Claim on Seized Hemp Shipment Barred, Showing Trickiness of Coverage

International treaties preempt state-based legal actions, giving an air transport company an escape from claims on what a hemp producer said was botched paperwork for an overseas hemp shipment, a federal appeals court said.

The ruling by the U.S. 4th Circuit Court of Appeals last week highlights the trickiness of running – and insuring – cannabis- and hemp-related businesses, even as the industry continues to grow around the world.

“This is why people are nervous about hemp: because there’s a lot of variability and a fair amount of risk,” said Erich Schutz, an underwriter and cannabis national practice leader at Jencap, a wholesale brokerage. “There are a lack of controls, lack of regulations, lack of consistency. And with that comes all the nastiness that comes with businesses that don’t have a lot of controls.”

The appellate judges upheld a lower federal court’s ruling that the Montreal Convention of 1999 precludes a lawsuit by a Portland hemp company, which claimed that the air carrier’s actions resulted in the seizure and destruction of the hemp product by federal authorities in 2020.

“Our rulings must be guided by the Montreal Convention which, under the Constitution, is part of ‘the supreme Law of the Land,'” Judge Robert King wrote for the three-judge appeals court panel.

The court documents do not indicate if the producer or the air transport company were covered by insurance policies, and lawyers for both sides could not be reached for comment. But Schutz and other insurance experts said it’s likely that any policies would have contained exclusions that barred coverage for federally illegal or “hot” higher-THC products. And coverage for international shipments of hemp, even if it’s fully legal, is hard to come by, anyway.

“There’s not a robust international coverage for hemp, when there should be because there are a number of operations that are multinational,” Schutz said.

The legal action began four years ago when Portland-based We CBD, a producer and distributor of legal hemp products, contracted with Planet Nine, a charter flight and cargo carrier, to transport 3,300 pounds of hemp to Switzerland. The transport cost topped $147,000. The value of the product could be as much as $1.3 million, according to a news report by The Charlotte Observer.

When the plane made a refueling stop in Charlotte, North Carolina, U.S. Customs authorities seized the 93 bags and later destroyed the contents. Testing showed that much of the hemp was above the 0.3% THC, or tetrahydrocannabinol, content allowed by federal law, the court opinion explained. While many U.S. states have legalized some form of higher-THC marijuana, federal law still prohibits it and other countries have differing regulations on THC levels in hemp.

We CBD argued that Planet Nine had failed to file the proper paperwork with aviation authorities, paperwork that would have indicated that cargo was on board the business-class jet. Planet Nine’s website shows it flies a number of aircraft, none larger than the 15-passenger Gulfstream G650.

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When local law enforcement officers in Portland saw the bags being loaded onto the plane, after some seats had been removed, they became suspicious and alerted federal Customs agents in Charlotte. At that airport, Customs officials could see the cargo, which was in duffle bags and trash bags, through the windows of the airplane.

This seemed odd because the flight’s paperwork did not mention any cargo being transported, the court explained. Agents moved in and removed the bags from the plane.

We CBD filed suit in North Carolina against Planet Nine, seeking compensation for the lost cargo. Planet Nine, a Van Nuys, California-based company, asked the court to dismiss the case, arguing that the Montreal Convention takes precedence.

That convention, the appellate judges explained, essentially replaced the Warsaw Convention of 1929. It holds that air carriers flying international routes are liable for damage to cargo and baggage that is sustained “during carriage by air.” Claims must be made pursuant to the treaty.

But the convention also gives air carriers an escape clause, the court noted, if the air company can show that “the destruction, or loss of, or damage to, the cargo resulted from …an act of public authority carried out in connection with the entry, exit or transit of the cargo.”

The destroying of the hemp by Customs agents is considered an act by a public authority, the courts said.

We CBD, represented by attorney William Terpening, of Charlotte, had also argued that the convention did not apply because the paperwork was left out before the flight was underway, and the destruction of the hemp came later – meaning those actions fell outside the scope of “carriage by air.”

But the appeals court said that argument was splitting hairs. Court rulings have long eschewed segmenting the precise event as long as it is part of the shipping or transport process.

“To rule otherwise would greatly diminish the ambit of the Montreal Convention and would concomitantly ‘encourage artful pleading by plaintiffs seeking to opt out of the Convention’s liability scheme’ — a result that the Supreme Court has counseled us to avoid,” Judge King wrote in the 4^th Circuit opinion.

Further, the court said: “Even assuming Planet Nine had an obligation to submit the U.S. Customs documentation and improperly did so, the Cargo could not have been destroyed unless it was in international carriage by air.”

The types of issues raised by this case will likely continue for years to come, thanks to the variation between federal, state and international laws. Even when the hemp is found to be below the United States’ .03% THC threshold, international shipments can be tricky, Schutz said. Some insurance carriers will provide coverage that allows up to .04%, but most don’t.

And the European Union requires a THC level of less than .02%, but other countries may be different. Switzerland, where the hemp in the We CBD case was headed, allows up to 1% THC for hemp to be considered legal, according to news reports and cannabis attorneys.

“This is where a good agent-broker comes in,” Schutz added. “You need to be able to overlay the regulations, the insurance contracts and what the heck your insured is actually doing. Make sure everything is inside the box.”