HEMP COMMERCIAL CONTRACTS
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Hemp Contract Enforceability — The Federal Advantage and Its AB 8 Limits
The enforceability advantage of hemp contracts over cannabis contracts is real but increasingly conditional. Because the 2018 Farm Bill removed compliant hemp (defined as Cannabis sativa L. with a delta-9 THC concentration of no more than 0.3% on a dry weight basis) from the federal Controlled Substances Act, hemp contracts are enforceable in both state and federal courts, and hemp operators have access to federal diversity jurisdiction, federal arbitration enforcement, and the full range of federal and state forum options unavailable to cannabis operators.
California’s AB 8 is progressively narrowing this advantage by tightening the definition of industrial hemp under California law, imposing CDFA testing and registration requirements on hemp cultivators, and extending DCC regulatory authority to hemp-derived cannabinoid products (including delta-8 THC, THC-O, and other synthetic cannabinoids derived from hemp) that enter the licensed cannabis market. A hemp supply agreement written in 2022 under the assumption that the buyer was a standard commercial food or supplement company may now need to address CDFA COA requirements, DCC product approval obligations, and AB 8 THC threshold compliance for the same product — depending on how the buyer uses the hemp biomass or hemp-derived cannabinoid.
The practical drafting implication is that every California hemp commercial agreement should include: (a) a regulatory compliance representation that the hemp product meets both the federal 0.3% delta-9 THC threshold and California’s AB 8 testing and registration requirements as they evolve; (b) a regulatory-change clause that addresses what happens to supply or purchase obligations when regulatory changes — including AB 8 amendments, new DCC regulations on hemp-derived cannabinoids, or CDFA testing standard changes — affect the legality or commercial viability of the contracted product; and (c) a termination-for-regulatory-change right allowing either party to exit the agreement without penalty if a regulatory change makes performance unlawful or commercially impracticable.
Hemp Supply Chain Contracts — CDFA, COA, and AB 8 Compliance Provisions
Hemp cultivation and processing in California is regulated by the CDFA under the Industrial Hemp Program, and every hemp biomass supply contract should reflect the specific CDFA obligations that apply at each stage of the supply chain. Under the CDFA Industrial Hemp Program, a registered hemp cultivator must: (1) submit a GPS-mapped cultivation plan and pay registration fees before planting; (2) arrange pre-harvest THC testing through a CDFA-accredited laboratory within 30 days before harvest; (3) receive a COA showing delta-9 THC concentration at or below 0.3%; and (4) report the harvest to CDFA. A hemp biomass supply contract that requires delivery before the COA is issued, or that fails to address what happens if the pre-harvest COA shows a THC concentration above the 0.3% threshold, creates a compliance gap that collapses the moment a hot crop is confirmed.
For hemp processors and manufacturers contracting to purchase hemp biomass or hemp-derived extract, the supply contract must also address AB 8’s tightening of testing standards for hemp-derived cannabinoid products that enter the licensed cannabis market. Under AB 8 and DCC regulations, hemp-derived cannabinoid products sold in the licensed cannabis market must meet DCC testing requirements — including the COA-before-retail requirement applicable to cannabis products — even though the underlying biomass was grown as hemp. A hemp extract purchase agreement that assumes the buyer can freely sell into the licensed cannabis market without DCC testing compliance may be commercially unworkable if the buyer’s distribution channel includes licensed cannabis dispensaries.
White-label and contract manufacturing agreements for hemp products require particular care when the products contain hemp-derived cannabinoids. AB 8’s definition of hemp-derived cannabinoid products that qualify for the licensed cannabis market — versus those that remain in the conventional food and supplement market — is still evolving, and a white-label agreement that does not allocate regulatory-change risk clearly between the manufacturer and the brand owner creates ongoing commercial uncertainty as AB 8 is implemented.
Cannabis vs. Hemp — Commercial Contract Differences
| Issue | Cannabis Commercial Contracts | Hemp Commercial Contracts |
|---|---|---|
| Contract enforceability | State courts only (Civil Code §1550.5); federal illegality defense applies | State and federal courts; no federal illegality defense; arbitration fully enforceable |
| Regulatory approval for acquisitions | DCC ownership change required (B&P §26040) | No state approval required for hemp business transfers |
| Supply chain regulation | DCC licensed distributor required for all transfers; Metrc chain-of-custody mandatory | No licensed distributor requirement; no Metrc tracking; CDFA COA required at cultivation |
| THC testing requirements | DCC-licensed lab COA required before each retail transfer; uploaded to Metrc | CDFA-accredited lab COA within 30 days of harvest; AB 8 tightening additional standards |
| AB 8 impact on existing contracts | AB 8 reclassifies some hemp-derived products as cannabis products requiring DCC approval | Existing hemp contracts may become unenforceable or require restructuring as AB 8 definitions change |
| 280E tax impact | Applies to all cannabis operations; interest and ordinary business expenses not deductible | Does not apply to hemp operations; standard deductibility available |
| Contract termination for regulatory change | Essential — DCC regulatory changes frequently affect supply and distribution arrangements | Critical under AB 8 — THC threshold changes and DCC scope expansion may make existing hemp contracts impracticable |
Representative Matters
- Negotiated a hemp biomass supply agreement for a San Joaquin Valley cultivator including CDFA pre-harvest COA conditions precedent to delivery obligation, a hot-crop termination right with cost allocation, and a regulatory-change clause addressing AB 8 THC threshold amendments.
- Drafted a hemp extract purchase agreement for a San Diego County processor, including CDFA COA requirements, AB 8 compliance representations, DCC regulatory-change obligations, and a termination-for-regulatory-change right calibrated to hemp-to-cannabis market convergence.
- Advised a Sacramento Valley hemp cultivator on restructuring a long-term hemp biomass supply agreement that predated AB 8’s tightening of industrial hemp definitions, ensuring the contract’s regulatory compliance representations and other provisions adequately addressed the new CDFA testing standards.