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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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Feds Warn More CBD Companies Over Health Claims

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The Federal Trade Commission (FTC) sent letters on Tuesday ordering three companies to stop making unfounded health claims about their CBD products.

“It is illegal to advertise that a product can prevent, treat, or cure human disease without competent and reliable scientific evidence to support such claims,” FTC said in a press release about the action.

Though the agency did not name the three companies that received letters, it described their claims.

One firm said on its website that CBD “works like magic” to relieve “even the most agonizing pain” and has been “clinically proven” to treat cancer, Alzheimer’s disease, multiple sclerosis, fibromyalgia, cigarette addiction and colitis.

Another company claimed CBD is a “miracle pain remedy” that can also treat treat autism, anorexia, bipolar disorder, post-traumatic stress disorder, schizophrenia, anxiety, depression, Lou Gehrig’s Disease (ALS), stroke, Parkinson’s disease, epilepsy, traumatic brain injuries, diabetes, Crohn’s disease, psoriasis and AIDS.

A third CBD provider sold cannabidiol-infused gummies that it said can treat “the root cause of most major degenerative diseases, including arthritis, heart disease, fibromyalgia, cancer, asthma, and a wide spectrum of autoimmune disorders,” according to FTC.

The agency is directing the companies to reply within 15 days with information about steps they have taken to address potential violations of the law, which could lead to injunctions and orders to refund money to consumers.

The latest actions follow several other steps the federal government has taken to push back on marketplace claims about CBD.

In March, FTC and the Food and Drug Administration (FDA) teamed up to send a previous round of letters to three companies for potentially making false or unsubstantiated health claims about their CBD products. In July, FDA issued a warning letter to Curaleaf Inc. about what the agency said were “unsubstantiated claims” the company made about cannabidiol products on its website.

Hemp and its derivatives, including CBD, were legalized under the Farm Bill that was enacted late last year but FDA has not yet created a process to approve the use of the compound in food products or dietary supplements.

Preliminary research has indicated that CBD has the potential to help people struggling with substance use disorders involving alcohol, opioids and stimulants, but to date it has only been federally approved to treat severe seizure disorders in the form of the prescription medication Epidiolex.

“Before making claims about purported health effects of CBD products, advertisers need sound science to support their statements,” FTC wrote in a blog post. “The takeaway tip for anyone in the industry is that established FTC substantiation standards apply when advertisers make health-related representations for CBD products.”

A separate FTC consumer advisory urges people to “talk with your doctor before you try a healthcare product you find online” and “find out about the product’s risks, side effects, and possible interactions with any medications you’re taking.”

This piece was first published by Forbes.

Photo by Kimzy Nanney.

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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Colorado Sold Twice As Much Recreational Marijuana As Medical Cannabis Last Year

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The share of legal marijuana sales in Colorado that came from the recreational market in 2018 significantly outpaced those from the medical market, according to an annual government report released on Monday.

In fact, there were about two times as many adult-use sales of flower compared to medical cannabis purchases—a new milestone for the state.

Colorado’s Marijuana Enforcement Division (MED) said that 288,292 pounds of bud were sold last year for recreational purposes, while 147,863 pounds were sold to medical marijuana patients. For comparison, in 2017, recreational consumers purchased 238,149 pounds and 172,994 pounds were sold to patients.

That means the recreational-medical gap increased 73 percent in one year.

Via MED.

Overall, 436,155 pounds of cannabis were sold in 2018, compared to 411,143 pounds in 2017.

In part, the trend can be attributed to the ongoing expansion of Colorado’s adult-use cannabis market since the state’s first recreational shops opened in 2014. Medical cannabis sales were notably higher than recreational sales in that first year of implementation, with just 38,660 pounds coming from the adult-use market and 109,578 pounds being sold to medical patients.

Medical and adult-use sales were roughly even in 2016. But by 2017, recreational sales accounted for 58 percent of the market. And last year, they represented 66 percent of the market.

MED also found that licenses for recreational marijuana facilities increased by three percent (47 licenses) while medical business licenses declined by eight percent (77 licenses).

Via MED.

“Data collection continues to be a priority at the MED,” Jim Burack, director of the program, said in a press release. “This ongoing analysis and compilation of industry information helps inform the public and contributes to our outreach efforts to stakeholders.”

The report also showed that the adult-use market is the primary destination for individuals purchasing edibles. Eighty-six percent of edible sales came from recreational consumers. And from July-December 2018, 75 percent of cannabis plants were cultivated for adult use.

