New Jersey Law Journal: The Issues Surrounding Third-Party Lab Testing of Cannabis

New Jersey’s cannabis industry is poised to explode in the coming years. On December 15, 2021, the Cannabis Regulatory Commission (“CRC”) began accepting applications for adult-use Class 1 (cultivation) and Class 2 (processing) licenses. Those licenses are available to both large operators, canopy sizes up to 150,000 square feet, and small operators, canopy sizes limited to 2,500 square feet (known as microbusinesses under the CRC regulations). Processing licenses are uncapped. Cultivation licenses are capped at 37, but only through February 2023, when they too become uncapped. On March 15, 2022, the CRC began accepting applications for adult-use Class 5 (retail) licenses. Those are likewise uncapped.

The CRC continues to sort through submitted applications, and would-be operators continue to submit applications; both the December 2021 and March 2022 Request for Applications periods remain open. It will likely take months for the CRC to evaluate all of the applications it has received, and months more for those awarded provisional licenses to open their doors. But by late 2023, and certainly by early 2024, New Jersey’s cannabis marketplace will have experienced significant maturation.

With such explosive growth, it is hard for the State’s regulatory infrastructure to keep pace. At the same time the CRC is overseeing the existing medical cannabis program and the expansion of some of those operators into the adult-use market, it is also bringing online 10 new medical cultivators and 30 new medical retailers from the August 2019 application process and accepting and reviewing (seemingly unlimited) applications from would-be adult-use operators. But the job of the CRC does not end with the award of licenses – that is just the beginning. The CRC is also responsible for ensuring product safety.

Indeed, among the chief arguments for cannabis legalization was safety: proponents argued that if cannabis was legal, regulators could ensure that products were safe and free from contaminants. That is right, but presupposes two things. First, that there is a cadre of licensed testing laboratories sufficient to keep pace with the expansion of New Jersey’s cannabis marketplace. Second, that the testing regulations that govern the frequency and type of testing are robust and incorporate lessons learned from states like California and Colorado that are far ahead of New Jersey in their regulatory infrastructure and experience.

A quick Internet search demonstrates the perils for New Jersey if the CRC’s testing regime lags behind marketplace expansion. Two months ago, medical cannabis patients in Arizona were sold products contaminated with pesticides. In New Mexico and Colorado, it was cannabis tainted with mold. Aside from the very real-world consequences of contaminated product—sick consumers or, worse, sick patients who are already medically compromised—the sale of contaminated product in the New Jersey marketplace just as the industry is expanding could shake consumer confidence and cause expansion to stall.

The CRC is certainly keen to this, and as part of the December 15 application process, the commission also began accepting applications for testing laboratories. To date, three laboratories have received preliminary approval from the CRC. The CRC is also in the process of promulgating regulations to govern testing, which are anticipated to be enacted in August. For now, the CRC is operating pursuant to emergency authorization, and has enacted a suite of testing regulations that mimic those enacted by regulators in Maryland.

The current testing regulations are found in subchapter 16 of N.J.A.C. 17:30. At a high level, the regulations require that every batch of usable cannabis and each lot of cannabis products manufactured be tested by a licensed laboratory (see N.J.A.C. 17:30-16.2(a)); and that no usable cannabis or cannabis product be distributed without first being sampled and tested by a licensed laboratory and a written report issued that the tested product meets or exceeds specifications (see N.J.A.C. 17:30-16.2(b)). The testing laboratory is responsible for collecting both a “representative initial sample” and a “representative retention sample” from each batch of usable cannabis cultivated and each lot of cannabis products manufactured (see N.J.A.C. 17:30- 16.3(b)); if the initial sample does not meet specifications, the testing laboratory “shall follow their standard operating procedure to confirm or refute the original results” (see N.J.A.C. 17:30- 16.4(b)(1)); at 6 months and again at 12 months following the release of a batch or lot, the testing laboratory is required to perform stability testing on the retention samples (see N.J.A.C. 17:30- 16.5(b)); and, finally, the testing laboratory performing the testing must produce a written report detailing its findings, which report shall be made available to the cannabis business, the CRC, and the end consumer (see N.J.A.C. 17:30-16.6(a)).

In brief, the regulatory regime contemplates that no cannabis flower or cannabis product will be sold until the batch or lot from which it originated is tested, the product at least meets CRC specifications, and a written report saying as much is issued by a licensed laboratory. This all seems simple enough, but key terms are either undefined in the regulations or subject to varied interpretations. Take, for example, batch size. Under 17:30-16.3(b)(4), batch and lot sizes can vary from less than 10 pounds of usable cannabis to greater than 50 pounds of usable cannabis. The regulations do not mandate a maximum batch size. Large batch sizes can create a host of problems.

First, large batch sizes mean that the testing laboratories will be forced to handle large quantities of cannabis for sampling purposes. By regulation, a “representative initial sample” is .5 percent of a batch or lot. For a batch of 100 pounds, that is the equivalent of a ½ pound of cannabis. By regulation, the retention sample must be double the initial sample, which means that the cannabis business must store a pound of cannabis on premises for at least one year for later stability testing. All of this means increased transportation costs for the testing laboratories—with increased opportunities for diversion—and increased storage costs for cannabis businesses.

Second, and more troubling, large batch sizes allow for pesticides, molds, metals, and other impurities to be more easily hidden during testing. The regulations require that for large batch sizes, those over 50 pounds, the testing laboratory collect “30 increment samples” as a representative initial sample, where “increment sample” is undefined in the regulations. Some industry experts have argued that 30 increment samples are too few where the batch sizes are large—a batch size of 51 pounds and 100 pounds both require only 30 increment samples to be taken under the regulations. The argument is that large batches are not as uniform as small batches, and potentially hazardous impurities may go undetected where too few increment samples are taken, or where the samples are taken from unrepresentative portions of the batch. This concern is multiplied given that where there is a testing failure, the regulations allow for testing laboratories to “follow their standard operating procedure to confirm or refute the original results.” See N.J.A.C. 17:30-16.4(b)(1)) (emphasis added). Those standard operating procedures could allow the testing laboratory to take a smaller sample from another portion of the batch in an effort to get the batch to pass. Of course, there will be real incentive to do this, as a 100 pound batch is valued at several hundred thousand dollars in today’s prices. If it does not pass, the batch must be destroyed.

As the New Jersey cannabis industry expands, it is natural for the public (and regulators) to focus on product supply and retail accessibility over seemingly arcane questions around batch sizes, increment samples, and statistically significant samples. While those questions may be arcane, they will have very real world consequences on the health of New Jersey’s cannabis consumers and the safety of the industry overall. The next few months will prove important as New Jersey finalizes and promulgates its testing regulations.

Reprinted with permission from the July 8, 2022 issue of the New Jersey Law Journal. © 2022. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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