The US Department of the Treasury issued final regulations (“Final Rules”) last week that expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review non-controlling foreign investments in certain US businesses and certain real estate transactions. The existing jurisdiction of CFIUS to review any transaction in which a foreign person acquires control of a US business with national security concerns has not changed. The final regulations become effective February 13, 2020.
CFIUS Jurisdiction Expanded to Cover Minority, Non-Controlling Investments in TID US Businesses
Under the final regulations, CFIUS’s jurisdiction is expanded to allow it to review certain minority, non-controlling investments in US businesses that (1) produce or develop critical technologies; (2) own or operate critical infrastructure; or (3) maintain and collect sensitive personal data of US citizens. CFIUS defines such businesses as a “TID US Business”.
A minority, non-controlling investment in a TID US Business will be subject to CFIUS review if it provides a foreign investor with one of the following: (1) access to material nonpublic information of the TID US Business; (2) right to appoint a board member or board observer of the TID US Business; or (3) any involvement (other than the voting of shares) in substantive decision-making of the TID US Business regarding the development of critical technologies, the operation of critical infrastructure or the use of sensitive personal data.
Under this expanded jurisdiction, the CFIUS process and filings largely remain voluntary.
However, as discussed below, a mandatory filing is required in two situations: (1) certain “substantial interest” foreign government-related transactions in TID US Businesses, and (2) certain investments “critical technologies” TID US Businesses.
Mandatory Filings Required for Certain “Substantial Interest” Investments by Foreign Government-Controlled Entities
A mandatory filing is required for transactions resulting in the acquisition of a “substantial interest” in a TID US Business by a foreign person in which a foreign government has a “substantial interest”. Under the Final Rules, the “substantial interest” requirement would be met if a foreign person has a voting interest (direct or indirect) of 25% in a TID US Business and a foreign government has a voting interest (direct or indirect) of 49% or more in that foreign person. With respect to funds and partnerships, a foreign government will be deemed to have a “substantial interest” if it holds at least 49% in the general partner, managing member or equivalent.
Mandatory Filings for Certain Foreign Investments in Critical Technologies
The Pilot Program, which established mandatory filing requirements for foreign investments in certain TID US Businesses involved in “critical technologies”, will expire on February 12, 2020. However, certain key aspects of the Program will remain in effect under the Final Rules. As with the Pilot Program, mandatory filings are required for investments in a TID US Business involving “critical technologies” that give a foreign investor certain substantive rights in that business – either control, board membership or observer rights, access to material nonpublic information, or involvement (other than voting of shares) in substantive decision-making regarding the TID US Business. The term “critical technologies” generally means defense articles, nuclear equipment and materials, select agents and toxins, a broad range of dual-use items subject to export control and certain “emerging and foundational” technologies that will be controlled for export under forthcoming regulations.
Under the Pilot Program, the filing requirement was triggered by a TID US Business producing, designing, testing, manufacturing, fabricating or developing a “critical technology” in one of 27 different enumerated NAICS Code industries. The Final Rules state that separate, additional rules will be issued that will eliminate the association between “critical technologies” and NAICS Codes, and will instead be based upon export control licensing requirements. Therefore, going forward, the mandatory filing requirement would be triggered by a TID US Business producing, designing, testing, manufacturing, fabricating or developing a “critical technology” that is subject to export control licensing requirements, regardless of the self-assigned NAICS Code in which the business operates. Further detail has not yet been provided so the significance of this modification remains to be seen.
In addition, the Final Rules include certain exceptions to these mandatory filing requirements for foreign investors from “excepted foreign states” (as discussed below), investments in a fund managed and ultimately controlled by US nationals, foreign investors who are already subject to mitigation, and investments in a TID US Business that is a TID US Business solely because it is involved in certain non-sensitive encryption technology.
Exemptions for Foreign Investors from Australia, Canada and UK
Certain investors from “excepted foreign states” are exempt from CFIUS’s expanded jurisdiction over TID US Business investments. Under the Final Rules, the “excepted foreign states” are Australia, Canada, and the United Kingdom.
Generally, persons who are nationals exclusively of excepted foreign states (and/or the US) can qualify as “excepted investors”, as can foreign governments of excepted foreign states.
