State vs. Federal Jurisdiction: Connecticut’s Recent Battle Over Intoxicating Hemp-Derived Products

Introduction

The interplay between the unintentional federal legalization of intoxicating hemp-derived products under the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) and state regulatory frameworks is increasingly testing the limits of jurisdictional boundaries, as shown in a recent decision remanding a Connecticut consumer protection case against RZ Smoke, Inc. back to the Connecticut Superior Court.

This article unpacks the Connecticut District Court’s order in State of Connecticut v. RZ Smoke, Inc. (RZ Smoke), including its holding that the question of whether certain products were derived from federally legal hemp was irrelevant to the claims brought by Connecticut. With many states moving to restrict intoxicating hemp-derived products, this case offers insights into how courts are handling the tension between federal hemp law and state consumer protection regimes.

Case Background and Key Allegations

I. Case Overview

This case hinges on the intersection between federal and state regulatory frameworks. At the federal level, the 2018 Farm Bill legalized hemp and hemp derivatives, provided they contain no more than 0.3% delta-9 THC by dry weight (7 U.S.C. § 1639o(1)). However, the statute is silent on the legality of other cannabinoids derived from hemp, such as delta-8 THC, creating room for legal ambiguity that has allowed a market for these intoxicating, unregulated products to flourish.

In 2021, Connecticut enacted the Responsible and Equitable Regulation of Adult-Use Cannabis Act (RERACA), which created a regulated market for adult-use cannabis products. Connecticut’s cannabis law defines “high-THC hemp products” as marijuana that is subject to state regulation. Conn. Gen. Stat. §§ 21a-240(29), (63). As such, through RERACA, the state regulates both marijuana and other hemp-derived products, attempting to curtail the sale of intoxicating cannabinoids outside the state-licensed cannabis framework.

RZ Smoke centers on consumer protection claims brought by the Connecticut attorney general (AG) under the Connecticut Unfair Trade Practices Act (the CUTPA). Connecticut alleged that RZ Smoke, Inc., a Connecticut-based distributor of hemp-derived products, willfully engaged in unfair and deceptive marketing and sales practices by exploiting the 0.3% delta-9 THC loophole in the 2018 Farm Bill to distribute products containing delta-8 THC, another intoxicating compound derived from cannabis. The products at issue were marketed to unlicensed businesses where they could be sold to children, all while circumventing Connecticut’s regulated cannabis system.

The state filed the original complaint in Connecticut Superior Court in February 2024. The defendants removed the case to federal court, asserting federal jurisdiction on the grounds that the legality of delta-8 THC products, through the 2018 Farm Bill loophole, presented a federal question. The state then filed a motion to remand, arguing that its claims arose purely under state law through the CUTPA without invoking any federal law, and thus did not belong in federal court.

II. Connecticut’s Claims Under the CUTPA

The heart of Connecticut’s complaint lies in its assertion that RZ Smoke, Inc. misled consumers by marketing delta-8 THC products as if they were part of the state’s tightly regulated cannabis market. Connecticut’s complaint details multiple allegations, including:

1. Misleading Product Labeling: The state alleged that the defendants’ products were packaged and marketed to resemble legal cannabis products, creating the false impression that they met the safety and regulatory standards of Connecticut’s regulated market.

2. Sales to Unregulated Retailers: Defendants distributed delta-8 THC products through nonlicensed channels such as gas stations, convenience stores, and other retail establishments, with little regard for age restrictions or responsible sales practices.

3. Appeal to Minors: The complaint further alleges that the products’ packaging, branding, and advertising were designed to appeal to minors, undermining state efforts to restrict access to intoxicating substances to adults over 21.

Based on these allegations, the state’s complaint centers on four causes of action under the CUTPA:

1. Deceptive Practices: Alleging that the defendants engaged in business practices likely to mislead consumers by marketing their products in a way that suggested the products were produced in accordance with applicable legal requirements for cannabis products in Connecticut, when they were not.