The market shift isn’t unique to Colorado. An Associated Press analysis from June detailed how states across the country that have established recreational marijuana programs are seeing the number of medical patients decline as more consumers transition to the adult-use market.

That may be partially explained by individuals who sought out medical cannabis recommendations choosing not to renew their registration after recreational marijuana shops became available. To that point, a recent study found that many customers at recreational dispensaries are consuming cannabis for the same reasons that registered patients do, such as to alleviate pain and sleep issues.

The concern for some advocates, however, is that adult-use legalization could drive up prices for patients, or leave them with fewer product options tailored to therapeutic use as demand for high-THC products increases.

“When states pass adult-use legalization we are seeing many patients leave the strict controls of the medical programs,” David Mangone, director of government affairs at Americans for Safe Access, told Marijuana Moment. “Patients must already pay out of pocket for cannabis, and any added cost like a registration fee for a medical card or renewal can make the process of obtaining medicine extremely burdensome and costly.”

“States like Colorado must continue to provide adequate benefits to patients to ensure the medical program remains robust,” he said.

Mangone added that “as states pass adult-use programs it is important that they continue to understand and appreciate the needs of patients.”

“A common frustration for many is not what happens in terms of access to cannabis, but rather what happens in terms of access to specific products. Products and flower with a high-THC content have a wider market appeal, but may not necessarily benefit the existing medical market.”

That said, one interesting finding from this latest MED report is that medical and recreational consumers alike seem increasingly interested in concentrates, with the units of such products sold to both nearly doubling from 2017 to 2018. Concentrates are sold at a much higher rate in the adult-use market, but the potent products evidently have growing appeal across the board.

Gov. Jared Polis (D) recently celebrated tax earnings from marijuana sales, touting the fact that the state has amassed more than $1 billion in cannabis revenue that has been allocated to various social programs.

And the marijuana market is continuing to evolve in state. Polis signed legislation in May allowing for home deliveries of cannabis products as well as social consumption sites.

The governor said last month at a conference with governors from around the country that the new delivery law could help mitigate impaired driving.

After Legalizing Marijuana, Colorado Saw ‘Significant Decrease’ In Opioid Prescriptions, Study Finds

Photo courtesy of Kimberly Lawson.

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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Credit Unions Won’t Be Punished For Working With Marijuana Businesses, Federal Regulator Says

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Regulators won’t punish credit unions simply for working with marijuana businesses that are operating in compliance with state laws, the head of the federal agency that oversees the financial services providers said in a new interview.

National Credit Union Administration (NCUA) Chairman Rodney Hood also suggested that Congress could entirely resolve banking issues in the cannabis industry by federally descheduling marijuana.

“It’s a business decision for the credit unions if they want to take the deposits,” Hood told Credit Union Times, adding that the financial institutions must follow existing federal guidance and ensure that the businesses they choose to service are not violating anti-money laundering laws or other rules.

“We don’t get involved with micro-managing credit unions,” he said.

While the comments don’t signify a new shift in policy, and don’t take into account the fact that the Justice Department still maintains authority to potentially prosecute credit unions that allegedly violate the law by banking marijuana proceeds, they are the latest indication of a growing consensus that federal action is needed to clarify the situation.

Uncertainty around banking in the state-legal marijuana market has been a hot topic in the 116th Congress.

Legislation that would shield banks and credit unions that take on cannabis clients from being penalized by federal regulators was approved by the House Financial Services Committee in March, and the Senate Banking Committee held a hearing on the bill last month. That panel’s chair, Sen. Mike Crapo (R-ID), said last week that he agrees a solution for the industry is necessary.

Though the NCUA head didn’t endorse specific legislation to give credit unions peace of mind when dealing with cannabis businesses, he did float the idea of descheduling marijuana as one way to provide unambiguous clarity for financial institutions.

“Hood said that Congress could remove all ambiguity if it enacted legislation to declassify marijuana,” the trade publication reported after its interview with the official.

Separately, the independent federal agency recently took one proactive step toward reforming policy partly in response to state-level legalization efforts. In a notice published in the Federal Register last week, NCUA proposed changing its rules so that individuals with prior low-level drug convictions would be allowed to work at credit unions.

Though bank and credit union representatives are calling for enhanced clarity when it comes to cannabis banking, more financial institutions do seem willing to take the risk anyway, with federal data showing a notable uptick in the number of marijuana-servicing banks in the last quarter.

Federal Agency Proposes Letting People With Drug Convictions Work At Credit Unions

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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