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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.

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Legal Marijuana States Have Generated Nearly $8 Billion In Tax Revenue Since Recreational Sales Launched, Report Finds

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States that have legalized marijuana for adult use have collectively generated nearly $8 billion in tax revenue from cannabis since legal sales first began in 2014, according to a new report from the Marijuana Policy Project (MPP).

The analysis examined the tax structure and revenue streams of all 18 states that have legalized recreational cannabis, though sales have not launched yet in seven of those states. Overall, it shows that establishing regulated marijuana markets gives states a steady and generally growing source of revenue that can support various programs and services.

Last year alone, the adult-use states collected $2.7 billion in taxes from cannabis sales. And as more markets come online and others mature, that’s expected to continue to grow.

For example, California took in more than $1 billion in tax revenue from recreational marijuana in 2020—a 62 percent increase from 2019.

Illinois has consistently been breaking monthly cannabis sales records since its program started in January 2020, and if the trend keeps up, it could create upwards of $1 billion in tax revenue this year. For the first time, marijuana taxes outpaced those derived from alcohol in the state last quarter.

The report does not factor in local tax revenue that individual municipalities may impose on cannabis sales, like in Denver where residents pay an additional 5.5 percent tax that has generated hundreds of thousands of dollars for the city.

“Legalizing cannabis for adults has proven to be a wise investment,” Jared Moffat, state campaigns manager at MPP, said in a press release. “Not only are states seeing the benefits of a regulated market and far fewer cannabis-related arrests—they’re benefitting in a direct, economic way, too.”

MPP also broke down different ways that adult-use states are using those tax dollars.

In Colorado, $404.5 million in marijuana tax revenue has supported the state’s public school system. Oregon invests 40 percent of its cannabis revenue to public education, as well as 25 percent to fund mental health and treatment programs. And in California, $100 million in cannabis tax dollars have gone to community groups to help people most impacted by punitive drug laws.

“Before legalization, money from cannabis sales flowed through an underground market that endangered public safety and disrupted communities. But now, we see all across the country that revenue from the legal cannabis industry is supporting schools, health care, and a range of other beneficial public programs,” Moffat said. “It’s no wonder that residents in legalization states overwhelmingly see legalization as a success.”

Reform advocates aren’t the only ones interested in seeing how states are approaching the tax side of marijuana legalization. The U.S. Census Bureau also has plans to begin collecting and compiling data on revenue that states generate from legal cannabis.

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Illinois Will ‘Blow Past’ $1 Billion In Legal Marijuana Sales In 2021, Chamber Of Commerce President Says

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“Are we going to get to a billion dollars? I think we’re going to blow past the billion dollars based on the experience in smaller states,” the Chamber leader said.

By Elyse Kelly, The Center Square

Illinois’s cannabis industry is growing up fast, with adult-use recreational cannabis sales expected to hit $1 billion by year-end.

In March alone, Illinoisans spent $110 million on recreational marijuana.

Todd Maisch, president and CEO of the Illinois Chamber of Commerce, said one factor contributing to Illinois’ explosive growth is that most neighboring states haven’t legalized marijuana yet.

“What we saw early on in states like Washington and Colorado is they did have demand come in from surrounding states, which frankly benefits our industry and benefits the taxes collected,” Maisch said.

Cannabis sales have already surpassed alcohol’s tax revenues for the state, and Maisch said he thinks $1 billion estimates are conservative.

“Are we going to get to a billion dollars? I think we’re going to blow past the billion dollars based on the experience in smaller states,” Maisch said.

There are only a couple of things that could stop Illinois’ explosive cannabis market growth, Maisch said. He said that policymakers could ruin things by pushing taxes too high as evidenced by the tobacco market.

“As taxes have gone up and up and up, they’ve pushed people all the way into the black market or they’ve created this grey market in which people are ostensibly paying some of the taxes, but they’re still getting sources of tobacco products that avoid much of the tax,” Maisch said.

The other thing that could head off continued growth is other states opening up recreational-use markets.

“So if you start to see surrounding states go to recreational, that’s definitely going to flatten the curve because we’re not going to be pulling in demand from other states,” Maisch said.