2. Willful Deceptive Practices: Alleging that the defendants knew or should have known that marketing their products as part of Connecticut’s licensed system constituted an unfair or deceptive act in violation of the CUTPA, and therefore seeking enhanced civil penalties based on the intentional nature of the misconduct.

3. Unfair Practices: Alleging that the defendant’s acts and practices: 1) violated public policy; 2) were unethical, immoral, oppressive, and unscrupulous, and 3) caused substantial harm to consumers by offering products that meet or exceed legal limits without producing the products under the state’s licensed system.

4. Willful Unfair Practices: Again, alleging that the defendants knew, or should have known, that their conduct was unfair or deceptive in violation of the CUTPA.

III. Defendants’ Federal Defense and Removal to Federal Court

RZ Smoke, Inc. sought to remove the case to federal court, arguing that Connecticut’s claims hinged on the definition of “hemp” under the 2018 Farm Bill. Their position was that the legality of delta-8 THC should be decided under federal law, given that the 2018 Farm Bill arguably legalized all hemp-derived products except those containing greater than 0.3% delta-9 THC.

The defendants also initially contended that Connecticut’s consumer protection claims were completely preempted by federal law, rendering federal jurisdiction appropriate. However, at oral argument, the defendants abandoned their preemption claim, seeming to acknowledge that the 2018 Farm Bill does not entirely preempt state consumer protection laws like the CUTPA. Their revised argument regarding jurisdiction focused on the idea that Connecticut’s claims arose under the state’s cannabis legalization laws, and not under CUTPA, thereby requiring the court to interpret the definition of hemp under federal law.

Legal Analysis: Federal vs. State Jurisdiction

I. The Well-Pleaded Complaint Rule

Federal law provides that federal district courts have original jurisdiction in civil actions that “arise under” the Constitution, laws, or U.S. treaties, also known as federal question jurisdiction. 28 U.S.C. § 1331. Answering the question of whether a case “arises under” federal law requires application of the well-pleaded complaint rule, which provides that federal jurisdiction exists only if a federal question appears on the face of the plaintiff’s properly pleaded complaint. Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). A federal defense, even one anticipated by the plaintiff in their complaint, does not create federal jurisdiction (Id. at 393).

II. Exceptions to the Well-Pleaded Complaint Rule

Even when a complaint relies solely on state law, federal jurisdiction may still exist, thereby justifying removal, if: 1) Congress has expressly provided for removal of state-law claims by federal statute; 2) the cause(s) of action under state law are entirely preempted by federal law; or 3) “the vindication of a state-law right necessarily turns on a question of federal law.” State by Tong v. Exxon Mobil Corporation, 83 F.4th 122, 133 (2^nd Cir. 2023).

With respect to the third exception, in Gunn v. Minton, 568 U.S. 251 (2013), the Supreme Court articulated a streamlined version of a prior test that requires satisfaction of four elements to reach a finding that vindication of state-law rights in a specific case necessarily turns on a question of federal law. The federal issue must be: “1) necessarily raised, 2) actually disputed, 3) substantial, and 4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Gunn, 568 U.S. at 258.

III. Application of the Gunn Test in RZ Smoke

In RZ Smoke, the purported federal issue in play was whether the products distributed by RZ Smoke constituted legal hemp products under the 2018 Farm Bill. The court initially noted that the state’s complaint focused entirely on state law claims under CUTPA, alleging that the defendants engaged in unfair and deceptive trade practices. While the complaint mentioned the 2018 Farm Bill to illustrate the ambiguity the defendants allegedly exploited, it did not assert any federal cause of action or seek relief under federal law. Thus, under the well-pleaded complaint rule, the court concluded that the case did not, on its face, raise a federal question sufficient to establish federal jurisdiction. RZ Smoke, 2024 WL 4501037 at *2 (D. Conn. 2024).

