Breaking Down The Two Lawsuits Fighting For Texas Hemp

UPDATE: A Travis County district judge has temporarily lifted the statewide ban on the sale of hemp flower. Read more here from the Texas Tribune.

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Chris here, co-founder of Chill Country.

Like everyone else in this space, my mind has been doing Good Will Hunting chalkboard math on whether these new DSHS laws are going to hold up or get held up.

My money is on getting a temporary injunction and forcing these laws to go back to the Legislature in 2027.

I’ve heard conflicting information about whether it’s better to have one lawsuit or several filed against DSHS for these new regulations. I’m a big fan of Rule #2 from Zombieland: The Double Tap, when you’re not sure a zombie is really down, do not be stingy with your bullets.

Below I’ll go over the two lawsuits against DSHS that I think will stop these regulations dead in their tracks. I’m not a lawyer and this isn’t legal advice. It’s my opinion that both lawsuits are complementary in that their arguments can be grouped into three major pillars, but with different evidence to support them. Those pillars are: DSHS changed what “legal hemp” means without the Legislature’s permission; the fees are not regulatory cost recovery, they’re a tax; and DSHS is attempting to override a failed legislative agenda outside of the Legislature.

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Two Lawsuits and What Happens Next

The two lawsuits filed were by Green Nation and the Texas Hemp Business Council. Green Nation filed on March 31st and THBC filed on April 7th. Technically, a Temporary Restraining Order (TRO) can be granted on the same day that it’s requested, but that hasn’t happened yet. TROs are designed for when harm is happening right now and there’s no time to wait. They are temporary by design and expire after 14 days.

After a TRO, both sides of a lawsuit come to court, present arguments and evidence, and the judge decides whether to keep the rules blocked while the full lawsuit plays out, in the form of a Temporary Injunction. This can last months or years, and the status quo remains while the case is litigated. This is what happened with Delta 8 in Texas, and why you can still buy it everywhere.

Finally, after a full trial, if the plaintiffs win, the court would issue a Permanent Injunction where the rules are blocked permanently.

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Delta 8 Is Crucial History

In 2021, DSHS issued a notice classifying any amount of Delta-8 THC as a Schedule 1 controlled substance, making it illegal. Sky Marketing Corp. (Hometown Hero) sued DSHS, arguing that this was an illegal reclassification of hemp products without a public hearing. A Travis County district court issued an injunction preventing the rule from taking effect. An appeals court affirmed the injunction, leading DSHS to appeal to the Texas Supreme Court. The Texas Supreme Court heard oral arguments on this case in January, and the big question is whether DSHS can reclassify hemp-derived cannabinoids through administrative action or if that authority is reserved for the Legislature. A ruling is still pending.

These new lawsuits are asking the same question, just in different forms: does the agency get to decide what’s legal hemp? If the Supreme Court decides that it cannot, then it would make all of these new regulations obsolete. Sky Marketing Corp. has already proved that this was a no-no in the lower courts twice, which is a great start. On to the three pillars of these two lawsuits.

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Pillar 1 — The Definition Problem

DSHS changed what “legal hemp” means without the Legislature’s permission.

THBC argues that the agency preserved the statutory definition of legal hemp in form while gutting it operationally. Essentially, compliance is now based on a “converted total delta-9 THC” value that was created by DSHS to override the Legislature’s definition of legal hemp.

The strongest part of this argument is that during its own rulemaking review, DSHS rejected requests from commenters to revise the legal hemp definition, saying that changing the statute requires legislative action and is outside the scope of their rulemaking authority. Reminds me of the trick question scene from My Cousin Vinny.

Green Nation echoes this argument but with a few unique perspectives. First, they found that legislative statutes for hemp require testing the THC concentration at the manufacturing stage OR in the final product. This allowed businesses to have works in progress (WIP) above the limit, as long as the final product was under the legal hemp threshold of 0.3% by dry weight. The new DSHS rules put that testing on both the manufacturing stage AND the final product stage. They argue that this exceeds the agency’s authority and will impose crippling expenses on regulated businesses.

If we remember Abbott’s veto, he asked, “What’s a farmer to do?” This testing at the manufacturing stage inhibits cultivation and manufacturing, a major source of revenue and jobs, which under the new DSHS rules would get pushed out of state. Abbott wrote that “there are many Texans conducting business responsibly, who invested millions of dollars planting fields or opening up retail stores in reliance on laws making hemp a lawful product to be sold at retail or otherwise introduced into commerce.”