An entity will be deemed an “excepted investor” if, among other requirements: (1) it is organized under the laws of an excepted foreign state or the US; (2) 75% or more of the members and 75% or more of the observers of the board of directors are citizens of either the US or an excepted foreign state; and (3) all investors that hold a 10% or more equity interest are citizens of either the US or an excepted foreign state.
“Excepted investors” are not subject to CFIUS’s expanded jurisdiction for non-controlling investments or covered real estate transactions (discussed below), nor to the mandatory filing requirements for “substantial interest” investments or “critical technologies” investments described above, but they do remain subject to the traditional CFIUS jurisdiction for transactions that would result in their control of a US Business with national security implications.
CFIUS Jurisdiction Expanded to Cover Certain Real Estate Investments
The existing CFIUS jurisdiction covers foreign investments in real estate only if it allows a foreign person to gain control over a US Business. Under the Final Rules, CFIUS has expanded jurisdiction to review purchases, leases and concessions of real estate by foreign persons, including Real Estate Investment Trusts (REITs), involving property with geographic proximity to airports or maritime ports, or sensitive US military and other government sites.
The Final Rules state that CFIUS intends to make a web-based tool available in the near future to assist in the determination of whether a real estate transaction would qualify as a “covered real estate transaction” subject to CFIUS review. Note that while the scope of “covered real estate transactions” subject to CFIUS review has expanded, these transactions are still voluntary filings under the Final Rules.
- Treasury plans to issue separate rules amending the criteria for mandatory filing requirements to be based on export control licensing requirements rather than NAICS Codes. This is a welcome change since it should simplify the classification of such businesses and aid in a more precise determination of whether a US business constitutes a TID US Business.
- “Emerging and foundational technologies” still have not been defined by the Department of Commerce. This definition will have a major impact on jurisdiction over what constitutes a “critical technology” for purposes of a TID US Business.
- Filing fees will be determined in later rulemaking. CFIUS is permitted to impose filing fees not to exceed the lesser of 1% of the transaction value or $300,000.
Investors and companies are now faced with a more complicated CFIUS framework and analysis, and CFIUS will continue to be a key issue in future transactions involving foreign investment. In light of the Final Rules, fund managers should also review their fund documents to determine whether existing governance rights and/or access rights could potentially trigger CFIUS’s expanded jurisdiction. If you have questions about this alert and its applicability, please contact Roger Wells, Tom Worthington or Rachel Meyer.
This week, FDA issued warning letters to 15 companies for selling products containing cannabidiol (CBD) in violation of the Federal Food, Drug, and Cosmetic Act (“FD&C Act”). The covered products include pet products, topicals, dietary supplements, and conventional foods (including peanut butter, water and gummies).
As we have written about [here], 2019 has seen a flurry of enforcement actions against companies marketing CBD-containing products. In this latest batch of warning letters, FDA alleges that these companies marketed CBD products in ways that violate the FD&C Act by making claims that CBD products could prevent or cure diseases in humans and/or animals, and marketing CBD products as a dietary supplement or a food additive. Significantly, this is the first time FDA has clearly stated that CBD cannot be in a dietary supplement because it is a drug.
In surveying these companies’ websites and social media, FDA cited claims such as:
- CBD product has “anti-inflammatory” properties” and can be “applied topically for temporary relief to treat pain and discomfort from arthritis, muscle strain, bruises, sprains, joint aches and backaches”.
- “CBD lowers incidence of diabetes”
- “Little known uses for CBD – CBD for opioid addiction”
- “Our treats and oil can help your dog and cat with anxiety, skin conditions, arthritis, and more”
- “What Does Conditions May CBD Be Effective For? [sic] IBS; Migraine headaches; Seizure disorders; MRSA; Cancer; Depression; PTSD; Autism; Parkinson’s; Alzheimer’s”
Some of the products cited by FDA are specifically marketed for infants and children and one product is intended for food-producing animals. These warning letters indicate that FDA remains concerned about products marketed for vulnerable populations, like infants and children, that may be at greater risk for adverse reactions, and that FDA continues to be focused on the safety of human food products.
