WSLCB - Special Board Caucus
(June 16, 2021)

Here are some observations from the Wednesday June 16th Washington State Liquor and Cannabis Board (WSLCB) Special Board Caucus.

My top 3 takeaways:

• Following serious allegations by a board member that a licensed cannabis processor was illegally converting cannabidiol (CBD) derived from hemp biomass into delta-9-tetrahydrocannabinol (delta-9-THC), the agency director was confronted regarding his previous statements and position on enforcement action.
  • In April 2020, some cannabis licensees publicly voiced concerns over the safety and legality of utilizing delta-8-tetrahydrocannabinol (delta-8-THC) and delta-9-THC synthesized from CBD extracted from hemp in commercial cannabis products. In the following weeks, board members started discussing the issue. Board Member Russ Hauge acted as the lead for the board.
    • Agency staff announced a policy statement for delta-8-THC and other cannabinoids on April 28th, followed by a clarifying bulletin on May 3rd. 
    • A rulemaking project on THC Compounds other than Delta-9 was opened by board members on May 12th as they continued learning about the practice. On May 26th, members heard from a business said to “license hemp-sourced THC technology to regulated cannabis license holders” who claimed “that our licensed process is sound, product is safe, and we would be pleased to share lab results.”
    • On June 3rd, WSLCB staff facilitated a deliberative dialogue between the public and a group of experts on cannabis plant chemistry largely focused on the conversion of CBD into delta-8-THC, with one panelist observing that the conversion to delta-9-THC was more difficult chemistry as delta-8-THC was “more stable, thermodynamically” and resulting compounds would “rather be delta-8 than delta-9, energetically.”
  • Hauge announced he’d requested the special caucus because he’d been involved in studying “the issues surrounding hemp-based cannabinoids being introduced into our system, specifically delta-8 and delta-9.” He hadn’t paid “much attention” to policy development for regulations around the conversion of CBD into delta-8-THC as he felt it was "fairly straightforward.” However, he "became convinced" from “talking to people and reading” allegations that "delta-9 created from hemp-based biomass" was already being sold in the state legal market, though he didn't “know how many or who" in the industry were doing it (audio - 7m).
    • Hauge reached out to Director Rick Garza and to the Marijuana Examiners office at the agency about accusations he’d received. He subsequently sent a request to Director of Education and Enforcement Chandra Brady at Garza’s behest, which Hauge understood would initiate an investigation by the Education and Enforcement Division.
    • Hauge said that in following up with Policy Affairs and Outreach Director Justin Nordhorn and Brady, he’d learned that “no enforcement had been started” because the statements released concerning delta-8-THC "may have impaired" the ability of WSLCB staff to take action against any processor engaged in the practice.
    • He reported receiving information from staff that there was “no doubt” that synthesized delta-9-THC “not from hemp grown in Washington” was being sold “by a processor or processors, to other processors or perhaps to retailers.” But other staff told him the agency would “not be on steady ground” to take action following the April 28th policy statement “and the qualifier that we put on there at the insistence of members of the industry.”
    • Hauge sought input from Assistant Attorney General (AAG) Geoffrey Allen as to whether the board should discuss the subject in relation to specific violations or as an agency policy “generally.” He opted to "have this discussion in public" rather than talk about particular enforcement actions and called for the special caucus as he’d been told agency staff wanted board direction “on this specific issue."
    • Hauge sent an email to fellow board members concerning RCW 69.50.326 on the “Use of additives to enhance CBD concentration of authorized products” as he believed the law was violated anytime a licensee converted CBD extract “from anywhere in the world” into delta-9-THC for inclusion in cannabis products. Feeling this had a significant and detrimental effect on those the state had authorized to produce the compound via licensed cannabis production, he asked, "Why are we not pursuing enforcement action?”
    • "I suggest that we should, simply as a matter of law," Hauge continued, otherwise "we're rendering moot our canopy limitation" as any amount of delta-9-THC could be entered into the system. He believed inaction would also make the distinction in producer tier sizes irrelevant and "impacts...our efforts at equity" by permitting a “substantial disruption in the market” just as the state has committed to making the sector more equitable through the Washington State Legislative Task Force on Social Equity in Cannabis (WA SECTF) and social equity retail licensing program to be administered by WSLCB.
  • Board Chair David Postman and Member Ollie Garrett asked for staff input. Garza spoke first, saying “the issue began" following an email forwarded by Hauge. While Garza “suggested...that we bring staff in," he had asked Brady “not to investigate, but I did ask [her] to look into the email” (audio - 1m).
    • Hauge said he’d emailed Brady about the allegation following Garza’s “direction after discussing the matter with you,” though he “thought it was a little unusual that you were asking me to give direction to the Director of Enforcement, that’s not the job of a board member, but at your request I did so.” Hauge later found out he was “on my own” once Garza advised against enforcement action at a subsequent meeting (audio - 2m).
    • Garza claimed confusion caused by “discrepancies in some of the information” offered by Hauge about which entity agency staff were being asked to investigate (audio - 3m).
      • Garza described how “Rion was in there when it’s actually Orion, it was actually a different entity, but I don’t know that that matters so much.” He then offered his opinion that the policy and clarifying statements had "made quite clear" that agency leaders were looking at “conflicting information coming from different industry members” on converting CBD into other cannabinoids, adding he "thought we made a decision at that point."
      • Garza read from the clarifying bulletin that the intention had been “to open public discussion around this issue. While the Board has broad rulemaking authority to act quickly when the public health, safety or welfare is at risk, the Board’s intention is to approach the issue conservatively and transparently, collecting input and actively collaborating with stakeholders. Until the LCB has reached a conclusion through the public rulemaking process whether to adopt rules to create enforceable requirements regarding products that contain delta-8, this policy statement is advisory.” Garza explained that he’d thought this was the reason the issue had continued to be talked about by the board and in public forums like the deliberative dialogue.
    • Hauge was insistent that the special caucus had been called to talk about CBD being altered into delta-9-THC, and that delta-8-THC policy wasn’t the issue. He asked Garza if it was correct that at the time he’d told Hauge enforcement wasn’t warranted, Garza and Nordhorn had “developed information directly from a license holder to the effect that they were, indeed, buying CBD on the open market from other sources, and turning it into delta-9, and selling it into the system. Isn’t that true?” Garza hedged that their preliminary information needed to be “validated” and he hadn’t said there should be “no enforcement action” (audio - 2m).