Maisch points out some concerns that accompany the explosion of Illinois’s recreational cannabis market including workforce preparedness.

“All of those individuals who are deciding to go ahead and consume this product are really taking themselves out of a lot of job opportunities that they would otherwise be qualified, so there’s a real upside and a downside,” Maisch said.

While it’s easy to track the revenues this industry brings into state coffers, he points out, it will be harder to track the lack of productivity and qualified individuals to operate heavy machinery and other jobs that require employees to pass a drug test.

This story was first published by The Center Square.

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Missouri Regulators Derail Medical Marijuana Business Ownership Disclosure Effort With Veto Threat

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Missouri regulators say they feel requiring medical marijuana business license ownership disclosures under a House-approved amendment could be unconstitutional, and they may urge the governor to veto the legislation. 

By Jason Hancock, Missouri Independent

An effort by lawmakers to require disclosure of ownership information for businesses granted medical marijuana licenses was derailed on Thursday, when state regulators suggested a possible gubernatorial veto.

On Tuesday, the Missouri House voted to require the Department of Health and Senior Services provide legislative oversight committees with records regarding who owns the businesses licensed to grow, transport and sell medical marijuana.

The provision was added as an amendment to another bill pertaining to nonprofit organizations.

Its sponsor, Rep. Peter Merideth, D-St. Louis, said DHSS’s decision to deem ownership records confidential has caused problems in providing oversight of the program. He pointed to recent analysis by The Independent and The Missourian of the 192 dispensary licenses issued by the state that found several instances where a single entity was connected to more than five dispensary licenses.

The state constitution prohibits the state from issuing more than five dispensary licenses to any entity under substantially common control, ownership or management.

On Thursday, a conference committee met to work out differences in the underlying bill between the House and Senate.

Sen. Eric Burlison, a Republican from Battlefield and the bill’s sponsor, called the medical marijuana amendment an “awesome idea. I think it’s awesome.”

However, he said opposition from the department puts the entire bill in jeopardy.

“The department came to me,” he said, “and said they felt that this was unconstitutional.”

DHSS has justified withholding information from public disclosure by pointing to a portion of the medical marijuana constitutional amendment adopted by voters in 2018 that says the department shall “maintain the confidentiality of reports or other information obtained from an applicant or licensee containing any individualized data, information, or records related to the licensee or its operation… .”

Alex Tuttle, a lobbyist for DHSS, said if the bill were to pass with the medical marijuana amendment still attached, the department may recommend Gov. Mike Parson veto it.

The threat of a veto proved persuasive, as several members of the conference committee expressed apprehension about the idea of the amendment sinking the entire bill.

Merideth said the department’s conclusion is incorrect. And besides, he said, the amendment is narrowly tailored so that the information wouldn’t be made public. It would only be turned over to legislative oversight committees.

Rep. Jered Taylor, R-Republic, chairman of the special committee on government oversight, said the amendment is essential to ensure state regulators “are following the constitution, that they’re doing what they’re supposed to be doing.”

The medical marijuana program has faced intense scrutiny in the two years since it was created by voters.

A House committee spent months looking into widespread reports of irregularities in how license applications were scored and allegations of conflicts of interest within DHSS and a private company hired to score applications.

In November 2019, DHSS received a grand jury subpoena, which was issued by the United States District Court for the Western District. It demanded the agency turn over all records pertaining to four medical marijuana license applications.

The copy of the subpoena that was made public redacted the identity of the four applicants at the request of the FBI. Lyndall Fraker, director of medical marijuana regulation, later said during a deposition that the subpoena wasn’t directed at the department but rather was connected to an FBI investigation center in Independence.

More recently, Parson faced criticism for a fundraiser with medical marijuana business owners for his political action committee, Uniting Missouri.

The group reported raising $45,000 in large donations from the fundraiser. More than half of that money came from a PAC connected to Steve Tilley, a lobbyist with numerous medical marijuana clients who has been under FBI scrutiny for more than a year.

This story was first published by Missouri Independent.

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