Earlier this week, FDA also published a Consumer Update detailing its underlying safety concerns about CBD, stating that “CBD has the potential to harm you, and harm can happen even before you become aware of it.” Further, based on the lack of scientific information supporting the safety of CBD, FDA has indicated that it cannot conclude that CBD is generally recognized as safe (GRAS) among qualified experts for its use in human or animal food. This is significant because without the GRAS designation, CBD would need to be the subject of an approved food additive regulation before it could legally be used in human or animal food.
These warning letters signal that FDA may be taking a more aggressive approach with increased scrutiny of CBD products. Our food and dietary supplement lawyers regularly advise clients on the status of CBD in FDA-regulated products. If you have any questions about this Alert, or are considering marketing or selling CBD products, contact our Food and Dietary Supplement regulatory team.
On October 29, the USDA released the much-anticipated draft rules for hemp manufacturing (the “Proposed Rules”). As we have previously written about HERE, the 2018 Farm Bill removed hemp from the Controlled Substances Act and ordered the USDA to establish a Domestic Hemp Production Program and implementing regulations. The Proposed Rules cover the requirements for where hemp can be grown, THC testing standards, the disposal process for “hot hemp” (hemp with THC content in excess of the permitted limit) and licensing protocols.
USDA-Approved State and Tribal Plans; USDA Plan
Under the Proposed Rules, a State or Indian Tribe that wants to have primary regulatory authority over the production of hemp in that State or Indian Tribe territory may submit a plan for monitoring and regulating hemp to the USDA for approval. States and Indian Tribes may begin submitting production plans once the Proposed Rules are published in the Federal Register (which we expect to happen yet this week). USDA will have 60 days following receipt to review and rule on the submitted plan.
The Proposed Rules also establish a USDA production plan to regulate production in states or territories where hemp production is legal but not covered by a USDA-approved State or Tribal plan. USDA will begin accepting applications 30 days after the Proposed Rules are published in the Federal Register; however, USDA will not issue licenses to producers located in a State or Indian Tribe territory that has a draft hemp production plan pending for USDA approval.
Regardless of whether a producer is operating under a State, Tribal or USDA Plan, operating under a USDA-approved plan is significant because hemp producers will be eligible for USDA programs, such as loans and crop insurance coverage.
There are requirements that all producers must meet, regardless of whether the USDA, State or Indian Tribe is overseeing production, including:
- Licensing requirements
- Maintaining information on the land on which hemp is produced
- Procedures for testing the THC concentration levels for hemp
- Procedures for disposing of non-compliant plants
- Compliance provisions, including annual inspections of a random sample of hemp producers to verify compliant hemp is being produced
- Procedures for handling violations
THC Testing and Violations
All hemp must be sampled and tested for THC levels by a USDA-approved sampling agent or authorized federal, state or local law enforcement within 15 days prior to anticipated harvest. Because of the potential for labs to handle product testing above the approved 0.3% THC level (which, under the Controlled Substance Act, would be marijuana and a Schedule I controlled substance), testing can only occur in DEA-registered labs.
The Proposed Rules also establish an acceptable hemp THC level distribution range that takes into account uncertainty in cultivation and provides some flexibility for producers. The Proposed Rules provide the following example: “if a laboratory reports a result as 0.35% with a measurement of uncertainty of +/- 0.06, the distribution or range is 0.29% to 0.41%. Because 0.3% is within that distribution or range, the sample, and the lot it represents, is considered hemp for the purpose of compliance with the requirements of State, Tribal, or USDA hemp plans.”
If the THC content is found to exceed the permitted THC limit (known as a “hot hemp”), it must be reported by the laboratory to the producer and USDA, and destroyed by someone authorized under the Controlled Substance Act and DEA to handle marijuana, such as a DEA-registered reverse distributor or federal, state or local law enforcement.
In cases where a negligent violation has occurred, a corrective action plan will be established and the producer must periodically report on compliance with the plan for at least 2 years following such violation. A producer who negligently violates the Rules three times in a 5-year period will be ineligible to produce hemp for a period of five years from the date of the third violation. Note that negligent violations are not subject to criminal enforcement by federal, state or local law authorities. In addition, the Proposed Rules provide that a producer would not negligently violate the Proposed Rules if the plants test between 0.3%-0.5% THC and the producer used “reasonable efforts” to grow compliant hemp.
