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:
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.
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.
Oregon Marijuana Sales Spike Could Continue As Consumers ‘Permanently Adjust Their Behavior’ Following COVID
Record-setting Oregon marijuana sales continue to be a bright spot in the state’s coronavirus-slowed economy, state analysts reported this week, but a convergence of unknowns—including the end of federal coronavirus relief and a possible rise in cannabis prices due to devastating wildfires—could still mean a rocky road ahead for consumers.
“Marijuana sales continue to be strong,” Oregon’s Office of Economic Analysis wrote in a quarterly revenue forecast published on Wednesday. “Since the pandemic began, the increase in recreational sales have been more than 30 percent above forecast.”
The increase tracks with other more established cannabis markets, such as those in Colorado, Washington and Nevada, which have also seen “strong gains” since the pandemic, the office said. “There are a number of likely reasons for these higher level of sales and expectations are that some of these increases will be permanent.”
Analysts also expressed a rosier outlook on the future of the state’s marijuana market than they did in last quarter’s report, which acknowledged a spike in sales since the pandemic began but concluded that business was eventually “expected to mellow” as incomes fell and bars reopened. Officials now forecast Oregon will see “somewhat more” in sales than previously projected.
The state has recently seen a string of record-setting months for cannabis sales. Over the summer, monthly cannabis sales had averaged more than $100 million, according to an Oregon Liquor Control Commission (OLCC) report.
The projected uptick in sales will mean an extra $30 million in marijuana tax revenue for the state during its two-year budget period ending in 2021. Total adult-use cannabis taxes for that period are now forecast to end up at more than $276 million.
“Factors leading to increases in sales include higher incomes due to federal support, increased stressors in everyday life, reductions in other forms of entertainment or recreational opportunities, and simply more time on one’s hand be it due to a COVID-related layoff, or increased working from home,” the report said.
“A key question is now that the federal aid is gone and other entertainment options return in the months ahead, will some of this increase in sales in recent months subside?” the Office of Economic Analysis wrote in the new report. “In a recent meeting of our office’s marijuana forecast advisory group, the broad consensus was that yes, some of these sales will come off, but not entirely so. And the longer the pandemic lasts, the more likely customers will permanently adjust their behavior as they become accustomed to their new routines and buying patterns.”
For now, the bulk of the increases appear to be driven by existing consumers. While “indications are that the customer base is broadening some as the market grows due to more users trying an increasingly socially acceptable product and ongoing converts from the black market to the legal market,” the report said, the increase “is more likely to be due to larger or more frequent sales to existing consumers than due to more consumers alone.”
“One item to watch moving forward are prices,” analysts wrote. “In recent years the supply of marijuana has greatly outstripped the demand, leading to lower prices. This is great news for consumers. Given that marijuana is a normal good, lower prices have led to larger quantities sold. But now that demand has increased, while supply has held steady, and with the potential impact of the wildfires right as growers are prepping for harvest, this balance in the market may shift… As such, it may be that prices rise, or at least not decline like they have in recent years.”
As far as tax revenue goes, any price increase would likely lead to more money for the state, “as the decline in quantity sold is not large enough to outweigh the price impact,” the report said.
How cannabis revenue is spent would also be affected by a drug decriminalization ballot proposition, Measure 110, that voters will decide in November. While the initiative isn’t expected to change the amount of taxes collected, it would redirect marijuana tax funds to expand drug treatment programs. “Whether current programs receiving marijuana tax revenue would ultimately see budgetary impacts,” analysts said, “would remain up to the Legislature should voters approve the measure this fall.”
Measure 110, which broadly seeks to reframe problem drug use in medical rather than criminal terms, is one of two key drug-reform measures on Oregon’s ballot in less than six weeks. The other would legalize the therapeutic use of psilocybin, the main psychoactive ingredient in psychedelic mushrooms. That measure would be the first of its kind in the U.S., although Canada has recently granted some patients immunity from that country’s prohibition on psilocybin.
Texas Ban On Smokable Hemp Lifted Until 2021, Judge Rules
A Texas ban on smokable hemp products hit another roadblock in court last week when a state judge barred officials from enforcing the prohibition until an industry challenge can be heard in court.
