3 Tips for Supply Chain Risk Management Amid Vaping-Related Lung Illnesses in the U.S.

The question of what’s behind the spate of vaping-related pulmonary diseases in the U.S. and Canada is vexing broad swaths of the cannabis industry. With vaping products rising in popularity and sales, there’s reason to be in a defensive mode; many of the public statements about these diseases point to problems in the illicit cannabis market or in the illicit e-cigarette market, but licensed cannabis businesses are embracing a cautious attitude of open communication about their products. 

The illicit cannabis market has grown more sophisticated with the growing awareness of vaping technology and consumer choice. That gap that forms, then, is a lack of education about what constitutes a safe vaping product in a licensed cannabis market. That’s where business owners can approach this issue and draw out some transparency from the supply chain.

Ben Bodamer, an attorney in Dickinson Wright’s cannabis practice group, says that the opportunity is here to get out in front of the amorphous and uncertain public reaction to what’s become a mainstream national news story. While many cannabis brands are issuing statements about the safety of their products, there’s a more important structural and legal approach that needs to be considered. 

In the meantime, it’s worth watching how federal and state regulators handle this story.

“This isn’t really just a story about one industry,” Bodamer says. “One question is: What is the intersection between the regulatory authority of the FDA and the federally non-compliant [but] state-compliant medical cannabis industry that’s legal in 33 states? I think we saw a little preview of that with what happened with CBD last fall, where the FDA commissioner sought to regulate CBD as a food ingredient, despite the fact that it was technically federally non-compliant, so shouldn’t have been used as anything from a federal perspective.

“You’ve seen what’s happened,” he continues, “where there’s complete confusion and a patchwork approach to regulation. I think a similar risk is entirely possible in the context of vaping, particularly if there’s not meaningful distinction between the issue of this illness and its origins and the highly regulated, state-compliant cannabis marketplaces.”

“That question of supply chain risk and product liability is one that I think is very much on people’s minds.”

– Ben Bodamer, Dickinson Wright

While much has been made about constituents like Vitamin E acetate found in illicit-market cannabis vape products, the general public has raised suspicions about vaping more broadly. Everything under the sun has been rolled into this question about the safety of vaping devices—including state-legal and tested cannabis products, illicit-market vapes, flavored e-cigarettes and so on. Licensed cannabis businesses would do well to evaluate their own standing in the market and speak directly to their consumer base.

Already, President Trump has pushed the FDA to crack down on flavored e-cigarettes and remove them from shelves in the U.S. As Bodamer points out, there’s reason to consider a similar federal overreach into the state-legal cannabis space. Whether anything significant will happen at the federal level remains unclear; political momentum is moving toward things like banking reform or some semblance of states’ rights legalization, but nothing is certain. Cannabis business owners have plenty to tend to without predicting the weather in Washington, D.C. 

“That question of supply chain risk and product liability is one that I think is very much on people’s minds,” he says, “and our advice to clients has been: You should have already been doing a host of things, combined with best practices in your entire supply chain, including complying with GMP practices, regardless of the fact that they’re not required by individual states.”

It’s the sort of thing enshrined in environmental health and safety tenets of the 2013 Cole Memo. Though the federal document has been rescinded, the spirit of the memorandum has persisted as a guidepost for state-licensed cannabis marketplace etiquette.

Here, Bodamer and fellow Dickinson Wright attorney Scot Crow offer a few ways to think about the glaring issue of supply chain risk management.

Know Your Indemnification Provisions

“This industry is highly complex,” Crow says, “and it’s very easy to find yourself on the edge of a sword unintentionally because no one paid attention to these provisions in the agreement because everyone’s excited to the deal.”

An indemnification provision is otherwise known as a hold-harmless provision. The legal language outlines who will pay for what when a conflict arises. Business executives should pay close attention to any mention of indemnification in different scenarios. Unknown and unforeseen circumstances can materialize in a maturing industry, and the spate of vaping-related lung illnesses is a terrific example.

“The more important thing is if I’m a dispensary, or retail operation, or I’m a production company, … is making sure all of a sudden [that] your indemnification provisions as agreements take on a much bigger part of the contract,” Crow says. “If you’re a vertically integrated operator, there’s really no way to protect yourself, other than to put in place GMP standards to protect yourself from the product liability claim and getting brought into some giant class action lawsuits. But those that are in the retail or production [side of the business], those agreements have a lot more importance than what they have had historically.”

Vet Your Supply Chain

Now’s the time, if you haven’t gone through this process recently, to get up-close and personal with your supply chain and re-interrogate its trustworthiness and compliance. The shape of legal claims is a matter of debate, but class-action lawsuits have emerged in various areas of the cannabis space, and it helps to identify and address any weak spots in a business’s interactions with third-party vendors or in other partnerships.

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“First of all, we don’t really know enough to know the kinds of claims that will emerge,” Bodamer says. “I know that the plaintiff’s bar is creative, but they’re also attentive. And in this context, they’re going to be following the results of ongoing investigations at the state level and at the federal level. And to the extent that [those] investigations reveal specific sources, and if those specific sources have been supplying product to individual companies, if that supply chain is in any way illegal, … I think the ease with which the plaintiff’s bar could bring claims would go up significantly.”

Getting out in front of the national news narrative with public statements on social media is one thing; showing proof of Good Manufacturing Principles or other standards and certifications will make a clear statement to the consumer base—and to public officials and private attorneys interested in parsing businesses’ tangential roles to a story with an expansive reach.

“You’re going to see scrutiny and the emergence of good actors versus bad actors from a supply chain standpoint,” he says. “It’s incumbent on good actors to point out their best practices, but it’s also incumbent on people to not be bad actors.”

…This Includes Licensing Arrangements

“Who could potentially get caught up in [litigation], I think, is a good question as well,” Crow says, “because the way that many of the companies are [set up], and this isn’t news, is that you’re expanding to licensing arrangements. You can see your brand eviscerated if it’s caught up in a dirty-type pen or delivery system, or it gets [linked to] an edible that [causes] a bad result or an adverse consequence.”

Any connection to other brands or other companies is a link worth examining, even in more relaxed times that aren’t burdened with a national news story and a rising count of sicknesses and deaths. Licensing agreements are, of course, included in this.

“You’re really putting a lot of trust in production companies that they are doing things properly and correctly in not violating state rules or adhering to the best possible standard that they could adhere to,” Crow says.

Bodamer adds an important follow-up, reminding cannabis businesses to be aware always of the federal government’s stance on cannabis: “That non-compliance across state lines also removes what would have been one of the … de facto protections from the federal prosecutorial standpoint, which is that if you are stay compliant, there’s less of an interest in federal prosecution.”