In cases where an intentional, knowing or reckless violation has occurred, the producer will be reported to the Attorney General, USDA and the chief law enforcement officer of the State or Tribe.
The Proposed Rules are an important step in creating a consistent regulatory framework for growing hemp and testing its THC content. Of note, the Proposed Rules do not address what happens to processed hemp products, such as CBD (which we have written about HERE). In a footnote, the Proposed Rules reiterate the provision in the 2018 Farm Bill preserving FDA’s authority to regulate these products.
The public has 60 days to comment on the Proposed Rules once formally published in the Federal Register. Thereafter, if USDA makes no changes based on the public comments, USDA will publish a Final Rule. Then implementing regulations still need to be drafted and published. Those regulations will be focused on the nuts and bolts of implementing the Final Rule. We are continuing to monitor developments in this area and will provide further updates as necessary. If you have any questions about this Alert, please contact Rachel Meyer or Sandra Morar.
Recent FDA Warning Letter Valuable Reminder To CBD Industry – Don’t Ignore Basic Regulatory Compliance
Following similar announcements by CVS and Walgreens, Kroger became the latest retailer to join the CBD craze when it announced plans to sell CBD-infused products. Sales of products containing CBD are expected to top $5 billion this year, a 700% increase from 2018, and could reach nearly $24 billion in sales by 2023, according to analysts. However, a recent warning letter from the FDA contains important reminders for the industry.
Although hemp-derived cannabidiol (CBD) was de-criminalized by the federal government in the 2018 Farm Bill, the Bill did not affect FDA or the States’ authority to regulate CBD or other cannabis or hemp products in FDA-regulated products. To date, the FDA has not approved CBD in food or drinks for humans or animals, dietary supplements or topical cosmetics and maintains its current position that it is illegal to sell a food or dietary supplement that contains added CBD in interstate commerce. Historically, however, the FDA has generally taken a passive approach to the enforcement of hemp-derived CBD products.
On July 22, 2019, FDA issued a warning letter to one of the largest producers of CBD-based products, Curaleaf, Inc. The FDA reiterated that certain hemp substances, including CBD, have a questionable regulatory and safety status in the eyes of FDA and some state governments despite the 2018 Farm Bill. But the more likely trigger for the action was the marketing claims that were associated with Curaleaf’s products.
The FDA surveyed Curaleaf’s website and social media pages, and found claims like:
• “[S]oothing tincture for chronic pain.”
• “CBD has been demonstrated to have properties that counteract the growth of spread of cancer.”
• “CBD has also been shown to be effective in treating Parkinson’s disease.”
• “CBD oil can be used in a variety of ways to help with chronic anxiety.”
• “CBD is being adopted more and more as a natural alternative to pharmaceutical-grade treatments for depression and anxiety.”
These are clear drug claims related to treating or preventing diseases, and FDA concluded that the products were misbranded and unapproved new drugs.
In response to the warning letter, the company stated that it’s removing statements from its website and social media that FDA identified as noncompliant. Also of note, following the warning letter, CVS immediately removed all Curaleaf products from its shelves, and Curaleaf’s stock tumbled.
The bottom line is that fundamental regulatory compliance matters. The full list of Curaleaf’s claims reinforce best practices for drafting and substantiating claims appearing on any food or dietary supplement labels (not just those containing CBD). And if the claim is on a product that is already under scrutiny for regulatory discretion, then compliance is especially important.
In addition to regulatory enforcement action, publicly issued warning letters may also lead to class action lawsuits based on a claim that statements are false and misleading and actionable under state consumer protection laws. While the statute the FDA is tasked with implementing (the Federal Food, Drug, and Cosmetic Act) does not include a private right of action, litigants and courts often use FDA warning letters for guidance as to whether a marketing claim is, or is not, susceptible to challenge under various consumer protection laws.
It is crucial for companies that market or sell CBD products to confirm that their marketing materials and labeling generally comply with FDA requirements and avoid making unapproved human or animal drug claims. If you currently market or are considering marketing CBD products, contact our Food and Dietary Supplement regulatory team to guide you through state and federal labeling and advertising requirements.
