The regulatory landscape
According to the Agriculture Improvement Act of 2018 (available at govtrack.us), which is often referred to as the “2018 Farm Bill,” “[t]he term ‘hemp’ means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” Pursuant to that legislation, which became U.S. law in December 2018 (read more at reedsmith.com), “hemp” was expressly removed from the definition of “marihuana” in the U.S. Controlled Substances Act and its regulations.
At the same time, the U.S. Food and Drug Administration (FDA) (1) reiterated that before a product containing CBD is marketed as a drug (read more at reedsmith.com), it must go through new drug approval and (2) stated that it remains currently illegal to put into interstate commerce a food containing CBD or to market CBD as, or in, a dietary supplement. The U.S. Department of Agriculture (USDA) recently issued an interim final rule (read more at reedsmith.com) for domestic hemp production, including requirements for testing hemp, licensing growers, disposing of noncompliant hemp, and collecting and storing information related to hemp production. However, the FDA still has not issued any regulations concerning the sale of CBD in food, dietary supplements, drugs, or cosmetics.
In the absence of federal guidance, some states have developed their own requirements for the sale and marketing of CBD products, including rules for testing and labeling CBD products. However, only a handful of states have developed such rules, while other states are either working to develop rules or have merely accepted the realities of an unregulated CBD market while awaiting further FDA guidance.
The rise of CBD-related false advertising class action litigation
This lack of government oversight combined with the mass proliferation of CBD products has prompted a rash of recent false advertising class action lawsuits against CBD companies across the United States.
In September 2019, a proposed class action lawsuit was filed in the U.S. District Court for the Southern District of Florida (to read more please download the document "Florida" below) against Diamond CBD, Inc. (Diamond) and its parent companies Potnetwork Holdings, Inc. and First Capital Venture Co. The suit alleges that Diamond misrepresented the quantity of CBD in its product on its product labeling and packaging as well as on Diamond’s website. Specifically, the plaintiff(s) alleged that Diamond was selling products “with a significantly lower amount of CBD than represented” and that it was “therefore cheating every consumer who buys the Products by that amount.”
The complaint filed in that action proposes two classes (one consisting of Florida residents and one consisting of non-Florida U.S. residents) who purchased Diamond CBD products for personal use within the applicable class period. The almost-nationwide class allegations are based on a theory of unjust enrichment – that is, Diamond allegedly received a benefit from plaintiffs (consumers) based on the overstated CBD amount, and had consumers known about the inaccuracies and overstatements regarding the CBD amount, they would not have purchased the products. The Florida class allegations are based on the Florida Deceptive and Unfair Trade Practices Act, Fla. Stat. sections 501.201 et seq., which prohibits “unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce.”
A similar class action lawsuit also was recently filed in the U.S. District Court for the District of Massachusetts (to read more please download the document "Massachusetts below) against Global Widget LLC dba Hemp Bombs. As in the Florida action, the complaint in this action also alleges misrepresentations regarding the advertised amount of CBD in the defendant’s products, specifically that defendant “grossly under-dosed” the amount of CBD in its products. The complaint further alleges that defendant falsely stated that its products were “certified pure,” knowing that consumers would pay more for products labeled as such.
Finally, still another class action lawsuit was just filed in the U.S. District Court for the Northern District of Illinois (to read more please download the document "Illinois" below) against Just Brands U.S.A. and its affiliates for alleged violations of the Illinois Consumer Fraud and Deceptive Trade Practices Act, 815 Ill. Comp. Stat. 505/1 et seq. This action alleges that the defendant falsely advertised its products as having “NO THC.” It further alleges that (1) the relevant products, however, do, in fact, contain THC and (2) the plaintiff was fired from his trucking job after failing a drug test that detected THC in his system.