• Board members and staff debated what authority they had to take action while seeking a legal interpretation of the imported CBD statute.
  • Postman sought a “bigger picture” of the situation by asking for a legal interpretation of RCW 69.50.326. He was curious whether the board had ever issued a violation under that statute but was unable to identify a lawyer in the meeting. In lieu of counsel, Postman asked for a staff interpretation (audio - 7m). 
    • Brady stated she could only offer an enforcement perspective not legal analysis.
    • Nordhorn thought the statute wasn’t “clear cut.” Without commenting on whether the conversion of CBD into delta-9-THC was legal, Nordhorn indicated that the statute in question allowed for CBD to be imported and used as an “additive” in cannabis products once it had passed the same testing requirements as the state’s legally produced cannabis. When the board was discussing delta-8-THC, the conversation had been about “similar concepts of hemp-derived product being converted into other product.” What was unclear was if “after they use it as an additive can they do something else with that product?” In his opinion, state lawmakers “most likely never intended for the production to be in that manner” but he was uncertain whether it was “clearly prohibited” for licensed processors under the law as written.
    • Hauge specified that he was not “currently licensed to practice" law, but as a former attorney and prosecutor he felt qualified to read RCW 69.50.326 which said, in part, “Licensed marijuana producers and licensed marijuana processors may use a CBD product as an additive for the purpose of enhancing the cannabidiol concentration of any product authorized for production, processing, and sale under this chapter. Except as otherwise provided in subsection (2) of this section, such CBD product additives must be lawfully produced by, or purchased from, a producer or processor licensed under this chapter (audio - 3m).
      • (2) Subject to the requirements set forth in (a) and (b) of this subsection, and for the purpose of enhancing the cannabidiol concentration of any product authorized for production, processing, or sale under this chapter, licensed marijuana producers and licensed marijuana processors may use a CBD product obtained from a source not licensed under this chapter, provided the CBD product:
        • (a) Has a THC level of 0.3 percent or less on a dry weight basis; and
        • (b) Has been tested for contaminants and toxins by a testing laboratory accredited under this chapter and in accordance with testing standards established under this chapter and the applicable administrative rules.”
      • The statute was added in 2018 through HB 2334 (“Regulating the use of cannabinoid additives in marijuana products.”) In addition to regulating CBD importation, the law increased “the annual fee for issuance and renewal of a marijuana producer's license, a marijuana processor's license, and a marijuana retailer's license” by $81.
    • Hauge found nothing suggesting “CBD from China or wherever” could be “turned into some other product” though he assumed lawyers representing vested interests could challenge that interpretation. Hauge declared, "that's not our job. Our job is to look at what the law says and then to take steps necessary to give that law shape." Inaction was tantamount to ignoring both the law and the “whole organization” of the legal cannabis market, he stated.
  • Garrett accepted seeming uncertainty over whether the practice was legal, but said board members had heard from cannabis licensees and some trade association representatives that there was "harm that is being done.” She asked, “does the board have the authority to do something at this point, even if it's something temporary?" (audio - 2m)
    • Postman said that in addition to investigation of specific parties and potential issuance of administrative violation notices (AVNs), the board could take other approaches like an interim policy, emergency rulemaking, and/or permanent rulemaking. Nordhorn remarked that while he was uncertain whether synthesizing cannabinoids from a CBD additive was allowed, he was confident that board members had “rulemaking authority” to take action because the issue was conversion into delta-9-THC (audio - 3m).
    • Hauge said the policy statement had been "meant to reassure" stakeholders that we wouldn't do anything “too precipitous” because at that time he “had no idea" processors had already been taking CBD extract, processing it, and selling it as delta-9-THC in retail stores. He made reference to “an email yesterday that was quite, quite illuminating to me" which named a processor. Hauge said the traceability system showed the processor was purchasing materials for tens of thousands of dollars but “his sales” were reported as “worth millions of dollars.” Hauge was convinced the cost “differential” in the conversion of CBD into delta-9-THC was the only explanation and called for a re-examination of the initial policy statement on synthetic cannabinoids in products. Postman had found that legal cannabis license holders had complained about both the policy statement and clarifying bulletin, and he wasn’t comfortable with the board projecting motive on anyone just from their statements on the topic. He expected the situation wouldn’t truly be resolved without legislative action in 2022 (audio - 4m).

