Hemp/CBD Litigation Forecast: Cloudy with a Chance of Damages

Our cannabis attorneys are often asked by media, clients, and other professionals working in the hemp and CBD marketplace what we think will be the next “big issue” in this developing industry. Often these questions concern regulatory and compliance questions, as (most) companies are keen to mitigate risk and avoid running afoul of state and federal regulators. Regulation is just part of the risk equation, however, as the value chain for hemp and CBD is rife with issues that may give rise to substantial and even “bet the company” litigation. This post offers an overview of litigation trends we are seeing, or in some cases predicting, that hemp/CBD producers, processors, manufacturers, and retailers should keep on their radar.

Disputes between hemp farmers concerning cross-pollination

Cross-pollination is an increasing source of conflict between hemp farmers and we expect an increase in “farmer v. farmer” litigation as hemp acreage increases across the country.  The passage of the 2018 Farm Bill has seen hemp production increase from roughly 25,000 acres in 2017 to 80,000 acres in 2018 to hundreds of thousands of acres in 2019. Oregon alone has surged to more than 60,000 acres of hemp in 2019. Colorado and Kentucky project more than 50,000 acres of hemp each this year and other states have reported significant increases in applications by growers to plant hemp.

Some farmers are growing hemp for biomass, others for seed, and still others for its CBD content.  This last kind of hemp is (for now) the most desirable as consumer demand for CBD seems to increase daily.  Farmers growing hemp for CBD desire certain strains of female hemp plants to achieve a high CBD yield The risk of cross-pollination and contamination by male plants can be a death knell to these farmers’ crops. Even fields grown with certified feminized seed will still have rogue male plants and many hemp farmers walk their fields regularly to remove the male plants. Farmers growing hemp for biomass (e.g. fiber and seed) are less concerned about whether their plants are male or female. Another complicating factor is that some farmers are not sufficiently aware of the dangers of cross-pollination and are not taking appropriate actions to protect their own crops.  Yet another factor, in some jurisdictions, is the risk of cross-pollination between marijuana and hemp.

State regulators are just beginning to work through the complex issues of how to license and approve farmers to grow hemp and how to isolate and protect farmers growing hemp for different purposes. Meanwhile, some farmers have taken matters into their own hands by filing suit against their neighbors for nuisance and other torts alleging that cross-pollination harmed or destroyed their crop.

We expect to see more of these cross-pollination lawsuits in the next several months and urge regulators and farmers to start working toward practical solutions to mitigate the risks of cross-pollination.

Disputes between hemp farmers and purchasers

Disputes between hemp farmers and purchasers of raw hemp – whether for processing CBD or other industrial purchases is a growing concern. Setting aside the cases involving some kind of fraud or failure to deliver the crop (see here, here, and here), we expect to see an increase in litigation between farmers and purchasers. Potential sources of litigation include whether the hemp is legal, chain of custody, total THC, CBD content, and compliance with appropriate state and federal regulations.

A potential saving grace is that many of these issues can (and should) be dealt with through a robust production contract or purchase order. Too often, however, we see contracts that fail to address specific issues relevant to hemp.  As we’ve said numerous times before, hemp is a unique commodity that requires contractual terms beyond those found in generic agreements. Although a robust contract may not prevent litigation, it may very well mean the difference between achieving lawsuit dismissal at the outset of a case or spending hundreds of thousands of dollars in litigation.

Consumer and shareholder actions relating to CBD

We anticipate that companies selling CBD products will see a significant increase in claims against them by consumers and shareholders. Last week a consumer class action complaint was filed against JustCBD in the Southern District of Florida. JustCBD sells a variety of products containing CBD – from gummies to soap to tinctures to cartridges. According to its website, the company was “founded on the basis that CBD is Mother Nature’s secret miracle.” The complaint alleges that JustCBD overstated the quantity of CBD contained in its products on repeated occasions and in violation of representations and warranties it made in marketing and selling its products. The plaintiff alleges it conducted independent testing (by Anresco Laboratories) that revealed:

the “JustCBD Honey Liquid Tincture,” which purports to contain “100mg CBD” in the bottle, actually contains just 48.92mg CBD per bottle. This represents an underfill of approximately 51%. As another example, the “JustCBD Apple Rings Gummies,” which purportedly contains “250mg CBD,” in fact contains a non-detectable quantity of CBD. 2 This represents an underfill of 100%. By misrepresenting the true quantity of CBD in their CBD Products, Defendants are able to charge a substantial price premium on account of these fictitious CBD quantity claims.

The complaint alleges claims for breach of warranty, unjust enrichment, fraud, violation of New York’s General Business Laws §§ 349 and 350, and violations of Florida’s Florida Deceptive and Unfair Trade Practices Act.  A full analysis of the JustCBD complaint is beyond the scope of this article. (Feel free to email me for a copy of the complaint).

Suffice to say companies selling CBD products ought to be on notice that the plaintiffs’ bar is actively searching out ways to cash in on the booming CBD market—the complaint notes that market is projected to surpass $23 billion in annual U.S. sales by 2023. Of special concern is that some states permit plaintiffs to recover attorneys’ fees for violations of their laws prohibiting unfair and deceptive trade practices.

Consequently, we anticipate a significant uptick in consumer class actions. (Particularly given some of the claims being made about CBD). Companies in the CBD marketplace should work carefully with their regulatory attorneys concerning any advertising claims and other statements made about their products. For more reading see here, here, here, here and here.

Lanham Act claims between competitors in the CBD marketplace

The Lanham Act, also known as the Trademark Act of 1946, is the principal federal statute that governs trademarks, service marks, and unfair competition. Although the Lanham Act is generally thought of as the trademark statute, the Lanham Act also protects businesses against unfair competition by competitors who use false or misleading advertising or labeling. (Notably, consumers do not have standing under the Lanham Act).

Although we are not yet aware of a Lanham Act lawsuit between CBD companies, we expect that to change. A plaintiff may seek injunctive relief (i.e. an order compelling the competitor to remove the false or misleading advertising) as well as damages and, in some instances, attorneys’ fees. Given some of the claims made by CBD companies (see here), cease-and-desist letters and lawsuits almost write themselves.

I’ll be addressing the Lanham Act in greater detail in the coming weeks as well as an important Lanham Act issue that is on the United States Supreme Court’s docket this term.

International trade and contract disputes concerning Hemp/CBD

Hemp is now an international concern and our international trade lawyers are getting a steady stream of questions on the importation and exportation of hemp and CBD – some that involve the United States and some that do not. See here for a discussion of the impacts of U.S.-China trade war on hemp.

An important part of any international dispute is the question of arbitration. This term the United States Supreme Court will resolve a key issue in international arbitration agreements: whether the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Foreign Arbitral Award Convention”) permits a non-signatory to an arbitration agreement to compel arbitration against a signatory to arbitration based on the doctrine of equitable estoppel.  See here for a fulsome discussion of this issue.

Given the global uncertainty surrounding trade and the shifting regulatory environments concerning Hemp and CBD, we fully anticipate an increase in cross-border disputes and international arbitrations.  So if your Hemp/CBD company is working internationally, we strongly recommend you start reading our China Law Blog – which touches on trade and other issues that go well beyond China.