On February 15, the Ninth Circuit Court of Appeals will issue a decision that will have far-reaching consequences in the industrial hemp industry.

The Court will rule on the Hemp Industries Association’s (“HIA”) claim that the Drug Enforcement Agency (“DEA”) overstepped its authority when it issued a new rule creating a controlled substances code number for marihuana extract.

On February 15, the Ninth Circuit Court of Appeals will issue a decision that will have far-reaching consequences in the industrial hemp industry.

What is marihuana extract?

The challenged rule defines marihuana extract to include “an extract containing one or more cannabinoids that has been derived from any plant of the genus cannabis, other that the separated resin (whether crude or purified) obtained from the plant.”

HIA v. DEA — Is Industrial Hemp a Controlled Substance?

While DEA contends it uses such drug codes merely for tracking purposes, HIA alleges that DEA and other agencies have applied the marijuana extract code to treat industrial hemp as a controlled substance — in violation of both federal law and congressional intent.

HIA alleges that DEA’s actions in issuing the rule constitute an unlawful scheduling action in violation of the Controlled Substances Act (“CSA”).

Moreover, DEA has made its position clear: CBD oil and other extracts derived from cannabis (including hemp) are Schedule I controlled substances.

HIA alleges that DEA’s actions in issuing the rule constitute an unlawful scheduling action in violation of the Controlled Substances Act (“CSA”). Why? According to HIA, DEA fails to distinguish between industrial hemp/hemp-derived materials and psychotropic marijuana — despite Congress requiring DEA to make these distinctions pursuant to the CSA and the 2014 Farm Bill.

HIA’s Two Key Arguments: Lack of Definition and a Carve-Out

HIA advances two primary arguments in support of its position:

First, the CSA does not define cannabis. Instead, it defines only marihuana as a controlled substance, and it exempts several parts of the cannabis plant from that definition.

CSA does not define cannabis.

Second, non-exempted parts of the cannabis plant have been carved out from the CSA and/or deemed lawful under other federal statutory provisions — including the 2014 Farm Bill and the Consolidated Appropriations Act of 2016 (“Spending Act”).

History Repeating Itself? 2004 HIA v. DEA Battle Appeared to Set Precedent

It bears emphasis that, in a previous lawsuit filed by HIA against DEA more than a decade ago, the Ninth Circuit held that at least one naturally occurring cannabinoid (THC) was lawful so long as it is not derived from marihuana or unlawful/unapproved parts of the plant.

A 2004 court decision involving DEA and HIA may shed some light on the outcome of this current dispute.

In that case, the Court permanently enjoined DEA from enforcing rules:

(i) adding hemp stalk, seed and oil containing non-psychoactive minuscule trace amounts of residual resin containing naturally occurring THC to Schedule I of the CSA, and

(ii) narrowly exempting only those hemp products not intended for human consumption.

The Court’s reasoning in that case appears closely analogous to the situation presented here.

The CSA defines marihuana to exclude “the mature stalks of such plant, any other compound, manufacture, salt, derivative, mixture or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil or cake, or the sterilized seed of such plant…” 21 U.S.C. 802(16).

DEA and HIA disagree over a definition.

Thus, in reaching its 2004 decision, the Ninth Circuit held that: “Congress was aware of the presence of trace amounts of psychoactive agents (later identified as THC) in the resin of non-psychoactive hemp when it passed the 1937 Marihuana Tax Act, and when it adopted the Tax Act marijuana definition in the CSA. … Congress knew what it was doing and its intent to exclude non-psychoactive hemp from regulation is entirely clear.”

The Court concluded that DEA’s rules were inconsistent with the unambiguous meaning of the CSA definitions of marijuana and THC.

What’s Changed Since Then: Farm & Spending Bills Allow Greater Latitude

Since that time, Congress has passed the 2014 Farm Bill, which defines and clearly permits the growth, cultivation and research of industrial hemp under defined parameters. The Farm Bill’s definition of industrial hemp includes any part of the plant, including the flower. Rather than having the distinction between industrial hemp and marihuana depend on the part of the cannabis plant from which a product is derived (as it is under the CSA), the Farm Bill distinguished the two based on the concentration of THC in each product.

The 2016 Spending Bill expressly prohibits the government from spending funds in contravention of 2014’s Farm Bill.

In 2016, Congress passed the Spending Bill. It expressly prohibits the government from spending funds in contravention of the Farm Bill, and further prohibits DEA from interfering with the interstate transportation of industrial hemp grown pursuant to the Farm Bill.

DEA Stands Its Ground

DEA contends that marihuana extract is a “subclass of the materials” the CSA already defines as marijuana. DEA asserts that HIA waived any right to challenge the marihuana extract rule, because petitioners failed to participate in DEA’s rule-making proceedings.

DEA asserts that the rule is well within its authority to promulgate regulations necessary and appropriate to control CSA-listed substances.

DEA also asserts that HIA lacks standing to challenge the rule on the grounds that it inflicts no injury on HIA. According to DEA, the rule simply adjusts DEA’s administrative methods for tracking substances the federal government has long controlled.

Finally, DEA asserts that the rule is well within its authority to promulgate regulations necessary and appropriate to control CSA-listed substances.

Congress Weighs in to Support HIA

However, Congress has filed its own amicus brief supporting HIA’s position. Congress argues that — in passing the Farm Bill and Spending Bill — it sought to clearly establish rules that both the Executive Branch and individual states must follow in order to research the viability of industrial hemp as an agricultural crop.

Congress deliberately recognized that industrial hemp products derived from any part of the plant can be used for many industrial purposes.

By passing the Farm Bill, Congress deliberately recognized that industrial hemp products derived from any part of the plant can be used for many industrial purposes, and they would not fall under the CSA’s definition of marihuana so long as the plant was cultivated to be below 0.3% THC concentration.

Congress argues that DEA did not properly interpret the text of the statute; that was what led Congress to pass the above-described Spending Bill provisions in the first place.

Thus, Congress asks the Court to recognize and honor the actions and purpose of Congress, and to find that the marihuana extract rule constitutes an abuse of DEA’s administrative procedure and rule-making authority.

Upcoming Decision Leaves a Question Mark for National Enforcement

The Ninth Circuit includes 15 federal judicial districts located in Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, North Mariana Islands, Oregon and Washington. Thus, the Ninth Circuit’s decision will not resolve the question on a national level.

The Ninth Circuit’s decision could have far-ranging implications for payment processing and banking in the CBD industry.

However, a positive ruling for the HIA will likely ease the way for more banks and payment processors to process payments and otherwise bank CBD businesses.

Theodore F. Monroe is an attorney whose practice focuses on the electronic payment and direct marketing industries. For more information, email him at [email protected] or call him at 213-233-2273.