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What Cannabis Entrepreneurs Need To Know About Intellectual Property

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This is a sponsored post by Larry Sandell of Mei & Mark LLP.

This post was updated on May 22, 2019 to reflect recent policy developments.

Marijuana industry leaders stay busy developing business plans, building brands, inventing technologies, creating supply chains, cultivating new strains, hiring employees, securing funding, and obtaining licenses. But it is essential for cannabis entrepreneurs to understand intellectual property (IP) rights and the benefits they can provide—and, perhaps most importantly, the potential problems that may occur when IP rights are ignored or overlooked for too long.

Because of ongoing federal cannabis prohibition, businesses in this space face additional IP challenges that don’t exist in other industries. This article will give you a quick sense of what you need to know in order to protect your rights.

Fundamentally, the law gives IP owners the right to exclude. Effectively acquired IP rights can give cannabis entrepreneurs the legal footing to prevent competitors from ripping off their brands, their technologies, their designs, and their secrets. In the cannabis space, where the law excluded so many for so long, it may seem untoward to engage in exclusionary practices, but IP is a very different animal than prohibition. As the cannabis industry continues to grow and established companies enter the market, early-acquired IP rights will prove indispensable. Beyond offering market protections and a competitive edge, IP rights can be licensed to generate additional recurring revenue, help attract investment, and enhance valuation for exits.

Without a clear understanding of the myriad types of IP protection available—and the benefits, potential pitfalls, and resource requirements of each—many entrepreneurs view obtaining effective IP protection as a daunting task. And unless an experienced IP attorney is retained, they are not wrong. Nonetheless, IP rights should be considered early and often in any business venture, especially in a nascent industry like this one. Those who procrastinate this critical business task risk permanently forfeiting rights, and may sometimes find IP roadblocks placed in their path by competitors who beat them in a race to the U.S. Patent and Trademark Office (USPTO) that they didn’t even know they were competing in.

IP rights vary widely, but are best understood by first considering which aspects of your budding cannabis business that you want to protect—namely: your brand, your technology, your cannabis strains, your designs, or your business secrets.

Protecting Your Brand:

Trademarks identify the source of a product or service, and serve to protect the goodwill and market recognition that a business has developed. Most commonly, a trademark is embodied in the name of a product, service, or business, its logo, or a slogan. Trademarks do not have a set expiration date, but generally remain enforceable so long as they are being used in commerce. However, to maximize rights (and avoid getting sued), it is important to search to make sure your proposed brand is “clear” prior to using it in commerce and, once in use, to effectively control your brand in the marketplace.

Federally Registered Trademarks provide the strongest protection for your brand, and enable you to enforce your trademarks anywhere in the United States. Registration requires both legal “use in commerce” and a lack of “confusingly similar” trademarks in your business area. If you aren’t using your trademark in commerce yet, but intend to do so, an “Intent to Use” (“ITU”) application can preserve your rights until you actually begin legal commercial activity. Federally registered marks are denoted by the ® symbol. Having an experienced trademark attorney file an application on your behalf typically costs $1,000-$1,500, and can help you maximize protections and avoid pitfalls.

Because marijuana is still federally illegal, the requirement for legal “use in commerce” presents a unique challenge for cannabis entrepreneurs seeking federal trademark protection. There are two proven strategies. First, you can trademark around the edges: While federal trademarks on cannabis, itself, may be unavailable, trademarks for most ancillary products and services can be obtained. For example, federal trademark registration is available for products and services supporting consumption and cultivation, and for sales of legal medical herbs.

Second, you can play the long game, and file an ITU claiming a bona fide intent to use a trademark in legal commerce in the future—i.e., anticipating that federal legalization will convert your commercial activity to legal “use in commerce.” For example, the “CANNIBIS CUP” is using this ITU strategy to play the long game. This ITU strategy may be particularly desirable to entrepreneurs who seek to lock down newly minted strain names or other important branding. As long as appropriate extensions of time are filed with the USPTO every six months, an ITU application can survive for three years after the USPTO “examines” the mark. So, playing the long game is a bet that federal legalization will occur in the near future.

The 2018 Farm Bill ostensibly legalized hemp (i.e., cannabis with <0.3% THC) and hemp-derived CBD. Accordingly, in May 2019, the USPTO publicly announced that hemp and hemp-derived CBD products may be eligible for federal trademark registration—at least as far as the Controlled Substances Act (CSA) is concerned. However, the USPTO also indicated that such products, if sold as food, food supplements, medicine, or the like, are subject to regulation by the Food and Drug Administration (FDA) and would not be considered to have legal “use in commerce” unless permitted by the FDA. Thus, until the FDA acts, most hemp products are still not eligible for Federal trademark protection.

