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Leaders in Cannabis Testing – Part 1: A Q&A with Milan Patel, CEO and Co-Founder of PathogenDx

By Aaron Green
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In this “Leaders in Cannabis Testing” series of articles, Green interviews cannabis testing laboratories and technology providers that are bringing unique perspectives to the industry. Particular attention is focused on how these businesses integrate innovative practices and technologies to navigate a rapidly changing landscape of regulatory constraints and B2B demand.

PathogenDx is an Arizona-based provider of microbial testing technologies. Since their inception in 2014, they have broadened their reach to 26 states in the US. In addition to cannabis product testing, PathogenDx also provides technologies for food safety testing, environmental testing and recently started offering human diagnostics testing to support COVID-19 response efforts.

We interviewed Milan Patel, CEO and co-founder of PathogenDx. Milan founded PathogenDx as a spin-off from one of his investments in a clinical diagnostics company testing for genetic markers in transplant organs. Prior to PathogenDx, Milan worked in finance and marketing at Intel and later served as CFO at Acentia (now Maximus Federal).

Aaron Green: What’s the history of PathogenDx?

Milan Patel: PathogenDx was effectively a spin-off of a clinical diagnostics company that my partner Dr. Mike Hogan, the inventor of the technology, had founded when he was a professor at the University of Arizona, but previously at Baylor Medical College back in 2002. I had invested in the company back then and I had realized that his technology had a broad and wide sweeping impact for testing – not just for pathogens in cannabis specifically, but also for pathogens in food, agriculture, water and even human diagnostics. In the last 14 months, this became very personal for every single person on the planet having been impacted by SARS-CoV-2, the viral pathogen causing Covid-19. The genesis of the company was just this, that human health, food and agricultural supply, and the environment has and will continue to be targeted by bacterial, fungal and viral pathogens impacting the safety and health of each human on the planet.

We founded PathogenDx and we pivoted the company from its original human organ transplant genetics market scope into the bigger markets; we felt the original focus was too niche for a technology with this much potential. We licensed the technology, and we repurposed it into primarily cannabis. We felt that achieving commercial success and use in the hands of cannabis testing labs at the state level where cannabis was first regulated was the most logical next step. Ultimately, our goal was and is to move into markets that are approved at the federal regulatory side of the spectrum, and that is where we are now.

Green: What year was that?

Milan Patel, CEO and Co-Founder of PathogenDx
Photo credit: Michael Chansley

Patel: 2014.

Green: So, PathogenDx started in cannabis testing?

Patel: Yes, we started in cannabis testing. We now have over 100 labs that are using the technology. There is a specific need in cannabis when you’re looking at contamination or infection.

In the case of contamination on cannabis, you must look for bacterial and fungal organisms that make it unsafe, such as E. coli, or Salmonella or Aspergillus pathogens. We’re familiar with recent issues like the romaine lettuce foodborne illness outbreaks at Chipotle. In the case of fungal organisms such as Aspergillus, if you smoke or consume contaminated cannabis, it could have a huge impact on your health. Cannabis regulators realized that to ensure public health and safety there was more than just one pathogen – there were half a dozen of these bugs, at a minimum, that could be harmful to you.

The beauty of our technology, using a Microarray is that we can do what is called a multiplex test, which means you’re able to test for all bacterial and fungal pathogens in a single test, as opposed to the old “Adam Smith” model, which tests each pathogen on a one-by-one basis. The traditional approach is costly, time consuming and cumbersome. Cannabis is such a high value crop and producers need to get the answer quickly. Our tests can give a result in six hours on the same day, as opposed to the two or three days that it takes for these other approved methods on the market.

Green: What is your business model? Is there equipment in addition to consumables?

Patel: Our business model is the classic razor blade model. What that means is we sell equipment as well as the consumables – the testing kits themselves.

