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New York to Require Licenses to Manufacture and Sell Hemp Derived CBD Products

By Jared Schwass, Matthew R. Kittay, and Michael R. Herz

Hemp and hemp-derived cannabidiol (CBD) products have seen an increase in demand over the last few years, but the legal and regulatory structure behind those products has been unclear and confusing. One reason behind the confusion is that there has been a lag in the implementation of a thorough regulatory scheme after the passage of the Agriculture Improvement Act of 2018 (commonly referred to as the 2018 Farm Bill).

The 2018 Farm Bill was signed into law in December 2018.  Once signed, hemp was removed from the definition of marijuana in the Controlled Substance Act (CSA), which, in effect, declassified hemp and CBD as a Schedule 1 drug and legalized the crop and its derivatives.  The 2018 Farm Bill defines hemp as cannabis (Cannabis sativa L), and its derivatives, with concentrations of delta-9-tetrahydrocannabinol (THC) equal to or less than 0.3% on a dry weight basis.  While legalizing hemp and its derivatives, the 2018 Farm Bill delegated the U.S. Department of Agriculture (USDA) and the U.S. Food & Drug Administration (FDA) the authority to regulate the production of hemp and its derivatives.  While the USDA has issued guidance and regulations on the cultivation of hemp, the FDA has lagged in providing clear guidance and regulations regarding the production and sale of CBD products.  That lag has resulted in states creating a patchwork of regulatory actions across the country.

States like Idaho, Iowa, and South Dakota do not allow any CBD products to be sold in their State.  However, other States, such as Oregon, Illinois, and New Jersey, have not implemented any restrictions on CBD products.

On December 9, 2019, New York passed one of the most comprehensive laws to regulate the manufacturing and sale of hemp and CBD products in the United States (s.6184-A).  That law required hemp cultivators, producers, and retailers to obtain licenses before conducting any commercial hemp and/or CBD activities and was originally scheduled to become effective on March 8, 2020.  Given the impact of the new licensing requirements under the law, the March 8, 2020 effective date proved to be an overly ambitious deadline to implement a new regulatory scheme and on January 23, 2020, the New York legislature amended that law and pushed the effective date to May 1, 2020, and extended the licensing requirements for processor and retailers to January 1, 2021.  The amendment also clarified the licensing requirements for the cultivation, processing, distribution, and retail of hemp and CBD products by providing guidance on the specific licenses that will be required for each type of operation.

Under the new law, the regulation of hemp cultivation in New York remains controlled by the New York Department of Agriculture and Markets (NYDAM).  Additionally, Article 29 of New York’s Agriculture and Markets law (formerly Growth of Industrial Hemp) was repealed and replaced, and renamed the “Growth of Hemp.”

Below is a summary of key highlights from the Growth of Hemp:

  • No person shall grow, cultivate, process, produce, sell, or distribute hemp in New York unless authorized by the NYDAM Commissioner (the Commissioner) as part of an agricultural research pilot program or licensed by the Commissioner. (§509)
  • A grower license does not authorize the processing or retail sale of hemp for human consumption (see definition below), unless that grower also obtains a cannabinoid hemp processor license, cannabinoid hemp retailer license, or any other license required under Article 33-B of New York’s Public Health Law (discussed further below). (§509)
  • Hemp grown outside New York must meet all standards established by New York to enter into its stream of commerce. (§507)
  • Licenses are non-transferable without the Commissioner’s consent and any change in ownership, substantial corporate change, or change in location or acreage grown without the Commissioner’s prior approval shall invalidate a license. However, the Commission can establish regulations to allow certain ownership changes without the need for prior approval. (§512)

In addition to changing the laws regarding the cultivation of hemp, the New York legislators also enacted the Regulations of Cannabinoid Hemp and Hemp Extract, which added Article 33-B to the New York Public Health Law. Parts of Article 33-B became effective May 1, 2020, such as the testing requirements and providing NYDAM the authority to regulate the processing, distribution, marketing, transportation, and sale of CBD and hemp extracts used for human consumption; however, the processor and retail licensing requirements are not effective until January 1, 2021.

Below are key highlights from the Regulations of Cannabinoid Hemp and Hemp Extract:

  • “Used for human consumption” is defined as “intended by the manufacturer or distributor to be: (a) used for human consumption for its cannabinoid content; or (b) used in, on, or by the human body for its cannabinoid content.” (§3398)
  • “Processing” is defined as “extracting, preparing, treating, modifying, compounding, manufacturing, or otherwise manipulating cannabinoid hemp to concentrate or extract its cannabinoids, or creating product, whether in intermediate or final form, used for human consumption.”(§3398)
  • Any person processing CBD or hemp extract used for human consumption is required to obtain a cannabinoid hemp processor license from the NYDAM, effective January 1, 2021. (§3398-B)
  • If a person has an active research partnership agreement with the NYDAM authorizing that person to process cannabinoid hemp, they will be awarded a license as long as they are compliant with the remainder of Article 33-B. (§3398-B)
  • Any retailer selling CBD, in final form to consumers within New York, is required to obtain a cannabinoid hemp retailer license from the NYDAM, effective January 1, 2021. (§3398-C)
  • The NYDAM was provided authority to implement rules regarding the packaging and labeling of hemp products sold in New York. (§3398-M)
  • All hemp products must be extracted and processed in accordance with good manufacturing processes found under federal law 21 CFR 111, 117. (§3398-N)
  • Transportation of hemp and hemp products alone does not require a license. (§3398)
  • Hemp processors must contract with independent commercial laboratories to test hemp extract and products. The Commissioner will establish the necessary lab certificates and testing protocols for the certified labs. (§3398-O)
  • Hemp products grown and processed outside of New York can only be sold in New York if they meet all standards established under New York law and regulations. (§3398-S)

As of the date of this article, the NYDAM has not issued its regulations found under Article 33-B and they are currently not accepting any applications for hemp processor or retailer licenses.  Companies that produce or sell CBD products in New York will need to keep a close eye on the progress and implementation of New York’s comprehensive hemp law, including the promulgation of any licensing procedures and the opening of the license application process, to ensure they are not prohibited from entering New York’s huge CBD market once the licensing requirements go into effect on January 1, 2021.

About the Authors 

 

Jared Schwass is an attorney at Fox Rothschild LLP who advises businesses entering and operating in the legalized marijuana market on regulatory compliance, risk mitigation and business transactions. He can be reached at [email protected].

 

 

 

Michael R. Herzi s an attorney at Fox Rothschild LLP who works with businesses in the cannabis sector that encounter financial difficulties, offering advice on alternatives to traditional bankruptcy. He can be reached at [email protected].

 

 

Matthew Kittay

Matthew Kittay

Matthew R. Kittay is the Co-Chair of the Mergers & Acquisitions Practice Group and Chair of the New York Corporate Team at Fox Rothschild LLP. He has handled major structuring deals and secured private equity and venture capital for a number of companies in the cannabis sector. He can be reached at [email protected].

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