On June 21, 2016, the Federal Aviation Administration (FAA) finalized its long-awaited rules authorizing the commercial use of small unmanned aircraft systems (UAS or “drones”). The new rules take effect in August and will allow drones to be flown commercially to benefit a host of industries such as agriculture, construction, real-estate photography, power and utilities, media coverage and emergency response. The rules are estimated to “generate more than $82 billion for the U.S. economy and create more than 100,000 new jobs over the course of the next 10 years.” Press Release, Federal Aviation Administration, DOT and FAA Finalize Rules for Small Unmanned Aircraft Systems (June 21, 2016) (available at https://www.faa.gov/news/press_releases/news_story.cfm?newsid=20515).
Key aspects of the rules include:
- Maximum drone speed, 100 mph;
- Maximum drone weight, 55 lbs.;
- Maximum drone altitude, 400 ft.;
- Drone must remain in the line of sight of the operator at all times during flight;
- Operations are allowed during daylight and during twilight if the drone has anti-collision lights;
- Flights are not permitted within five miles of an airport without obtaining FAA approval;
- Pilot must be at least 16 years old;
- A single pilot may not operate more than one drone at one time;
- Flights are prohibited over any persons not directly participating in the operation, under a covered structure or inside a covered stationary vehicle;
- Pilot must pass an aeronautical knowledge test at an FAA-approved knowledge testing center for a remote pilot certificate and pass a background check by the Transportation Security Administration.
In the months ahead, the FAA will offer an online process to waive some restrictions if an operator can prove the proposed flight will be conducted safely. Although the new rules do not deal with privacy issues, the FAA has encouraged all operators to check local and state laws before gathering information using sensors, video and photography technology. For more information on drones and registration with the FAA, see http://knowbeforeyoufly.org/.
- Luke C. Holst is a registered patent attorney with experience in both patent prosecution and patent litigation. Holst is a former Patent Examiner at the U.S. Patent and Trademark Office; Law Clerk to the Honorable Mark W. Bennett at the U.S. District Court for the Northern District of Iowa; and Legislative Counsel at the U.S. Capitol to an Iowa Congressman on the U.S. House of Representatives Committee on the Judiciary. At McGrath North, Holst works on patent issues, other intellectual property matters, and litigation.
As farmers gear up for planting season, a common question asked is who owns farm data generated by agriculture technology providers (“ATP”)? The answer isn’t as simple as it should seem.
Farm data is generally defined as data collected and analyzed from sensors and software on planters, combines, sprayers and other farm implements. Farm data can be used to help farmers improve efficiency, reduce inputs, know when to irrigate, produce better yields and ultimately make higher profits. However, farmers have concerns over how their agricultural data may be used, shared and sold which may lead to adverse economic or commercial consequences for the farmer. For example, will farm data be accessible to government agencies like the Environmental Protection Agency, used by Wall Street traders to speculate or manipulate the commodities market or leveraged by seed and chemical companies? The issue is further exasperated when multiple parties are involved. For instance:
- Does a landowner own farm data generated on their land or the tenant?
- Does a co-op that applies the fertilizer and/or pesticide own the farm data or the farmer who pays for the application?
- Does the owner of the precision ag hardware that collects the data own the farm data or the farmer on whose land the equipment is used?
In light of these questions and concerns, the American Farm Bureau Federation led a consortium of thirty-five farm and commodity groups to set forth “Privacy and Security Principles for Farm Data.” The principles state with regard to farm data ownership:
Ownership: We believe farmers own information generated on their farming operations. However, it is the responsibility of the farmer to agree upon data use and sharing with the other stakeholders with an economic interest, such as the tenant, landowner, cooperative, owner of the precision agriculture system hardware, and/or ATP etc. The farmer contracting with the ATP is responsible for ensuring that only the data they own or have permission to use is included in the account with the ATP.