State Registered Trademarks: If federal trademark registration is unavailable, it may be worthwhile to consider registering your trademarks in the states where you conduct business. Many states permit some form of state-level trademark registration. It should be noted, however, that a state-level trademark registration may typically only be effectively enforced within the boundaries of the registering state. For example, if you had a California trademark registration, you could not use it to prevent a competitor from using your trademark in Colorado. State registered trademarks may be used to fight “cybersquatters.”

While virtually all states have a “legal use” requirement, such requirement does not prohibit trademark registration in states where cannabis is legal for recreation and/or medical purposes. However, such requirement still means that your business must already be engaged in legal commerce—and is in compliance with relevant state cannabis licensing requirements—before applying for registration. Unfortunately, most states do not allow “intent to use” trademark applications. (Washington State is a notable exception.) Thus, even in a legalization state, a prospective cannabis grower might not be able to begin securing a state-level trademark registration until after she is granted a grow license in that state.

Common Law Trademarks: Even without any registration, your brand, if actually used in commerce, may retain some protection. Common law trademarks are often designated by the TM symbol, which merely signifies that the brand owner thinks that it has a valid trademark. It is, however, notoriously difficult to enforce common law trademarks. Accordingly, businesses that save money on the front end by skipping trademark registration may regret it later if a competitor subsequently tries to rip off their brand.

Copyright Registration for Logos: In addition to trademark protection, brand logos may be protected by copyright law. Through a copyright, a logo may be protected as a work of artistic expression rather than as a brand. While copyright registration is not strictly necessary, it provides for robust enforcement options. Additionally, the US Copyright Office allows you to register copyrights online for a small fee.

Protecting Your Technology:

Utility Patents protect an invention, and grant inventors the right to exclude others from making, using, or selling it for up to 20 years. In the cannabis space, utility patents can protect, for example, growing apparatuses and methods, extraction techniques and chemical compositions, smoking and vaping devices, software, and even plants themselves (see below). Legal use in commerce is not required, but the USPTO carefully examines each patent application to ensure that the claimed invention is adequately described, novel (new), and nonobvious. In the US, a utility patent application must be filed within one year of the first public disclosure or offer for sale of the invention. Entrepreneurs who miss this deadline permanently forfeit their ability to secure a patent. Obtaining a high quality, enforceable patent typically requires retaining an experienced patent attorney to prepare and file the application. This can cost $8,000 and up, depending on complexity of the invention.

Provisionals: Provisional patent applications may be used to delay expending these considerable financial resources for up to one year—often enough time to assess whether your invention has a good shot at commercial success. Essentially, a provisional holds your place in line for 12 months. It can protect your rights if a competitor files for a similar patent or sells a similar product during that time, and can help you avoid missing the one-year deadline for filing after selling or marketing your own invention. Using a provisional application requires filing a corresponding nonprovisional utility application within the 12 months. If a corresponding application is not filed, the provisional simply expires and its contents remain secret. While provisionals have few formal requirements and are sometimes filed by inventors without attorney assistance, cannabis entrepreneurs would be wise to at least consult with an experienced patent attorney before filing to avoid pitfalls that can render a provisional ineffective. Engaging a patent attorney to prepare and file a provisional application can cost around $3,000 and up.

Protecting Your Cannabis Strains:

Utility Patents: The USPTO has confirmed that cannabis plants may be protected by utility patents. To date, issued cannabis utility patents have claimed plants with specific chemical profiles.

Plant Patents: Plant patents are a distinct form of IP protection that protects asexually reproduced plants, and the USPTO has issued at least one cannabis plant patent. Similar to utility patents, plant patents have a life of up to 20 years, and the invented strain must be both new and nonobvious. Additionally, the one-year filing requirement still applies, so a grower loses rights to file for plant patents for any cannabis strain that he sold more than 365 days ago. Finally, growers should be aware that plant patents are sometimes considered to have less value because they are directed to a single plant genome, rendering the right to exclude both narrow and hard to enforce.

Plant Variety Protection Certificates are issued by the US Department of Agriculture (USDA), and can provide their owners exclusive rights to seeds of a new crop for 20 years. To date, no cannabis certificates have been issued. The reasons are two fold: First, a seed deposit is required, and the USDA, a federal agency, has refused to accept any. Second, certificates protect only new and distinct sexually-reproduced plants that have stable progeny. Many cannabis strains of value are asexually propagated and therefore fall outside of these requirements.

