Criminal Charges Against Hemp Business Prompt Lawsuit and National Confusion

By Hilary Jacobs, Christopher Strunk, and Mackenzie Schoonmaker

A recent lawsuit filed by an Oregon CBD company highlights the risks of criminal prosecution that industrial hemp businesses still face, notwithstanding the 2018 Farm Bill and robust local regulations – and the potential civil liability that follows.  On April 24, 2020, Key Compounds LLC (“Key Compounds”) filed a suit against Massachusetts-based hemp extraction and processing company Phasex Corporation (“Phasex”) alleging that Phasex destroyed Key Compounds’ business by providing it with CBD oil with THC concentrations in excess of the legal standard of .3% THC, resulting in criminal charges against Key Compounds and its personnel.  See Key Compounds LLC v. Phasex Corporation, No. 6:20-cv-680 (D. Or., filed Apr. 24, 2020).  

According to Key Compounds’ complaint, Key Compounds contracted with Phasex to process its industrial hemp extract to CBD oil while removing any THC to “nondetectable levels.”  Instead of properly processing the hemp extract as agreed, Key Compounds claims that Phasex’s faulty processing led to CBD oil with THC concentrations 15 times higher than the 0.3% level permitted by federal law.  

Prompted by strong odors of “marijuana,” police in Oregon intercepted the package containing the CBD oil just prior to its return to Key Compounds, in which Phasex erroneously included the high-THC extract – a waste product which should have been discarded – in the return package.   Law enforcement seized the package, raided Key Compounds’ facility, and filed felony drug trafficking charges.  The most concerning of the charges against Key Compounds was for unlawful manufacture of marijuana, a Class B felony, which was rooted in the assumption that an industrial hemp business must always maintain THC concentrations of less than .3% by dry weight.  This conflicted with Oregon regulations, which require that the products only need to meet the standard at two points, including time of harvest, before the products are made available to the public.  Or. Admin. R. 603-048-0600, 2330 – 2340.  Although the three serious felony charges against Key Compounds, including this one, were dropped, Key Compounds is claiming that the criminal investigation destroyed the company’s reputation and customer base. 

Hemp processors should heed Key Compounds’ action as a cautionary tale of operating in today’s market.  Without uniform federal standards governing industrial hemp processing, the hemp processing market is governed by a patchwork of state regulatory schemes.  Further, although the USDA’s Interim Final Hemp Rule made the legality of sending industrial hemp and industrial hemp products across state lines clear, hemp processors are still prone to the whims of local law enforcement – especially when the “odor of marijuana” still constitutes probable cause to initiate a search.  Indeed, local prosecutors, many without a full understanding of the 2018 Farm Bill or even state-level cannabis regulations, still have unfettered discretion to bring charges – whether or not ultimately successful. The transportation issue is a critical one, because growers will need to send product quickly to DEA labs for testing, which may necessitate interstate shipment– either by mail, as in this case, or via truck transportation (which has resulted in multiple seizures of product).  Hemp businesses should ensure that they have counsel with insight on the local hemp regulations in any state in which they operate or ship product to, and incorporate appropriate liability-limiting language in their agreements to account for this risk.