The court then turned to the exceptions outlined in Exxon Mobil Corporation and quickly dismissed the first two, noting that there was no applicable federal law either creating a right of removal or completely preempting Connecticut’s claims under the CUTPA. Id. at *3. Looking to the final exception (whether “the vindication of a state-law right necessarily turns on a question of federal law”), the court found that the defendants failed to satisfy the Gunn test, concluding that federal jurisdiction was not appropriate.

With regard to the first element (whether a federal issue is “necessarily raised), the court held that whether the products at issue are considered “hemp” under the 2018 Farm Bill was not a necessary element of Connecticut’s CUTPA claims. The key issue was whether the defendants misled consumers by packaging and marketing their products in a way that falsely suggested they were part of Connecticut’s regulated cannabis market. That deceptive conduct is actionable under CUTPA regardless of whether the products met the federal definition of hemp. Since the court was able to resolve the case without reaching the purported federal issue, the claim did not “necessarily raise” federal law. RZ Smoke at *3.

Stemming from that decision, the court quickly disposed of the remaining elements of the Gunn test, showing that the defendants did not meet a single element. Again, since the court could reach a decision on the case without concluding that the products were legal hemp or illicit marijuana, there was no federal issue that was “actually disputed.”

The court also determined that resolving whether the products qualify as hemp under federal law would require fact-specific inquiries into the defendants’ extraction processes and the THC content of their products. Since the question was therefore not “a nearly pure issue of law, one that could be settled once and for all and therefore would govern numerous similar cases,” the federal issue was not “significant.” Finally, the court concluded that absent a clear rule demanding removal, even assuming all other elements were met, courts typically err on the side of allowing the state claims to be heard in state court. As a result, the federal issue was not “capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” Id. at *4.

Accordingly, the court concluded that Connecticut’s CUTPA claims did not “arise under” federal law, nor did they meet any exception articulated in Exxon Mobil Corporation. The court then granted the state’s motion to remand the case to Connecticut Superior Court. Id.

Why It Matters: Key Takeaways for Businesses and Counsel

State of Connecticut v. RZ Smoke, Inc. highlights the growing tension between state efforts to regulate intoxicating hemp products and the federal loophole established by the 2018 Farm Bill utilized by hemp manufacturing companies to manufacture intoxicating products. The case exemplifies how states are using consumer protection laws, such as the CUTPA, to fill regulatory gaps and address the sale of hemp-derived products that could bypass traditional cannabis controls.

The court’s decision to remand the case back to state court underscores several important points. First, some state consumer protection statutes can be used to target the sale and marketing of intoxicating hemp products. Even if those products are arguably legal under federal law, state AGs retain the authority to regulate business practices to protect consumers. Second, the ruling serves as a cautionary tale for businesses operating in the intoxicating hemp-derived product space. Relying solely on the federal legality of hemp derivatives may not be enough to shield businesses from state-level enforcement actions.

Finally, the decision also provides valuable insight into the limits of federal removal jurisdiction. As demonstrated by the court’s application of the Gunn test, a mere reference to federal law, or a defense rooted in federal law, is insufficient to confer federal jurisdiction. This holding serves as a reminder to litigants that the strategic decision to remove a case to federal court must be carefully considered, particularly where state law is the primary focus of the dispute.

As states continue to refine their regulatory frameworks for intoxicating hemp products, more cases like this are likely to emerge, raising complex questions about federal preemption, removal jurisdiction, and the interaction between state consumer protection laws and federal cannabis policy. The evolving regulatory landscape presents both challenges and opportunities for businesses and their counsel, making it critical to stay informed of these developments. Stay tuned to Troutman Pepper’s Cannabis Communications Newsletter for ongoing insights and analysis on the latest regulatory developments, enforcement trends, and litigation risks in the cannabis and hemp industries.

Source: https://www.jdsupra.com/legalnews/state-vs-federal-jurisdiction-5860221/