The PathogenDx technology uses standard, off-the-shelf lab equipment that you can find anywhere. We didn’t want to make the equipment proprietary so that a lab has to buy a specific OEM branded product. They can use almost any equipment that’s available commercially. We wanted to make sure that labs are only paying a fraction of the cost to get our equipment, as opposed to using other vendors. Secondly, the platform is open-ended, meaning it’s highly flexible to work with the volumes that different cannabis labs see daily, from high to low.

One equipment set can process many different types of testing kits. There are kits for regulated testing required by states, as well as required environmental contamination.

Green: Do you provide any in-house or reference lab testing?

Patel: We do. We have a CLIA lab for clinical testing. We did this about a year ago when we started doing COVID testing.

We don’t do any kind of in-house reference testing for cannabis, though we do use specific reference materials or standards from Emerald Scientific, for example, or from NCI. Our platform is all externally third-party reference lab tested whether it’s validated by our external cannabis lab customers or an independent lab. We want our customers to make sure that the actual test works in their own hands, in their own facility by their own people, as opposed to just shrugging our shoulders and saying, “hey, we’ve done it ourselves, believe us.” That’s the difference.

Green: Can you explain the difference between qPCR and endpoint PCR?

Patel: The difference between PathogenDx’s Microarray is it uses endpoint PCR versus qPCR (quantitative real time PCR). Effectively, our test doesn’t need to be enriched. Endpoint PCR delivers a higher level of accuracy, because when it goes to amplify that target DNA, whether it’s E. coli, Salmonella or Aspergillus pieces, it uses all the primer reagent to its endpoint. So, it amplifies every single piece of an E. Coli (for example) in that sample until the primer is fully consumed. In the case of qPCR, it basically reaches a threshold and then the reaction stops. That’s the difference which results in a much greater level of accuracy. This provides almost 10 times greater sensitivity to identify the pathogen in that sample.

The second thing is that we have separated out how the amplified sample hybridizes to the probe. In the case of our assay, we have a microarray with a well in it and we printed the actual probe that has the sequence of E. coli in there, now driving 100% specificity. Whereas in the qPCR, the reaction is not only amplifying, but it’s also basically working with the probe. So, in that way, we have a higher level of efficiency in terms of specificity. You get a definite answer exactly in terms of the organism you’re looking for.

In terms of an analogy, let’s take a zip code for example which has the extra four digits at the end of it.  In the case of endpoint PCR, we have nine digits. We have our primer probes which represent the standard five digits of a zip code, and the physical location of the probe itself in the well which serves as the extra four digits of that zip code. The analyte must match both primary and secondary parts of the nine-digit zip code for it to lock in, like a key and a lock. And that’s the way our technology works in a nutshell.

Endpoint PCR is completely different. It drives higher levels of accuracy and specificity while reducing the turnaround time compared to qPCR – down to six hours from sample to result. In qPCR, you must enrich the sample for 24 to 48 hours, depending on bacteria or fungus, and then amplification and PCR analysis can be done in one to three hours. The accuracies and the turnaround times are the major differences between the endpoint PCR and qPCR.

Green: If I understand correctly, it’s a printed microarray in the well plate?

Patel: That’s correct. It’s a 96-well plate, and in each well, you’ve now printed all the probes for all targets in a single well. So, you’re not running more than one well per target, or per organism like you are for qPCR. You’re running just one well for all organisms. With our well plates, you’re consuming fewer wells and our patented foil-cover, you only use the wells you need. The unused wells in the well plate can be used in future tests, saving on costs and labor.

Green: Do you have any other differentiating IP?

The PathogenDx Microarray

Patel: The multiplex is the core IP. The way we process the raw sample, whether it’s flower or non-flower, without the need for enrichment is another part of the core IP. We do triplicate probes in each well for E. Coli, triplicate probes for Salmonella, etc., so there are three probes per targeted organism in each of the wells. We’re triple checking that you’re definitively identifying that bug at the end of the day. This is the cornerstone of our technology.