However, following the passage of the 2018 Farm Bill, the USDA, on April 24, 2019, announced that it now accepts Plant Variety Protection applications of seed-propagated hemp varieties. Thus, cultivators of industrial and CBD-heavy hemp have a newly opened path to protect their IP.

Protecting Your Designs:

Design Patents: Design Patents protect ornamental designs for functional items. For example, while the functional aspects of a vaping device may be protected by a utility patent, the way it looks—or just specific aspects of its look—may be protected by a design patent. Design patents that claim only specific design elements are broader and may be easier to enforce. Cannabis entrepreneurs in the software space should note that design patents are increasingly used to protect GUIs, especially when it comes to animated user interfaces. The same basic rules of utility patents apply to design patents, except that design patents last for 14 years from issuance (rather than 20 years from filing) and provisionals are not available. Retaining an experienced patent attorney to prepare and file a design patent application can cost $1,500 – $2,500, largely depending on the quality of drawings already possessed.

Copyright: Copyright protection can be used to protect all manner of artistic expression, whether on websites, T-shirts, or cannabis-related products. While there is an area of overlap between design patents and copyrights, design patents may (if strategically prepared) be quite broad and therefore easier to enforce.

Protecting Your Business Secrets:

Trade secrets are very different from the other IP types discussed above. Your customer lists, older secret recipes, business plans, and similar proprietary information are often best protected by keeping them secret. Still, there is always a chance that a disgruntled former employee sells or reveals your secrets, an unscrupulous competitor hacks into your computer systems, or a contractor uses your data in an unauthorized manner. Although the law varies, virtually all states offer trade secret protections that can support or compensate you in such situations. Trade secret laws, however, are typically only effective if your business had already taken reasonable steps to protect its proprietary information. An experienced attorney should be counseled to ensure that your trade secret practices are adequate under your state’s law, but uniform best practices include having all employees and contractors sign agreements that outline authorized and unauthorized data uses, having reasonable network security, and never divulging your trade secrets outside of signed NDAs.

Conclusion:

As the cannabis industry continues to grow and attract new market entrants, effectively securing IP rights has become a critical business task. Entrepreneurs who fail to assess and pursue appropriate IP rights early in the business cycle do so at they own peril. While thinking about patents, trademarks, copyrights, and trade secrets may not seem as urgent as making payroll and growing your profit margin, failing to promptly secure IP rights may undercut your business in the future, allowing competitors to rip-off the successful aspects of your business.

About the author:

Larry Sandell is a registered patent attorney with Mei & Mark LLP and has a decade of experience in IP law. He focuses his practice on drafting and prosecuting patent and trademark applications, counseling clients on strategic IP matters, litigation, and appellate practice. Larry has a passion for advising start-ups and other innovative companies, and has argued in the U.S. Courts of Appeal for the Ninth Circuit, the Federal Circuit, and D.C. Circuit. In addition to his legal practice, he is the CEO and General Counsel for a start-up medical device company.

Before entering law school in 2005, Larry fought for marijuana law reform, serving as Assistant Director of State Policies for the Marijuana Policy Project. He ran a successful ballot initiative signature drive in Nevada in 2004, putting legalization on the 2006 ballot; worked on Nevada’s 2002 ballot initiative campaign; and coordinated medical marijuana lobbying efforts in state legislatures.

Larry can be reached at [email protected]

ATTORNEY ADVERTISING NOTICE

Please note that this article may be considered attorney advertising in some states. Prior results described on this article do not guarantee similar outcomes in future cases or transactions. The opinions expressed are those of the author and do not necessarily reflect the views of the Mei & Mark LLP (818 18th St., NW, Suite 410, Washington, DC 20006), its clients, Marijuana MomentTM LLC, or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

This is a sponsored post by Larry Sandell of Mei & Mark LLP.

Marijuana Moment is made possible with support from readers. If you rely on our cannabis advocacy journalism to stay informed, please consider a monthly Patreon pledge.

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Illinois Saw Record-Breaking Marijuana Sales In June, Including From Out-Of-State Visitors

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In the middle of a global pandemic and one of the worst unemployment crises in American history, Illinois marijuana retailers saw their busiest month on record in June, racking up more than $47.6 million in total sales.

No matter how you slice the data, released by the state on Tuesday, recreational cannabis sales last month shattered existing records in the state, which began legal sales to adults on January 1 of this year. Stores in Illinois sold nearly a million (994,545) cannabis items in June—5,000 more than any previous month—and brought in record sums from in-state residents ($35.3 million) and out-of-state visitors ($12.4 million) alike.

Illinois marijuana sales by month

Illinois Department of Financial and Professional Regulation

Tax figures are set to be released later this month by the state Department of Revenue. Until then, they’re difficult to accurately estimate. Unlike many other states to have legalized cannabis, Illinois collects different tax rates based on product type and potency. Local jurisdictions can also impose taxes of their own.