Protect yourself
Because all of the above lawsuits are in their early stages at this time, the issue of whether or not the proposed classes will be certified has not yet been determined. However, these actions underscore the critical importance of accurately labeling, marketing, and advertising CBD products, as well as the risks associated with failing to do so. Although the FDA and the Federal Trade Commission have been the primary regulatory threats to the CBD market to date, their primary focus has been on unsubstantiated medical and health claims, and the enforcement actions have come primarily in the form of warning letters. In contrast, in the lawsuits identified above, the plaintiffs’ bar is seeking economic redress ranging from money damages and disgorgement of profits to consumer refunds.
Suppliers of CBD products should be aware that, in addition to the federal laws that prohibit unfair or deceptive acts or practices and false advertising, each state also has enacted its own consumer protection laws that prohibit such conduct. By way of example, California’s Business and Professions Code prohibits sellers from making any statement that is “untrue or misleading, and which is known, or by the exercise of reasonable care should be known, to be untrue or misleading.” Its False Advertising Law prohibits sellers from making false statements or statements likely to mislead consumers about the nature of a product or service, and its Consumers Legal Remedies Act prohibits a number of unfair marketing practices, including misleading labels, vague claims, and outright deception. Courts in California, and many in other states that have similar laws, regularly permit class actions to move forward under circumstances in which a consumer buys a product in reasonable reliance on statements made on the label or packaging, and the product fails to live up to the consumer’s expectations or understanding.
Studies have shown that the majority of the CBD products on the market are mislabeled. In a 2017 study on the labeling accuracy of CBD extracts sold online, almost 70 percent of the products tested were found to be mislabeled. Researchers in the study purchased and independently analyzed 84 CBD products from 31 companies. The results were as follows:
- 43 percent of the products tested were under-labeled, meaning that the CBD content exceeded the labeled value by more than 10 percent.
- 26 percent were over-labeled, meaning the CBD content tested more than 10 percent below the labeled value.
- Only 31 percent of the products were labeled accurately.1
The accuracy of labeling varied by product type: 82.5 percent of the vaporization liquids, 75 percent of the tinctures, and 55 percent of the oils tested were labeled inaccurately.
Such mislabeling opens the door for plaintiffs’ claims. To reduce the risk of being the target of a lawsuit for false or misleading advertising or of being held liable based on such claims, CBD-related companies should consider taking the following steps:
- Complying with all applicable federal laws and regulations concerning CBD, including, but not limited to, not making any unsubstantiated health or medical claims about products containing CBD.
- Reviewing and following all applicable state regulations concerning CBD in the states in which you are doing business, and avoiding doing business in states in which CBD is still illegal.
- Retaining a reputable laboratory to rigorously test all CBD products in order to ensure that information on product labels is as accurate as possible and maintaining certificates of analysis to substantiate that information.
- Making sure that claims set forth in all labeling, packaging, marketing, and advertising of CBD accurately reflect any test results and are otherwise fully substantiated before the claims are made.
- Obtaining and maintaining appropriate and adequate insurance coverage for personal injury claims.
- Consulting with experienced cannabis, regulatory, advertising, insurance-coverage, and other counsel, as appropriate.
Be prepared
At least until the FDA issues comprehensive regulations for the testing, labeling, and marketing of CBD products, and despite CBD companies’ best efforts, it is likely that the number of lawsuits targeting this industry will continue to increase. If and when a CBD business is sued, it should consider taking the following steps:
- Immediately retain litigation counsel with experience in the relevant law and industry.
- Ensure that your litigation counsel timely responds to the complaint or obtains an extension of time to respond to the complaint before the deadline to respond passes.
- Promptly provide written notice of the complaint (or even the threat of a lawsuit) to any relevant insurance carrier.
- Implement a litigation hold to preserve relevant documents, including emails and other electronically stored documents.
- Work with litigation counsel to craft a litigation strategy that will best meet your company’s needs.
Attorneys at Reed Smith are ready and available to help ensure that your products and marketing materials are developed in a way to mitigate the risk of litigation and to help defend against legal actions should they arise.
- jamanetwork.com
Client Alert 2019-270
