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Dec. 19, 2023 |  By: Rebecca Rivas - Missouri Independent

Company behind Missouri marijuana recall poses legal challenge to state’s regulations

marijuana

By Rebecca Rivas - Missouri Independent

Missouri’s crackdown on a cannabis company accused of illegally importing THC concentrate could lead to a showdown over the state’s authority to regulate the industry.

Delta Extraction had its license to manufacture cannabis products revoked in November, months after a massive recall pulled more than 60,000 products off the shelves — which the state says were illegally made with a hemp-derived THC concentrate imported from out of state.

As the legal battle continues to drag out, the company has upped the ante: If the state continues its efforts to sanction Delta and the recalled products, it will respond with litigation the company’s attorneys believe could gut Missouri’s marijuana regulations.

“Delta is also not limited to only challenging the [Department of Health and Senior Services’] authority to regulate hemp-derived products,” Delta’s attorney Chuck Hatfield, wrote in a Nov. 15 letter to the state. “Any lawsuit will likely include claims relating to the department’s regulatory authority in other areas of the marijuana industry.”

On the outside, the company with 20 employees located at the end of a dusty farm road near Pacific seems an unlikely candidate for upending Missouri’s regulatory framework.

But behind the scenes, Delta’s owners and associates include some of the most influential players in Missouri cannabis.

From its ownership group — which hosted Missouri Attorney General Andrew Bailey at a Ladue fundraiser just two weeks after his office took over defending the state in Delta’s litigation — to the powerful lobbyists and attorneys enlisted to represent the company and its affiliates, Delta is anything but an underdog.

State Sen. Nick Schroer, a Republican from O’Fallon who chairs the legislative committee that oversees Missouri’s marijuana rules, said Delta hired the “big guns” to win its license back — including longtime Jefferson City attorneys Hatfield, a Democrat, and Lowell Pearson, a Republican.

“That’s where I think this is a very interesting issue because it’s not necessarily political,” Schroer said. “It impacts all the parties, all individuals across the state, from veterans to people that just like to smoke recreationally and so many others in between.” 

In order to reach a settlement with state regulators, Delta was willing to admit that it “failed to strictly comply with regulatory requirements,” according to Hatfield’s letter. 

However, the company won’t admit that it did something wrong when it imported a hemp-derived THC concentrate, Hatfield said, because hemp is not a federally controlled substance.

Lisa Cox, the department’s spokeswoman, said Delta Extraction’s license was revoked for “numerous violations of rules, including extensive failure to comply with seed-to-sale tracking requirements.” 

Cox also said the company “was not permitted to use THC in its products unless that THC was created from cannabis grown by a licensed cultivation facility.” 

A question for the courts

At the center of Missouri’s massive marijuana recall is a THC concentrate, or distillate, made partially from hemp.

Delta bought oil from a Florida lab containing THC-A extracted from the hemp plant. Once the oil was in Missouri, the company heated it through a decarboxylation process — which turns it into Delta-9 THC, the cannabinoid most commonly known for producing a high. 

Buying hemp-derived THC-A from Florida is much cheaper than producing it from Missouri marijuana.

While hemp is federally legal, state regulators argue that once hemp-derived THC comes into the marijuana realm, they can regulate it. 

The Missouri constitution “expressly requires all marijuana and marijuana-infused products sold in Missouri to be cultivated or manufactured in Missouri,” the department argued in a Dec. 4 document in the Delta’s appeal of the recall and license revocation before the Administrative Hearing Commission.

The question currently before the commission is whether or not Missouri regulators have the authority to prohibit licensed companies from infusing Missouri-grown marijuana products with hemp-derived THC. 

The commissioner overseeing the case, Carole Iles, has already said in an Aug. 29 order that it’s illegal to add “hemp-derived chemically modified ‘converted’ cannabinoids” to marijuana products.

That’s why the fight will likely end up in court. 

In September, a federal judge in Arkansas sided with hemp companies in granting a preliminary injunction on a state law aimed at regulating hemp-derived THC. 

U.S. District Judge Billy Roy Wilson said if Arkansas wants to participate in the federal hemp program, then it can’t pick and choose which parts of the law it wants to follow.

“Clearly, under the 2018 Farm Bill, Arkansas can regulate hemp production and even ban it outright if it is so inclined,” the Sept. 7 ruling states. “The legislature seems to have tried to keep the parts of the program it likes (purely industrial uses) and eliminate the parts it doesn’t (human consumption).”

Hatfield said that’s what Missouri cannabis regulators are trying to do. 

“The Division of Cannabis Regulation’s authority to regulate is limited to non-hemp marijuana and does not depend on whether it is used to make THC,” he states in the letter to the department. 