It must be noted that the “Privacy and Security Principles for Farm Data” aren’t binding and there are no federal laws directly regulating the storage use or transfer of agricultural data. However, the takeaway is that farmers, landlords, co-ops and agriculture technology providers need to make sure their contract or lease is explicit to who owns farm data. When drafting such contracts, important questions to keep in mind include: (1) Does the contract describe what type of data is being collected; (2) Is control of farm data addressed; and (3) Does the contract state whether the farm data may be accessed, sold or shared with others? Farmers, landlords, co-ops and agriculture technology providers therefore need to take the time to carefully draft and understand contractual language before they sign to ensure farm data ownership issues are clear.
- Luke C. Holst is a registered patent attorney with over twenty years of experience in the agriculture industry as part owner-operator of a family farm in Northwest Iowa. Holst is a former Patent Examiner at the U.S. Patent and Trademark Office; Law Clerk to the Honorable Mark W. Bennett at the U.S. District Court for the Northern District of Iowa; and Legislative Counsel to Congressman Steve King at the U.S. Capitol. At McGrath North, Holst works on patent and trademark issues, including intellectual property litigation.
Amidst falling farm prices and lower income, the agriculture industry is turning towards an emerging technology in an attempt to deploy resources more efficiently and increase profit margins. Drones, also called Unmanned Aerial Vehicles (“UAV”) or Unmanned Aerial Systems (“UAS”), offer a futuristic approach to farm management that provide many benefits over traditional methods. Under the traditional approach, crop scouters would periodically inspect fields along their perimeter to judge crop conditions. Because farms typically encompass hundreds or thousands of acres, the interior of the field was often left unchecked during the growing season. Today, farmers may utilize UAVs equipped with high definition cameras to obtain complete aerial views of their fields and monitor crop conditions in real-time. Thus, farmers may quickly and efficiently respond to circumstances affecting crop health, poor drainage, and areas requiring replant to boost yields. As technology evolves, UAVs are also coming equipped with infrared cameras and advanced sensors that allow farmers to check for signs of crop disease, recognize nutrient deficiencies, assess drought conditions, identify weed hot-spots, apply pesticides, irrigate on an as-needed basis, and predict harvest yields. The livestock sector has further taken note of this cutting edge technology, wherein a leader in the cattle feeding industry recently filed a patent application with the United States Patent and Trademark Office for incorporating UAVs into livestock feeding operations. For all of these significant reasons, the Association for Unmanned Vehicle Systems International has predicted that the agriculture industry will capture up to 80% of the commercial drone market.
Unfortunately, flying drones for commercial use is currently prohibited in the United States, absent express permission from the Federal Aviation Administration (“FAA”). According to the FAA, commercial use may be considered using a UAV to take photographs/videos for compensation and/or sale to another individual. Commercial use may also include a farmer using a UAV to take photographs of his/her fields for decision-making purposes (e.g., identifying target areas requiring replant, fertilizer application, irrigation, etc.). In 2015, the FAA released proposed rules for the commercial use of drones. Key aspects include:
- Maximum drone speed, 100 mph;
- Maximum drone weight, 55 lbs.;
- Maximum drone altitude, 500 ft.;
- Drone must remain in the line of sight of the operator at all times during flight;
- Operator must conduct flights during daylight hours only;
- Operator must be at least 17 years old;
- Operator must pass an “aeronautical knowledge test” every 24 months; and
- Operator must obtain an Unmanned Aircraft Operator Certificate.
The FAA has predicted that the proposed rules will be finalized as early as June 2016. Therefore, UAVs may soon be flown commercially to benefit the agriculture industry, in addition to a host of other industries such as real-estate photography, media coverage, and law enforcement. In the meantime, UAVs may still be operated for hobby or recreational purposes (e.g., taking photographs for your own personal use) after being registered online with the FAA. For more information on UAVs and registration with the FAA, see http://knowbeforeyoufly.org/.
- Luke C. Holst is a registered patent attorney with over twenty years of experience in the agriculture industry as part owner-operator of a family farm in Northwest Iowa. Holst is a former Patent Examiner at the U.S. Patent and Trademark Office; Law Clerk to the Honorable Mark W. Bennett at the U.S. District Court for the Northern District of Iowa; and Legislative Counsel at the U.S. Capitol to an Iowa Congressman on the U.S. House of Representatives Committee on the Judiciary. At McGrath North, Holst works on patent and trademark issues, including intellectual property litigation.