A group of four hemp producers sued the state last month over the ban, which began when lawmakers passed a hemp legalization bill last year that explicitly forbade the production of products intended for smoking or vaporization. State health authorities extended its reach earlier this year to prohibit the sale and distribution of such products made outside Texas, a move the hemp companies claim was an unconstitutional overreach of their authorities.
In a ruling issued Thursday, Travis County Judge Lora Livingston wrote that the hemp companies may have a point. Writing that the plaintiffs “have demonstrated a probable right to relief,” Livingston granted a temporary injunction that effectively voids the ban on production, distribution and sale of the products until the conclusion of a trial set to begin in February.
Livingston had previously issued a temporary restraining order in the case last month that had a similar but shorter effect, preventing the state from enforcing the ban for a matter of weeks. The new ruling freezes the ban for at least four months, and potentially longer.
Opponents of the ban said that while the issue is far from over, Livingston’s recent decisions are a sign the challenge could ultimately succeed.
“So far, the rulings relating to this lawsuit are very encouraging,” said Heather Fazio, director of Texans for Responsible Marijuana Policy, which opposes the ban and has organized hundreds of supporters to submit comments to regulators.
“Advocates in Texas have remained vigilant, with both legislative engagement and regulatory oversight,” Fazio said in an email to Marijuana Moment. “Now, Texas businesses are challenging our state’s poorly designed policies in the courts. And they’re winning!”
Plaintiffs are challenging both the legislature’s initial ban on production and processing of smokable hemp as well as the Department of State Health Services (DSHS) added ban on distribution and sale, which they claim violate the state constitution’s protections for economic freedom. They also maintain that DSHS lacked the authority to extend the production ban to retail sales.
The companies also point to logistical problems caused by the ban. Because smokable hemp flower is indistinguishable from hemp grown for other purposes, they argue, the ban will encourage bad actors to mislabel products in order to avoid the prohibition. That could put consumers at risk by exposing them to chemicals and other adulterants not intended for consumption.
Banning smokable hemp would also hurt the state economically, the producers claim, as Texas hemp companies wouldn’t be able to compete with out-of-state producers that can already make and sell anything from hemp joints to CBD vape cartridges.
“The law does not ban the use or consumption of smokable hemp products. As such, Texas consumers will simply buy smokable products made out-of-state,” the lawsuit says. “If Texas had banned the processing and manufacture of cheese in Texas, Texans wouldn’t stop eating cheese.”
Meanwhile, the state’s legalization of hemp for other purposes has caused headaches in the criminal justice community. Because hemp looks and smells similar to marijuana, law enforcement agencies have struggled to know whether individuals have a banned substance until they can chemically analyze a seized product. But state testing labs are overburdened, and in February the state Department of Public Safety said it would “not have the capacity” to perform testing in misdemeanor cases. Prosecutors as a result have dismissed hundreds of low-level cannabis cases.
Marijuana possession arrests fell almost 30 percent in Texas from 2018 to 2019, recently released state data shows, and that trend seems connected to hemp legalization.
Image by Lindsay Fox from Pixabay
Federal Workplace Drug Testing Proposal Could Discriminate Against People Of Color
A newly proposed federal rule would expand workplace drug testing programs by allowing certain employers to collect and analyze samples of workers’ hair, a move critics say would lead to disproportionate job-related punishments for people of color.
Federal agencies can already test workers’ urine and saliva, which provide evidence of more recent drug use, but “hair testing potentially offers several benefits when compared to urine, including directly observed collections, ease of transport and storage, increased specimen stability, and a longer window of drug detection,” the Substance Abuse and Mental Health Services Administration (SAMHSA) argued in a notice of proposed rulemaking published in the Federal Register on Thursday.
If adopted, the change would affect thousands of government employees as well as private workers in certain federally regulated industries such as those who work in transportation or at nuclear power plants.
Drug reform advocates are skeptical about the move.
“It’s shameful that these harmful federal drug testing guidelines are even being considered again,” Rep. Barbara Lee (D-CA), co-chair of the Congressional Cannabis Caucus, told Marijuana Moment. “Not only is hair follicle testing discriminatory against people of color due to its sensitivity to melanin and darker hair, it gives no indication of someone being impaired on the job. This just goes to show how far behind the federal government is on cannabis policy.”
Paul Armentano, deputy director for the advocacy group NORML, said it is “mind-boggling that, in 2020, SAMHSA is considering expanding federal drug testing guidelines.”
