Using CBD from hemp still can be regulated by the FDA – Mr. Smith and Ms. Jones need to comply with the FDA regulations. Additionally, the Farm bill only legalizes the product of CBD based hemp products at the federal level. In order for Smith and Jones to begin their California business, they need to know whether their hemp-based CBD edibles, lotions, and other products are legal in California. Additionally, Smith and Jones need to review whether the Drug Enforcement Agency (DEA) approves hemp.

They also need to understand that the Farm Bill approved hemp-based CDBD development because hemp generally has much lower levels of THC than marijuana.

As we wrote in a prior article, California, which allows adult usage of marijuana and medical use of marijuana, has not chosen to legalize CBD from hemp. Instead, California is matching the FDA’s position – that CBD use of hemp is illegal.

In July, 2018, the California Department of Public Health declared unregulated CBD to be unfit as a food ingredient or dietary supplement for humans and animals. More precisely, the California Department of Public Health said that food, drink, and dietary supplements that are infused with CBD can’t be sold by non-licensed retailers.

The FDA and scientific studies

One approved use of marijuana-based CBD is a chemical called “Epidiolox.” This is a syrup used to treat two different forms of childhood epilepsy. The U.S. Food and Drug Administration approved the product based on extensive scientific research.

“The FDA believes that scientifically valid research conducted under an Investigational New Drug (IND) application is the best way to determine what patients could benefit from the use of drugs derived from marijuana.”

Proper classification of CBD products

It is critical for Ms. Smith and Mr. Jones to understand how a CBD product product is classified (as a food, a drug, a dietary supplement, a cosmetic, a medical device, or a medical food, or some other form), and what laws such as the Food and Drug Cosmetic Act apply. Skilled CBD lawyers understand what factors determine a product’s classification.

Businesses also need to understand what actions can result in FDA warning letters. Warning letters can escalate into fines and penalties and into injunctions to stop any operations. Skilled lawyers understand what compliance steps are required depending on the classification. Common compliance issues include:

• Current good manufacturing practices (CGMP)
• Misbranding
• Adulteration
• Improper labeling
• Dishonest marketing

Possible FDA label requirements

Before Ms. Smith and Mr. Jones can market their CBD oil products, they need to review with skilled CBD oil lawyers the need to place labels on their products which include specific information the FDA thinks is necessary to properly educate the consumer.

Labels need to include more than just the ingredients. The Smith and Jones CBD company may need to include some of these additional items:

• The total cannabinoid content – CBD, THC, etc.
• The ratio of CBD to other cannabinoids
• Indicate if the product hemp or cannabis based
• State where the ingredients were produced – in California or elsewhere

“There may need to be separate labels for seniors, for medical marijuana users, and for recreational users. Labels also contain claims, and these should be reviewed by legal counsel familiar with FDA rules, laws governing consumer advertising, and other relevant laws and regulations.”

Can Smith and Jones sell their CBD-based dietary supplement products or drugs?

Currently, the FDA does not approve dietary supplements that are made with THC or CBD. The FDA considers a substance to be authorized for investigation as a new drug if it is the subject of an Investigational New Drug application (IND) that has gone into effect.

“If a substance (such as THC or CBD) is an active ingredient in a drug product that has been approved under the relevant federal law, or has been authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, then products containing that substance are outside the definition of a dietary supplement.”

If products aren’t approved by the FDA, then their development, product and sale will likely be illegal. Even if they are approved, if Smith and Jones sell them as dietary supplements when they are drugs or misbrand them in any way, Smith and Jones may receive a warning letter from the FDA that their product is misbranded.

Can Smith and Jones sell their CBD-based food products?

Currently, the FDA also states that it is illegal under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.

Can Smith and Jones make claims their products have therapeutic effects?

The FDA may send a warning letter to Smith and Jones if they make unwarranted therapeutic claims. Making therapeutic claims is a red flag that product should be classified as a drug and not a dietary supplement, food, or some other product type.

In order to make therapeutic claims, companies generally need to have their product approved as a new drug – only, after extensive scientific research is conducted.

FDA warning letters

If Smith and Jones misbrand their products, make false advertising claims, fail to include proper labels, fail to follow current good manufacturing practices (CGMP), or violate other FDA regulations – they may receive an FDA warning letter.

Our FDA compliance and regulatory lawyers advise businesses and individuals on the best ways to respond to an FDA warning letter, including compliance steps they need to take to preserve their business while appropriately responding to FDA concerns.

Failure to respond successfully to an FDA warning letter can result in more than just the cessation of the product’s development and sales. The FDA can follow-up the warning letter with civil fines, seizure of property, injunctions, and even (in the case of public safety concerns or intentional/reckless conduct), criminal prosecutions. In addition, the Federal Trade Commission (FTC) and state regulatory authorities can piggy-back off an FDA warning letter and begin their own enforcement.

Warning letters can damage the reputation to a company because the warning letters are posted on the FDA’s website which alerts the media. Shareholder confidence can be affected. The ability to get and keep federal and state government contracts can be diminished. Competitors may try to take advantage of the time and money you’ll need to focus on responding to the warning letter.

And of course, once a dietary supplement, cosmetics, medical device, or other manufacturer or distributor receives an FDA warning letter, that company is on FDA’s radar for more serious enforcement.

Additional federal and state requirements Smith and Jones need to review with a CBD lawyer:

Smith and Jones should discuss with their CBD lawyer:

• The necessary licenses and permits
• If the source of their CBD oil is from an approved licensed facility
• Whether their products are purchased in California or from another state or country
• Does the CBD product comply with the Farm Bill and relevant state law?
• What warranties suppliers are making
• What scientific tests have been performed on their supplies and what scientific tests they are performing
• The amount and percentage of THC in their supplies and products
• What steps they are taking to show compliance with federal and state laws
• What representations they indent to make – especially representations that might be a red flag for the FDA
• Whether the production, development, and sale of their products is legal
• Many other questions

Ms. Smith and Mr.  Jones need to review their legal requirements with an experienced CBD lawyer before they begin any operations. A skilled CBD lawyer will review the current federal and California laws so developers and investors can understand what operations are legal. The lawyer should also review what regulations apply. Failure to follow FDA regulations, FCT regulations, or any state regulations can result in criminal and civil penalties. Businesses can be forced to cease operations for non-compliance.

Contact the CBD law and regulation attorneys at Cohen Healthcare Law Group, PC We are experienced at helping companies understand the legal and practical issues in starting a healthcare business. This includes paying close attention to compliance issues. We focus on preparation and planning to minimize the risk of FDA warning letters and other related legal actions.