While some might be surprised to see such high sales figures in the midst of a global pandemic, the strong sales month is hardly an isolated incident. Sales in May also set new records after a relatively slow March and April. Prior to May, the top sales month was January, when stores first opened. On the inaugural day of legal sales, this past New Year’s Day, customers bought more than $3.1 million worth of products.

Oregon, which began commercial sales to adults in 2015, has also seen record cannabis sales this year amid the coronavirus pandemic. Relative to 2019, an unusual spike in sales came in March, which officials attribute to consumers stocking up on products as stay-at-home orders took effect. Oregon then saw a record-high sales month in April, the first full month under the coronavirus lock lockdown, boosted in particular by sales around April 20.

Oregon marijuana sales during COVID-19

But while Oregon analysts expect the strong sales to continue awhile longer, they warned this spring of a coming downturn as COVID-19’s consequences—on both Oregon’s population and its economy—work to diminish consumer demand and purchasing power.

“Expectations are that some of these increases are due to temporary factors like the one-time household recovery rebates, expanded unemployment insurance benefits, and the shelter in place style policies,” the state’s Office of Economic Analysis said in a May report. “As the impact of these programs fade in the months ahead, and bars and restaurants reopen to a larger degree, marijuana sales are expected to mellow.”

For states, the busy cannabis sales have brought in record tax revenue at a time when many cities and states need it most. As the Chicago Daily Herald reports, state sales taxes are off by more than $181 million compared to the 2019 fiscal year. Also down are hotel taxes ($64 million), automobile taxes ($7 million) and public utility taxes ($64 million).

While Illinois cannabis tax revenue for June has yet to be reported, it’s likely that amount will also set a record given its close relationship to total sales.

The state has consistently brought in tens of millions of dollars from legal marijuana sales each month since sales launched. Per state policy, 35 percent of that money goes to the state’s general fund, 25 percent goes to aid communities disproportionately affected by the war on drugs, 20 percent goes to substance use treatment and mental health programs and 10 percent goes toward the state’s bill backlog.

In May, Illinois officials announced they would use $31.5 million of marijuana tax revenue to fund restorative justice grants to communities harmed by the drug war. “Equity is one of the administration’s core values,” said Lt. Gov. Juliana Stratton (D), who made one of the state’s first legal cannabis purchases, “and we are ensuring that state funding reaches organizations doing critical work in neighborhoods most impacted by the war on drugs.”

Marijuana Tourism Will Boost Tax Revenue, Illinois Governor Says In State Of The State Speech

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Summer Dreams Of Marijuana-Infused Slushies Are Melted By Oklahoma Regulators

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Bad news for Oklahoma medical marijuana patients trying to beat the summer heat with a marijuana-infused slushy: State regulators say the icy beverages “are unlikely to meet requirements set forth in Oklahoma statutes and rules” for cannabis products.

As the weather heats up, THC-infused slushy machines have been popping up at more and more Oklahoma dispensaries. Made by companies such as Glazees, which offers flavors such as watermelon and blue raspberry, the THC-infused drinks sell for about $12-$15.

But despite their popularity with some patients, regulators say the slushies fail to comply with a number of state rules, such as a requirement that products be packaged in child-resistant containers. Dispensaries themselves also “are not allowed to alter, package, or label products,” regulators said.

State rules further require that all medical marijuana products be tested in their final form. “In this instance, the finished product is the slushy mixture to be dispensed to patients/caregivers, not the syrup,” regulators said. “If water, ice, or any other substance is added to the product, additional testing is required to ensure the product is safe for consumption and final-product labeling is accurate.”

Regulators didn’t specify how adding water or ice to cannabis products could affect consumer safety, however.

The Oklahoma Medical Marijuana Authority (OMMA) issued the update on Thursday in what it called a “slushy-machine guidance” memo. The office said it had received “multiple inquiries regarding the processing and dispensing of marijuana-infused slushies on-site at medical marijuana dispensaries.”

The memo was silent, however, on the likelihood of enforcement. As of Friday morning, slushies still appeared on menus for some Oklahoma dispensaries.

It’s not the first obstacle encountered by Oklahoma marijuana businesses, which began popping up across the state voters passed a medical marijuana law in 2018.

Earlier this year, lawmakers passed a wide-ranging medical cannabis expansion bill, which would have allowed out-of-state residents to obtain temporary licenses, permitted licensed businesses to deliver marijuana to customers and eliminated jail time for for first-time possession convictions. But Gov. Kevin Stitt (R) then vetoed the bill, and lawmakers didn’t hold a vote to override the action.