We were just approved by the State of New York, and the New York Department of Health has 13 different organisms for testing on cannabis. Think about it: one of the most rigorous testing requirements at a state level – maybe even at a federal level – and we just got approved for that. If you had to do 13 organisms separately, whether it’s plate culture or qPCR, it would become super expensive and very difficult. It would break the very backs of every testing lab to do that. That’s where the multiplexing becomes tremendously valuable because what you’re doing is leveraging the ability to do everything as a single test and single reaction.

Green: You mentioned New York. What other geographies are you active in?

Patel: We’re active in 26 different states including the major cannabis players: Florida, Nevada, California, Arizona, Michigan, New York, Oklahoma, Colorado and Washington – and we’re also in Canada. We’re currently working to enter other markets, but it all comes down to navigating the regulatory process and getting approval.

We’re not active currently in other international markets yet. We’re currently going through the AOAC approval process for our technology and I’m happy to say that we’re close to getting that in the next couple of months. Beyond that, I think we’ll scale more internationally.

I am delighted to say that we also got FDA EUA federal level authorization of our technology which drives significant credibility and confidence for the use of the technology. About a year ago, we made a conscious choice to make this technology federally acceptable by going into the COVID testing market. We got the FDA EUA back on April 20, ironically. That vote of confidence by the FDA means that our technology is capable of human testing. That has helped to create some runway in terms of getting federalized with both the FDA and the USDA, and certification by AOAC for our different tests.

Green: Was that COVID-19 EUA for clinical diagnostics or surveillance?

Patel: It was for clinical diagnostics, so it’s an actual human diagnostic test.

Green: Last couple of questions here. Once you find something as a cannabis operator, whether its bacteria or fungus, what can you do?

Patel: There are many services that are tied into our ecosystem. For example, we work with Willow Industries, who does remediation.

There’s been a lot of criticism around DNA based technology. It doesn’t matter if it’s qPCR or endpoint PCR. They say, “well, you’re also including dead organisms, dead DNA.” We do have a component of separating live versus dead DNA with a biomechanical process, using an enzyme that we’ve created, and it’s available commercially. Labs can test for whether a pathogen is living or dead and, in many cases, when they find it, they can partner with remediation companies to help address the issue at the grower level.

Another product we offer is an EnviroX test, which is an environmental test of air and surfaces. These have 50 pathogens in a single well. Think about this: these are all the bad actors that typically grow where soil is – the human pathogens, plant pathogens, powdery mildew, Botrytis, Fusarium – these are very problematic for the thousands of growers out there. The idea is to help them with screening technology before samples are pulled off the canopy and go to a regulated lab. We can help the growers isolate where that contamination is in that facility, then the remediation companies can come in, and help them save their crop and avoid economic losses.

Green: What are you most interested in learning about?

Patel: I would prefer that the cannabis industry not go through the same mistakes other industries have gone through. Cannabis started as a cottage industry. It’s obviously doubled every year, and as it gets scaled, the big corporations come in. Sophistication, standards, maturity all help in legitimacy of a business and image of an industry. At the end of the day, we have an opportunity to learn from other industries to really leapfrog and not have to go through the same mistakes. That’s one of the things that’s important to me. I’m very passionate about it.

One thing that I’ll leave you with is this: we’re dealing with more bugs in cannabis than the food industry. The food industry is only dealing with two to four bugs and look at the number of recalls they are navigating – and this is a multi-billion-dollar industry. Cannabis is still a fraction of that and we’re dealing with more bugs. We want to look ahead and avoid these recalls. How do you avoid some of the challenges around antimicrobial resistance and antibiotic resistance? We don’t want to be going down that road if we can avoid it and that’s sort of a personal mission for myself and the company.

Cannabis itself is so powerful, both medicinally as well as recreationally, and it can be beneficial for both consumers and industry image if we do the right things, and avoid future disasters, like the vaping crisis we went through 18 months ago because of bad GMPs. We must learn from those industries. We’re trying to make it better for the right reasons and that’s what’s important to me.

Green: Okay, great. That concludes the interview. Thank you, Milan.

Patel: Thank you for allowing me to share my thoughts and your time, Aaron.

