(and how you can protect yourself)
It happens every time. Emerging industries with breakthrough innovations burst onto the scene with fanfare and headlines only to be followed up with legal ambiguity that leads to masses of civil lawsuits. But with any fast-growing industry, legal challenges creep up for a myriad of reasons including lack of preparation, accidents, fraud, bad contracts or a money-hungry plaintiff. Welcome to America. The hemp and CBD industry is not exempt from these lawsuits. And over the last six months, a myriad of lawsuits and class action suits have popped up that could threaten your company if you aren’t properly prepared.
We broke down the lawsuits by category to get a better sense of what the industry is facing, and what would be the greatest risk to hemp and CBD companies. Granted, this list isn’t comprehensive, but it does provide a snapshot of what is happening in the industry. We also offered some tips that could help protect you from resource-intensive legal disputes- but don’t forget, we are not your lawyer- so this does NOT constitute official legal advice.
1) Banking & Payment Processors: One company is in a dispute with a payment processing company that is holding more than $500k in funds. There is hope that this will become less frequent now that the banking policies are freeing up larger banks to do business with CBD companies. In the meantime, how can you avoid this? Talk to a lot of processors (and banks) and get a better understanding of their policies, rates and penalties specifically for CBD. Pick the best company, and read the fine print. I’d also talk to friendly competitors in the industry and see who they are using. Additionally, make sure you are using best practices for accepting credit cards to avoid chargebacks and credit card fraud.
2) American Disabilities Act Website Civil Suits: Several CBD companies have been sued because their websites weren’t compliant with ADA regulations. One visually impaired guy sued 60 different companies that weren’t compliant. Yes - REALLY. Talk to a web professional, do some Googling on how to fix this, and then talk to an attorney who specializes in digital tech to ensure your website is compliant.
3) Seed & Clone Disputes: While only 5.7% of the suits were related to seeds and clones, I’m gathering from the whispers at hemp trade shows and online discussions that this is a greater problem. How can you fix this? Know your partner and know your partner’s source. Ensure that you speak with AT LEAST 3 potential partners. Check all of their CofA’s, certifications and also get referrals for previous clients. Talk to industry experts, consultants and associations. Remember, you get what you pay for. But in this case, you won’t find out for 4 months after you invest hundreds of hours and a ton of cash, which makes getting the right seeds crucial.
4) Claims and Marketing: While we are all excited about the health benefits of CBD, and we are confident that it can help us with sleep, anxiety, pain management, (and so on), right now, we don’t have the clinical trials to validate anything. Therefore, before you put claims on your website or packaging, talk to an attorney about what you can put on your labels (and website), and how to phrase it.
5) Business Disputes: Make sure your contracts are air-tight and consider every scenario. It’s really important you get an attorney who specializes in your area of expertise, AND they specialize in contracts. Pay a good attorney early, and it will save you from paying them a whole lot more later.
6) CBD Legality: Many major companies, like Charlotte’s Web and CV Sciences, were hit up overselling a product because it hasn’t been officially deemed legal by the FDA. This falls in the grey area of CBD’s current status. We need to thank these bigger companies for taking it on the chin and getting legal clarification in the courts for everyone. It’s likely that they were targeted because they have deeper pockets. The good news is that current FDA Chief Dr. Stephen Hahn has indicated that he’s likely to play ball with CBD and that “it would be a fool's game” to try to shut it down (article HERE) . So, hopefully, within a year, CBD will be either considered a dietary supplement or hopefully (not likely) GRAS (generally recognized as safe). When this happens, these should disappear. In the meantime, hold your breath and talk to your lawyer on how best to protect yourself.
7) Hemp and Processing Disputes: Issues have arisen over the quality of hemp, and the percentage of CBD that’s processed. Although working with nature isn’t an exact science, a solid contract written by an attorney with agricultural and/or food processing experience should help set expectations and also create penalties in the contract should expectations not be met. Additionally, know your source. Having a strong supply chain process, and tracking every document is critical to avoid disputes. A system like TagOne which uses blockchain to track supply chain information and data will have a huge impact on avoiding these types of disputes and keeping your partners honest.
8) Seizures & Transfer of Ownership: I can't imagine that anything could be more frustrating than having your federally legal hemp seized by the Idaho state police for containing .3% of THC. How can you avoid this? Well, for starters, don’t drive through Idaho. I’m partially kidding, but in all seriousness, know the states that are hemp (and Cannabis) friendly, and those that aren’t. Logistically this is challenging, but it’s worth it. Additionally, have your transfer of ownership documentation along with your Certificate of Analysis paperwork in your truckers' hand and ready to be produced. Using an integrated supply chain system like TagOne can help solve this challenge. Check with your attorneys on planning and contingency plans. And it may even be worth contacting the state police of the states you are passing through. Read more about this company that lost more than $1mm in hemp in Idaho HERE.
9) Labeling and Ingredient Accuracy: Unfortunately, tests are showing that many CBD products have either way too much, or way too little CBD in them. In one study from Leafly, almost 50% of the products had more than 120% or less than 80% of the labeled CBD quantity. Imagine how frustrating this is for the consumer who either sees no results, or their results are inconsistent from brand to brand, and bottle to bottle. How can you fix this? Get proper testing from an accredited testing facility and ensure that the CofA is connected with each batch (digitally), holding your contract manufacturers accountable and tracking their documentation, and moving towards end-to-end traceability.
While no executive wants to deal with legal issues, they are a reality in business these days. The best we can do is ensure that our operations and marketing teams are prepared, experienced, and accountable to avoid common missteps and to consult with experts.
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