Schroer said he’s heard from numerous marijuana businesses that are suffering from the recall, and he’s not sure the state’s decision to pull Delta’s license and thousands of products from the shelves was the right one. He believes voters wanted a marijuana program where all products were homegrown in Missouri. 

“And arguably, was hemp part of that?” he said. “I think we’re gonna find out in the courts.” 

The underdog

Aside from the legal battle, the case sets up another conflict. 

For Missouri’s marijuana cultivators, hemp-derived THC poses a threat to their livelihoods because Missouri marijuana licensees must go through a rigorous and costly regulatory process — one that hemp companies don’t.

If Delta and other manufacturers can buy hemp-derived THC concentrate for a fourth of the price that it costs to purchase Missouri-grown marijuana THC concentrate, then the state’s marijuana cultivators will suffer. 

But it would be a big win for the state’s hemp farmers. 

Sean Hackmann, president of the Missouri Hemp Trade Association, said Delta sold more than $20 million of distillate that was a mixture of marijuana grown in Missouri and hemp from other states.

“Twenty million dollars in the Missouri hemp industry would be huge, if that was produced, extracted and processed inside our state,” Hackmann told The Independent in September. “But it was all some other state that benefited from that. Not our Missouri industry.” 

While normally the underdogs, the hemp industry now has people like the marijuana industry’s top lobbyist Steve Tilley and attorneys Hatfield, Pearson and Alec Rosenblum fighting for its interests because it benefits their clients.

And the web of political ties runs deep. 

A member of Delta Extraction’s ownership team, Josh Ferguson, hosted a fundraiser for Attorney General Andrew Bailey’s election campaign on Nov. 7. 

Delta’s lawsuit against the state has made its way to the Court of Appeals, and that’s where the attorney general’s office normally takes over legal representation in marijuana cases. 

Two weeks before the fundraiser, Bailey’s office began representing the state in Delta’s appeal. The case is being handled by Solicitor General Josh Devine, the highest-ranking lawyer in the attorney general’s office. 

“The AG’s Office represents state agencies in these cases at the appellate level,” said Madeline Sieren, Bailey’s spokeswoman. “That is what we did here. Any political activity is separate and apart from his work as attorney general. I would direct any questions about political activity to the campaign.”

Political power

Delta Extraction is 50% owned by A Joint Operation, a management group with three principals: Ferguson, Josh Corson, and Ryan Rich. 

Ferguson is the owner and founder of Kaldi’s Coffee. Corson comes from a real estate background and Rich is owner and CEO of Hot Box Cookies. 

Rachael Herndon Dunn is chief development officer at A Joint Operation and one of the initial founders of Greenway Magazine, which covers the cannabis industry. 

The other half of Delta Extraction is owned by Ozark Highland Cannabis LLC, which is the umbrella for the Midwest Magic brand that uses Delta Extraction’s facility to make its products. Edward Maritz is the registered agent for Ozark, and Jack Maritz is the general manager for Delta Extraction.

Delta was also manufacturing products for the Conte brand. According to documents filed in both the lawsuit and appeal with the commission, Delta has been producing Conte’s THC distillate for over a year. The majority of the distillate is hemp-derived THC-A combined with a small amount of Missouri marijuana. 

The company has sold 700 liters of this concoction since at least July 2022, Jack Maritz said in his Aug.14 testimony before the Administrative Hearing Commission. 

And it’s sold to 135 Missouri marijuana license holders, with Delta making $20 million since it began offering a hemp-marijuana distillate in April 2022, company leaders said in their testimonies. 

The 700 liters of oil has the potential to make “millions of packs of edibles,” Maritz said in his testimony.

Over the summer, Conte Enterprise Holdings hired the Jefferson City lobbying firm Strategic Capitol Consulting. The firm is owned by Tilley, a former state lawmaker and fundraiser for Gov. Mike Parson. 

Rosenblum serves as Conte’s attorney.

The Administrative Hearing Commission will hold a three-day hearing on the company’s appeal of the recall and license revocation in February or early March. If the commissioner sides with the state, then Delta will continue the fight in court. 

A separate lawsuit against the state was filed in September by a company that purchased the recalled THC oil from Delta and is now challenging the regulators’ authority to pull the product from the shelves. 

While not a Missouri licensee, the company, Integrated Sales Solutions, argues that its products are on lockdown and the company’s livelihood is suffering. 

Integrated Sales Solutions  is represented in the lawsuit by Marc Ellinger — Bailey’s campaign treasurer. 

Ellinger did not return The Independent’s request for comment.