• Following input from legal counsel, the board settled on scheduling a closed executive session with agency counsel, with the view expressed that the issue was “not something we can bat around among ourselves for a period of weeks or months."
  • Garrett pointed out there was consensus on taking some action in the near term but not what that action would be. Postman thought that laws around government meetings precluded a vote on board action as the possibility hadn’t been publicly announced in the agenda (audio - 6m).
    • Garza indicated the situation wasn’t the first occasion the cannabis sector was "in a different place on this issue" and he called for a work session on the subject to let board members hear from and question legal and policy staff as well as industry representatives.
      • Garza also advised a work session on cannabis plant chemistry following questions the board had after the deliberative dialogue.
    • Garrett asked about a timeline for their next steps, with Postman agreeing with Garza’s idea for a work session to “drill down” into the topic with staff and lawyers. Postman added that an already approved rulemaking project covering THC Compounds other than Delta-9 could be modified to address converting CBD into delta-9-THC. Postman was also wary of having legal counsel weigh in on the topic publicly, on short notice, and with implications for enforcement actions against license holders.
  • AAG Geoffrey Allen chimed in, explaining he’d been listening to the discussion, but technical difficulties had prevented him from speaking earlier. He was reluctant to give legal advice in a public meeting, advising that it would be better submitted “in writing” to the board and reviewed in a closed meeting. Regarding licensees engaged in the practice of synthesizing delta-9-THC from CBD, Allen believed it was better to hold off on specific actions though he recognized the "urgency with which this session was called" (audio - 1m).
  • Hauge deemed Allen’s idea a “logical next step,” stressing that there was “economic damage to the market that we have now." While the board had been "told many times" it wasn’t their job “to protect the market,” the proliferation of synthesized delta-9-THC displaced the compound as produced by legal growers, "puts in jeopardy our future plans" for increasing equity, and threatened the viability of some business structures and sizes. "This is not something we can bat around among ourselves for a period of weeks or months," he insisted. Garrett was comfortable with Hauge’s choices for the path forward as he’d been “the lead” person for the board. Postman didn’t have a strong view of what actions would be warranted but believed “staff understand that it's a priority right now” even as the board couldn’t be “naming names” about who had engaged in the practice (audio - 4m).
  • Postman said he’d already gotten emails about a "lack of enforcement” indicating “regulatory capture" and though there was no action being taken at the moment, he didn’t think being “deliberate” and transparent amounted to “inherent wrongdoing” by agency leaders. "The industry clearly is ahead of the regulators in coming up with new things,” he concluded, and “we gotta get knowledgeable about it" in order to make fair policy (audio - 2m).
  • Nordhorn reiterated that rulemaking on THC was open and synthesized delta-9-THC could be added into that project. Doing so would enable “public engagement” while making progress on the issue. Postman expressed an interest in discussing that further “soon with staff” (audio - 1m).
  • Postman confirmed with Garza that no additional direction was required to move ahead. Garza responded that agency staff were “here, and engaged, and ready to work with the board.” Hauge promised to organize an executive session with agency counsel focused on the “nuances” of synthesized delta-9-THC soon and the board would decide on action after that (audio - 2m).