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INSIGHT: A Budding Opportunity—Why the CBD Industry Requires Regulation

Jan. 15, 2020, 9:01 AM

Due to perceived health benefits without the hallucinogenic side-effects of marijuana, cannabidiol (CBD) sales have nearly quadrupled since 2015. But as the marketplace saturates with CBD, production, distribution, sale, and use of products remains almost entirely unregulated.

Recent attention to health risks associated with vaping nicotine and cannabis-derived substances has underscored the need for government-issued parameters and consistency in the CBD market to prevent potentially harmful products from entering the stream of commerce.

Manufacturers, distributors, and suppliers should embrace and participate in reform to address these public health concerns. Indeed, the certainty of regulation creates a valuable opportunity to create brand value, consumer loyalty, and business growth.

Consumers Are Policing Their Own Town

With no scientific substantiation, many CBD manufacturers claim their products are a cure for everything from AIDS to cancer, arthritis, dementia, anxiety, insomnia, ADHD, depression, and more.

Lacking codified regulatory scheme, the Food and Drug Administration has resorted to issuing warning letters discouraging false claims about what is tantamount to an unapproved drug.

In the absence of meaningful FDA enforcement, private false advertising suits are operating as the primary check on the industry. Civil class action lawsuits predicated on consumer protection statutes—and the significant exposure they carry in terms of damage and attorney’s fees—are cropping up with increasing frequency. Challenging false marketing statements and representations regarding the amount of CBD contained in products, litigation offers an attractive avenue to hold those companies that play fast and loose with labeling to account.

However, the lacking federal and state legislative framework coupled with unsettled research on CBD health benefits will almost certainly lead to diverging—if not outright conflicting—judicial outcomes. Indeed, with no agency rules or opinions to rely on—let alone a body of case law remotely on point—courts will be operating in uncharted territory when applying the reasonable consumer standard that sits at the heart of many consumer protection statutes.

Thus, while the judiciary will serve as a necessary stopgap to stem the most egregious cases at least in the short term, adequate levels of legal certainty will only come with formal legislative guidance.

Promising signs exist that federal regulation is on the horizon. In a recent spending bill allocating $2 million to CBD research and regulation, Senate Majority Leader Mitch McConnell (R-Ky.)—a strong proponent of the 2018 Farm Bill that removed hemp as a Schedule 1 illegal substance—added language prompting the FDA to develop a “regulatory pathway for CBD in products” under its jurisdiction.

CBD Regulation Will Assist Manufacturers

Uniform standards for manufacturing, testing, labeling, and marketing of CBD products will protect consumers who will be better informed prior to purchasing and using CBD. But a transition to a more stable regulatory environment is also good for business. While new legal frameworks often work to increase manufacturing costs and prices in the short term, manufacturers can expect to reap significant long-term advantages.

A more fleshed out enforcement policy will allow CBD manufacturers to secure investors and other key business partners with greater ease. With better-defined legal parameters in place, distributors and retailers will be more willing to carry reputable products.

Similarly, if the FDA adopts comprehensive policies governing the use of CBD in food, food and beverage companies will begin to enter the market with greater confidence. Perhaps most critical, banks may be more willing to do business with CBD companies once the FDA gives CBD the green light.

Private Interest Groups Want Action

Given what is at stake—a complex, uncertain, and far reaching public health concern—the FDA has been deliberate and slow to act. In the interim, consumer groups have stepped in to drive the conversation.

In September, the Arthritis Foundation issued “guidelines” to assist adults with arthritis using CBD. Careful not to suggest that CBD will heal arthritis pain, the guidelines instead set forth suggestions for how CBD may be used safely.

In addition to cautioning consumers to “avoid companies that claim their products have disease benefits”, the guidelines also warn of mislabeled products. According to the guidelines, “the biggest issues are strength of CBD (significantly more or less than the label says), the presence of undeclared THC, and contamination with pesticides, metals and solvents.”

Finally, the guidelines include a formal comment to the FDA requesting expedited study and regulation of CBD products.

While the Arthritis Foundation’s guidelines serve as helpful guidance to educate consumers on safe practices for CBD use, they are not a substitute for a formalized and detailed legal framework. Like other consumer products, at a minimum, explicit directions are required regarding appropriate label disclosures for ingredients, CBD amounts, product origins, and permissible marketing statements regarding the use and benefits of the product.

Now, with the support of McConnell in the Senate, public interest groups, and the CBD industry itself, the regulatory pathway for safe adult use of CBD is as clear as it has ever been. With CBD laws comes certainty, which is an unquantifiable benefit for those operating in an industry dubbed the “wild west.”

Once the rules of the game are set, those who intend to play by them will be able to differentiate themselves and flourish with peace of mind.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Lori Lustrin is a partner at Bilzin Sumberg whose practice focuses on complex class action litigation in federal court. She specializes in representing distributors and retailers in plaintiff opt-out litigation as well as food and beverage and consumer product companies in false advertising and deceptive labeling suits.

Jake M. Greenberg is part of Bilzin Sumberg’s Litigation Practice Group and focuses on representing corporations and business executives in a variety of complex commercial disputes. His clients include private equity lenders, e-commerce merchants, credit card processors, wholesale importers, and software companies.

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