Hardware Platforms in Cannabis: A Q&A with Mike McDonald, President and CEO of Ammonite

By Aaron Green
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More and more we are seeing the development of proprietary hardware platforms in cannabis. With proprietary technology in hand, manufacturers often lean on MSOs, LPs and other brand partners to grow their business through existing sales channels.

We spoke with Mike McDonald, President and CEO at Ammonite, to learn more about the history of the Dablicator™ platform and Ammonite’s North American brand partner strategy. Mike formed Ammonite as a spin-off company from Jetty Extracts after getting to know the founders in a real estate transaction. Prior to Ammonite, Mike was an operator in the manufacturing and product development space, having helped to launch the Giant bicycle brand as well as growing and eventually selling the Atlas Snowshoe Company to K2 Sports.

Aaron: How did you get involved in cannabis?

Mike: Well, like a lot of folks in the industry, my background is pretty eclectic. I come primarily from an operator’s perspective – I’ve been in manufacturing, product development and company growth for my whole career. I lived in Taiwan for several years and helped to launch the Giant bicycle brand worldwide. I was also involved with a ski business that was started at Stanford as a thesis project called Atlas Snowshoe Company. Fast-forward, we built it into the largest snowshoe brand and activity in the US and later sold it to K2 Sports. So, I’ve always been involved in the growth of product-related businesses.

Mike McDonald, President and CEO at Ammonite

I’ve also done some real estate development as well; I actually sold our building to the Jetty guys, which is how we met. In that process, I got involved with their company, helped Jetty reorganize its business model, raise some money, and then just got addicted to the whole industry and really found it fascinating. I liked the team at Jetty and couldn’t resist jumping in, and now I’ve been full-time in the business for over three years.

Aaron: How did you get involved in Ammonite?

Mike: Ammonite is actually a spin out company from Jetty Extracts, which is one of the largest brands in California. Our main Ammonite product is called the Dablicator™ Oil Applicator, which was originally invented at Jetty as a medical device for cancer patients. We saw a big demand for it as a private label partnership product, so we decided to spin out a separate hardware company and really focus on developing unique IP and CBD and cannabis related hardware.

Aaron: What trends are you following in the industry?

Mike: Certainly the MSOs of the world are really expanding and the top three to five are making a mark with growth and more sophistication in the market. I think the social equity movement is really a big component that we’re all excited about in the industry. You’re seeing the larger players really put their money where their mouth is around that. We’ve always been a big part of that in California.

Specifically, regarding trends in the cannabis space, Colorado and California are probably the two most mature markets. We generally say what’s happening in California and Colorado eventually make their way out to the rest of the world. Vaping was invented in California and Colorado, and now it’s a huge part of the business where before, four or five years ago, the market was mostly flower-centric.

There’s a trend away from inhalables, with more awareness around lung-related illnesses and of course COVID, so we’re seeing a big growth in edibles, drinks and so forth. Interestingly enough, although it’s an inhalable, infused pre-rolls are a big growth sector as well. Jetty is actually launching an infused pre-roll program in February.

Folks are looking for ways to get their medicine without smoking – and this has definitely led to a growth in the oil application business. Oil application has traditionally been delivered via a syringe. Dablicator™ oil applicator is essentially an improved, more convenient syringe. On the medical side, patients have been taking oil sublingually, putting it in food and drink and so forth for years because a lot of them can’t smoke. As that trend transfers over to the adult use market, oil application is becoming really big. You can take it sublingually; you can put it in your food or beverage. On the recreational side, you can add it to your loose flower or joints, or of course, dab it directly onto your rig via the heat resistant tip.

Further, you’re probably familiar with a lot of these portable dab rigs that are taking off, like the G Pen Roam and the Puffco Peak and a variety of others. So now you can dab on the go with your standard wax and shatter in a jar. It’s just not the most convenient way if you’re up on a hike or on a mountain bike ride. So now, with a portable dab rig and something like the Dablicator™ oil applicator, you can have a really convenient mess-free way to enjoy cannabis. The big growth in concentrates and areas that aren’t necessarily inhalables is where our product hardware really fits in.

