7th Circuit snuffs out injunction on state smokable hemp law

An injunction prohibiting the state government from prosecuting certain uses of smokable hemp has been lifted after the 7th Circuit Court of Appeals found the prohibition was overbroad. But when the smoke clears, the appellate panel said a revised injunction may still be appropriate.

Judge Diane Wood wrote for the unanimous circuit panel that vacated the injunction July 8 in C.Y. Wholesale, Inc., et al. v. Eric Holcomb, et al., 19-3034. The immediate impact on the legal status of the possession and sale of smokable hemp in Indiana, which is widely available at retail CBD establishments, was not immediately clear.

Indiana Attorney General Curtis Hill applauded the ruling in a press release. “We are pleased that the appeals court upheld Indiana’s criminal prohibition on the manufacture and possession of smokable hemp,” he said. “The court has rightly recognized Indiana’s authority to enforce this law.”

The case traces back to the federal 2014 Farm Law, which allowed states and research institutions to cultivate industrial hemp for research without getting a license from the Drug Enforcement Administration. Industrial hemp is known to have significantly lower levels of THC, the psychoactive element found in marijuana.

Then in 2018, a subsequent Farm Law expanded the definition of industrial hemp to include cannabis plants not only having a low THC concentration, but all low-THC cannabis derivatives. The 2018 law also excluded industrial hemp from the federal definition of marijuana, meaning it is no longer listed as a controlled substance.

In both laws, states retained the authority to regulate the production of hemp. However, the 2018 legislation forbids states from “prohibit[ing] the transportation or shipment of hemp or hemp products … through the State.”

Meanwhile in Indiana, the General Assembly in 2019 passed Senate Enrolled Act 516, which aligned the state definition of industrial hemp with the federal definition and legalized the commercial production of hemp in the state. But possession of “smokable hemp” – defined as industrial hemp “that allows THC to be introduced into the human body by inhalation of smoke” – remained illegal. According to Judge Wood, “law enforcement offices find it nearly impossible to distinguish between low-THC smokable hemp and marijuana in the field.”

A group of Hoosier hemp sellers and wholesalers, identified by the 7th Circuit collectively as “C.Y. Wholesale,” filed for a preliminary injunction days before SEA 516 took effect. They sought to prevent the state from criminalizing the manufacture, financing, delivery and possession of smokable hemp, arguing that doing so was preempted by the Farm Law and would violate the Commerce Clause.

Senior Judge Sarah Evans Barker of the U.S. District Court for the Southern District of Indiana issued the injunction under the preemption theory, but she found the Commerce Clause argument “less convincing.”

Then in 2020, the General Assembly enacted SEA 335, which limits SEA 516 and “clarifies that Indiana’s prohibition on the delivery and possession of smokable hemp does ‘not apply to the shipment of smokable hemp from a licensed producer in another state in continuous transit through Indiana to a licensed handler in any state.’” SEA 335 took effect July 1, after the 7th Circuit heard arguments.

“Both for that reason, and because many of the arguments are unaffected by Act 335, we focus primarily on Act 516,” Wood wrote.

In overturning the injunction, the circuit panel began its analysis by noting that Barker “failed to enter a standalone document containing the injunction, as required by Federal Rules of Civil Procedure 65(d)(1)(C) and 58(a).” While not a jurisdictional flaw, “it has an effect on the clarity of the injunction,” the panel wrote.

“The court reasoned that Act 516 would put market participants who transport industrial hemp through Indiana at risk of criminal prosecution, in violation of the express preemption clause of the 2018 Farm Law. Yet it broadly enjoined the portions of Act 516 that criminalize much more than transportation, including the manufacture, financing, delivery, or possession of smokable hemp,” Wood said. “… The failure to enter an independent injunction requires one to infer the scope of the injunction from the opinion, and regrettably, the opinion’s conclusion is not fully supported by its analysis. The discipline of the separate-order rule would likely have averted this problem, and so we once again remind district judges not to overlook it.”

Turning to the merits, the panel noted that the Farm Law allows for states to regulate the production of hemp. Additionally, the federal law’s express preemption clause does not limit a state’s right to prohibit industrial hemp cultivation or production.

“We are also unconvinced that the express preemption clause, standing alone, precludes a state from prohibiting the possession and sale of industrial hemp within the state,” Wood wrote. “What it unequivocally does cover is the interstate transportation of smokable hemp. This means that a more limited injunction of Act 516 that addresses only transit through the state, along with ancillary restrictions on the possession and delivery of smokable hemp to the extent that those provisions interfere with that transit, is the most that would have been warranted on express preemption grounds.”

C.Y. Wholesale also raised a conflict preemption argument, but that likewise failed at the 7th Circuit.

“Although Congress may have relaxed federal restrictions on low-THC cannabis in order to facilitate a market for hemp, the Law indicates that the states were to remain free to regulate industrial hemp production within their own borders,” the judge wrote. “Despite legalizing industrial hemp on the federal level, the Farm Bill expressly permits the states to adopt rules regarding the industrial hemp production that are ‘more stringent’ than the federal rules.”

Finally, rejecting the plaintiffs’ Commerce Clause argument, the circuit panel agreed with the district court that “this argument does not show sufficient promise of success on the merits to warrant a preliminary injunction” and further “adds nothing of substance to C.Y. Wholesale’s express preemption theory.”

But “(a)lthough we find that the district court’s injunction was too broad, we should not be misunderstood as saying that a properly tailored injunction is not warranted,” Wood noted. Indiana may be illegally prohibiting the interstate transportation of industrial hemp, she said, in which case the district court could “appropriately issue an injunction … .”

Further, on SEA 335, the circuit judges held that they would “leave from the district court to decide whether this language violates the Farm Bill’s express preemption clause … .”

Finally, the 7th Circuit advised the district court on remand to ensure that the remaining plaintiffs have standing to challenge SEA 335’s licensing provision, as “they may not be the right parties to challenge Indiana’s requirement that businesses seeking to transport smokable hemp through the state be licensed in the states in which they do business.”

The case was remanded for proceedings.•