Oklahoma activists also filed a proposed marijuana legalization ballot measure in December, but it’s unlikely the campaign can gather enough signatures to put the measure before voters this November. Their signature-gathering was largely delayed due to the coronavirus pandemic, and only last week did the state Supreme Court rule that the campaign could initiate petitioning. Supporters now have about 90 days to gather nearly 178,000 signatures from registered voters.

Virginia Lawmakers Announce Plans To Legalize Marijuana, One Day After Decriminalization Takes Effect

Photo courtesy of Max Pixel

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Yelp Blocks Marijuana Businesses From Two Key Advertising Features

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Yelp is no longer offering two key advertising features to marijuana-related businesses, the company confirmed to Marijuana Moment.

Two cannabis businesses have shared an email from Yelp announcing the policy change. It states that the company had “unfortunate news” and that it will be removing both the “Business Highlights and Portfolio advertising options for cannabis-related businesses, effective immediately.”

“We will be removing these programs from your Yelp page over the course of the next few business days,” the email continues.

The Berkeley Patients Group (BPG), which is the longest-running cannabis dispensary in the country, told Marijuana Moment on Wednesday that it has already seen a significant impact since receiving the notice two days earlier.

“This is yet another blow for us—amidst a devastating pandemic, no less,” BPG Director of Marketing Lauren Watson said. “Yelp was one of only a few effective advertising channels available to legal cannabis companies, and now, without warning, we’re being shut out. Just two days after the new policy was implemented, we’re seeing over a 60 percent decline in page views.”

In a tweet, the chief technology officer of cannabis delivery company Bud.com shared a screenshot of the email from Yelp.

“It’s frustrating to pay taxes and compete with unlicensed folks who can advertise digitally against you,” he said.

The Business Highlights service allows individuals to pay to feature up to six descriptors on their page showing what “makes their business unique” such as “family-owned.” The separate Portfolio option is another paid feature where businesses can include photos of projects they’ve completed “to showcase their quality of work, expertise, and specializations along with additional details such as cost and project timelines.”

A Yelp spokesperson told Marijuana Moment that the company made the policy change in February—though these two marijuana businesses said they only received notice of the change this week. Just prior to when the company says it made the decision to block marijuana firms from the premium products, an NBC News investigation found that Yelp’s site included pages for unlicensed cannabis dispensaries, prompting the launch of the verification process.

The company allows “cannabis businesses on our platform in all states where it is either recreationally or medically legal, as it’s important that consumers have access to first-hand information about these businesses,” the spokesperson told Marijuana Moment.

The representative did not directly reply to a question about the reasoning for the policy change. Instead, they discussed how Yelp does not “take revenue from cannabis businesses that have not purchased our Verified License product.”

“By verifying their license to operate, Yelp is able to confirm to consumers that the business has satisfied the requirements of their local regulator to operate legally,” they said. “Once verified these businesses are then eligible to purchase Yelp’s enhanced profile product only, at this time.”

Asked for clarification about whether verified marijuana businesses are eligible for the two advertising services mentioned in the email announcing the change to current clients, the spokesperson confirmed they are not.

“If a cannabis company purchases Verified License, they’re then only eligible to purchase Yelp’s enhanced profile product, at this time,” they said.

The company did not immediately respond to a follow-up question about why at least some businesses were not notified about the policy change until this week even though the company says it made the decision four months ago.

“This is just one more example of prohibition discouraging companies from working with legal cannabis businesses, depriving them of the basic and vital services enjoyed by every other industry,” Morgan Fox, media relations director for the National Cannabis Industry Association, told Marijuana Moment. “Given Yelp’s size and accessibility, this unfortunate decision will certainly be a blow to many cannabis businesses which are already hurting because of the pandemic, as well as lack of access to relief funds and other financial services.”

“Thankfully, there are some other services out there that can provide business information to consumers which are either tailored to cannabis or are willing to work with related businesses,” he said.

While Yelp provides the verification service for licensed marijuana businesses, the cannabis-focused directories Weedmaps and Leafly have both taken steps in recent months to prevent unlicensed shops from being advertised on their sites. WeedMaps said it removed about 2,700 listings for illegal dispensaries as of January and Leafly reported that it booted about 1,000 as of September 2019.

Nevada Pardons More Than 15,000 People With Marijuana Convictions Under Governor’s Resolution

Photo element courtesy of Flickr/StickerGiant.

Marijuana Moment is made possible with support from readers. If you rely on our cannabis advocacy journalism to stay informed, please consider a monthly Patreon pledge.
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