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Pillar 2 — The Fee Problem

The fees are not regulatory cost recovery, they are a tax the agency has no power to impose.

From the THBC lawsuit: the fees, which have been increased by orders of magnitude, carry substantial economic consequences for regulated businesses across the state. Speaking for Chill Country, dozens of coffee shops and boutiques have told us that at the $5,000/year fee level, they will no longer be able to carry our products.

The juicy part of this is that DSHS produced an internal note forecasting revenues from the new fees of over $200 million per year, while also recognizing that their cost to administer and enforce the program would be less than $70,000 the first year and just $6,000 in subsequent years. Regulatory fees should be consistent with actual regulatory enforcement costs.

THBC argues that fees that increase 40x overnight, and in major excess of regulatory cost, are not a cost-recovery measure but a revenue generator, also known as a tax. Texas’s Constitution limits occupation taxes on people in mechanical and agricultural pursuits, and hemp farmers and processors could arguably fall under that category.

THBC also argues that these increased fees act not only as a tax, but as barriers to entry. Raising fees this dramatically will concentrate business into the hands of those who already have enormous resources. Gordon Gekko, anyone?

Green Nation points out that DSHS currently runs a massive surplus from the existing lower fees, revenues were around $1.6 million while the program cost about $800k. They note that the fee increase for manufacturing is a 4,000% increase and retail is a 3,333% increase, neither tethered to any sort of program cost forecast. Instead, they argue, these fees are an attempt to kill this market, achieving something the Legislature refused to do.

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Pillar 3 — The Process Problem

The Legislature ran its full constitutional course and produced no new law, agencies cannot override that result.

From the THBC lawsuit: the question is whether an agency can substitute its own policy judgment for the outcome produced by the constitutional lawmaking process. That process ran its full course, produced a 9:1 ratio of opposing testimony to SB3, and ultimately led to a clear veto. Then two special sessions couldn’t get anything done either. THBC is asking the court to enforce the boundary between the Legislature, the Governor’s Office, and state agencies.

Businesses in all industries have to be able to rely on the law as written by the Legislature. When agencies are permitted to rewrite that law, not only does the industry suffer, it scares off investment and hurts Texans who depend on the separation of powers to ensure their representatives, not appointed administrators, make the choices that affect their lives.

Green Nation echoes these arguments but also highlights that the lack of a grace period denied regulated entities a reasonable opportunity to come into compliance within the bounds of supply chain reality. They point out that the veto expressly mentioned that SB3 could amount to an unconstitutional taking of private property, that changing the rules in the middle of the game is unfair and causes unnecessary economic damage.

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I’m Not a Lawyer, But I Did Stay at a Holiday Inn Express Last Night

I just attended the THBC webinar where they announced that the TRO court hearing is scheduled for Friday, April 10th. It’s a discussion between two lawyers and a judge, no experts, no witnesses. It will be based purely on the papers filed by THBC, and there will likely be a decision the same day on whether a temporary injunction is granted. If an injunction is granted, it would mean a reversion to the status quo: THCA would be available again, compliant raw material for processing would be available for manufacturing in Texas, and fees would go back to what they were.

There’s an additional question about scope: how far should the relief of a TRO go? Should it apply to an entire industry or just to the plaintiffs of the lawsuit? Because of court shopping, some courts will limit relief to plaintiffs and members of named trade associations. For a little insurance, if you haven’t already, it’s probably time to join the THBC, since they’re seeking relief for all of their association members.

The lawsuit does NOT challenge age gating, packaging requirements, or similar provisions.

There is a chance the hearing gets delayed or moved, but we’re all hoping it doesn’t. If granted, a TRO will most likely last 14 days, though the state may request more time before a Temporary Injunction hearing.

If no TRO is granted, DSHS can continue to enforce the new laws until the matter is litigated further.

JR Johnson from THBC said he doesn’t like to gamble when asked for a percent chance of a TRO being granted.

I put both cases into Claude and asked for its odds assessment.

It put the chances of a TRO at 75–85% and a temporary injunction at 60–70%. I like those odds, my money is on an injunction.

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Chill Country is grateful to THBC and Green Nation for getting these lawsuits filed. We’re fans of the plant, and even though we don’t sell flower, we believe Texans should have access to all forms of natural cannabis and hope to see it back on shelves in short order.

To support these legislative efforts, please consider donating to THBC here, and we’ll have the Green Nation donation link up soon.

• Category: Current Events, Hemp Laws, Nature Is Medicine