Late Wednesday evening the Texas House of Representatives dealt the hemp industry in the Lone Star State what can only be described as a Texas size heartache with the passage of Senate Bill 3 (SB3), effectively banning all hemp derived products containing THC and placing significant restrictions on non-intoxicating hemp products. The state of Texas has seen exponential growth in the sale of hemp derived products in reliance on the 2018 Farm Bill and 2019 bipartisan legislation meant to bolster Texas agriculture, each leaving significant ambiguity with respect to hemp derived products. Hemp derived products in various forms and concentrations have flourished largely due to a lack of restriction in Texas. As the industry continued to grow a lot of brands and operators doubled down in the hopes that everything truly would be “bigger in Texas” rendering the industry essentially too big to fail. Arguably that may be the case with some estimating the passage of SB3 places 6,300 small business, 40,000 jobs and $4 billion in retail at risk.

Even with the significant economic consequences of the ban, some shrewd maneuvering by the Lt. Gov. Dan Patrick (R) resulted in SB3 passing 95-44, without the house amendments that would have created an alternative regulatory framework as a compromise. In line with the version of SB3 passed by the Texas Senate several months ago, SB3 establishes a range of criminal offenses. The manufacturing, delivery or possession of any THC product “with intent to deliver” carries a potential third-degree felony charge and possession alone classified as a misdemeanor. Products containing non- intoxicating hemp derived cannabinoids (specifically CBD and CBG) would still be permitted, however, are subject to additional restrictions and the manufacturing of such products without the requisite license could result in the same penalty

The Texas hemp industry fell victim to a common affliction of underregulated markets. Over the past year states without restrictions on hemp products have appeared more attractive to brands and operators because those jurisdictions present unique opportunities. However, less is not always more, at least not permanently. What tends to happen is that irresponsible brands make extremely high potency or dangerous products, sometimes marketed to children, readily available. This creates a heightened scrutiny and the appearance of a public health crisis, which forces the pendulum to sway in the opposite direction, and quickly. In some states this has resulted in a ban, like California. In other states, like Illinois, the proposed ban has failed. Arizona was poised to pass legislation in March that would have regulated hemp products like alcohol, however, before it could be passed the attorney general issued a declaration that such products are unlawful and subject to criminal penalties.

The risk to brands and operators when the tides turn suddenly in any state can be significant. Most brands enter into agreements with co-packers or distributors that carry significant consequences if the products are no longer viable in that jurisdiction. This can include a mandatory buy back with a penalty or significant termination penalties.

In Texas, SB3 will be headed back to the state Senate for passage with an amendment permitting research and then will be headed to the office of the Governor for signature. In Arizona, hemp industry advocates are pursuing relief through the courts. Developments will continue to ensue across multiple states through the end of this legislative term and likely thereafter. Our team at Husch Blackwell continues to monitor such developments. If you have any questions please reach out to Alyssa Samuel or your Husch Blackwell attorney.