“Hair follicle testing is highly problematic,” Armentano said. “A positive test, even when confirmed, provides neither evidence of behavioral impairment nor recent drug exposure. Moreover, the sensitivity and accuracy of the test is highly variable.”
Because hair exists outside a person’s body, for example, it’s more vulnerable to contamination—including secondhand smoke and other chemicals—than other sample types. That can put workers at risk of false positives unless results are checked through another testing method.
“Arguably most problematic,” Armentano said in an email, “is the reality that these tests discriminate against certain ethnicities because it is influenced by melanin content and is thus more sensitive to those with darker hair—while far less sensitive to those with gray hair.”
Other factors, such as humidity and hormones, could also affect test outcomes, Armentano added.
SAMHSA in its proposal acknowledges that numerous studies “provide scientific evidence that melanin pigments may influence the amount of drug incorporated into hair,” as well as that hair products more commonly used by people of color could lead to false positives. “As noted,” the filing says, “the Department wishes to solicit feedback on scientific studies comparing drug results and hair color and comparing urine to hair.”
The proposal is the latest effort by SAMHSA to expand federal drug screening to include specimens besides urine, including hair, saliva and even sweat. SAMHSA initially floated the idea of hair-based testing in 1997, and the agency put forward a rulemaking proposal along those lines in 2004. Regulators ultimately rejected that proposal amid concerns over accuracy, but SAMHSA has pursued the plan ever since. In recent years, the agency expanded testing to include saliva.
Unlike urine and saliva, hair can take up to a week to show evidence of drug use, rendering it especially useless as a measure of a worker’s immediate impairment. SAMHSA is proposing that hair testing be used only in pre-employment drug screening and random testing—not in cases where workers are suspected of recent use.
In an effort to protect workers from false positives and ensure that hair tests hold up in court, the proposal includes a directive that an alternate specimen, such as urine or saliva, be collected in order to verify a positive hair-test result. “This two-test approach,” SAMHSA’s summary says, “is intended to protect federal workers from issues that have been identified as limitations of hair testing, and related legal deficiencies.”
Marijuana-related cases, however, may not qualify for that additional layer of scrutiny. “The Department is specifically requesting comments, including support from the recent scientific literature, on whether hair tests that are positive for the marijuana analyte, delta-9-tetrahydrocannabinol-9-carboxylic acid (THCA), should be excluded from the requirement to test an alternate authorized specimen,” the proposal says.
Workers, some labor unions and even a Federal Drug Testing Advisory Board (DTAB) member have criticized the SAMHSA proposal as misguided, warning that the proposal is getting away from the science.
As reported in the trade publication Freight Waves, which covers the shipping and logistics industries, independent truck drivers are opposed to the rule, citing bias toward hair color and texture as well as a general lack of evidence that hair testing would improve driver safety. Major trucking companies, however, generally support the change.
DTAB member Michael Schaffer criticized the rulemaking process as “fatally flawed” because the board was left out of discussions.
“This means that these proposed guidelines were developed without the expertise needed to ensure that they are scientifically accurate and defensible,” said Schaffer, a toxicologist at a drug-testing lab, according to a Freight Waves report. “I fear that these proposed guidelines are going to unnecessarily restrict the use of hair drug testing, an incredibly effective tool at detecting drug use, for reasons which have no scientific basis.”
Armentano at NORML said that doubling down on a testing procedure that could exacerbate racial disparities simply doesn’t make sense, especially given today’s political climate.
“Given the heightened awareness surrounding the need for social and racial equity,” he said, “the idea of proposing a testing procedure that will inherently deny more people of color opportunities than it would others who have engaged in exactly the same activities is beyond tone deaf and counterproductive.”
SAMHSA estimates that about one percent of the 275,000 drug tests it expects federal agencies to do every year will be for hair specimens. When it comes to workers in jobs regulated by the Department of Transportation, the agency anticipates that 1.53 million of a total 6.1 million drug tests will be hair-focused. For nuclear workers, 15,000 of 150,000 total tests would be of hair specimens.
“These projected numbers are based on existing annual pre-employment testing that currently occurs in the regulated industries and current hair testing being conducted,” SAMHSA wrote
The agency is accepting public comments on the proposal through November 9.
This story was updated to add comment from Lee.
Photo courtesy of Markus Spiske