Aaron: How did you come up with the idea for the Dablicator?

Mike: The Jetty team had a friend that had brain cancer. He was doing a lot of chemotherapy and was having trouble eating and keeping weight on and he couldn’t smoke. So, the guys at Jetty began to bring him cannabis oil, which he was able to use ingesting it from a spoon initially and it really helped him with his pain, his anxiety and his appetite. In that process, we realized that there wasn’t really a great way to deliver oil. Syringes were there, but they were kind of sketchy and they weren’t convenient.

So, the Jetty team developed a better mousetrap. Several iterations later, this Dablicator™ product was ready for patients. In fact, it became a big part of the Jetty Shelter Project, a non-profit where the team delivers cannabis to cancer patients, and it was a very much sought-after product delivery device in that world. So, it was developed inside of a need on the medical side and it’s really sort of grown inside the expansion on the adult-use side.

Aaron: Can you explain how the Dablicator™ oil applicator works from a perspective of form and function?

Mike: Pre-Dablicator™ you would use a syringe type product – for direct oil application, sublingual application, or as an add on to your flower. The difference between Dablicator™ oil applicator and a traditional syringe is that Dablicator™ is a twist and plunge product. Imagine a pen filled with oil, but instead of inhaling it, you’re able to dispense it through a tip that is heat resistant, which means you can apply directly to your dab rig nail. You’re able to put it in your pocket without fear of cannabis oil leakage. It’s discreet, precise, compact and portable.

Aaron: How does the user dose using Dablicator™ oil applicator?

Mike: Basically, there’s measurements on the plunger of 55 milligrams apiece – one click is 55 milligrams, and you can dispense as many clicks as you like. What’s cool about the product itself is if you’ve clicked too many times accidentally, you can back it off and the excess oil won’t dispense. You can go to dablicator.com and see demo videos as well.

Aaron: Dablicator™ oil applicator started as a Jetty Extracts spin-off. I see you are now white labeling for other oil brands. How do you go about selecting your partners?

Mike: We call it our brand partner program. It’s not too dissimilar to what other hardware manufacturers, like PAX and GPen, are doing. We’ve got a patented and innovative device where our brand partners, MSOs and leading brands throughout the US and Canada, can take their existing vape and tincture oils and offer them in Dablicator™ oil applicator hardware.

Our focus is signing up major, well respected brands and MSOs on to the “platform,” meaning they are able to immediately offer between six and ten new SKUs to their consumers. They take their existing oils, put them into a custom branded Dablicator™ hardware unit and add their custom branded packaging. It’s a full turnkey solution. For example, one of our partners, 710 Labs, is developing their RSO and were shopping for a delivery method specifically geared towards medical patients. Within eight weeks, we had a custom program for them and delivered hardware, and we assisted on the packaging front as well.

Our partners have to be reputable folks that are interested in developing or delivering oil in a unique and innovative way. Frankly, our early partners are those that see where the growth is. 710 Labs is on the platform, as well as Surterra in Florida, Ancient Roots in Ohio, and we’ve got multiple conversations going to some of the other MOSs and the LPs in Canada.

Aaron: Are the brand partners loading the oil applicator themselves?

Mike: We customize the product for them and then ship them unassembled and empty. In their lab, they use the same machinery and equipment they use to fill their vape cartridges. They then fill their Dablicator™, assemble it, package it and ship it out just like any other product that they’re processing and manufacturing.

Aaron: What kind of oils are suitable for Dablicator™?

Mike: Pretty much any oil that’s going into a vape cart is suitable and then some. Some of our customers, including Jetty, started out with a THC distillate. Live resin is becoming a big product category in California as well as solventless oils. Dablicator™ oil applicator can accommodate everything from distillate to live resin to solventless to RSO and even full spectrum CBD. If it can flow, if it doesn’t crystallize up like shatter and sugars and diamonds, you can put it into Dablicator™, even the thickest of oils. It’s designed to contain any kind of liquids that are flammable.

Aaron: What geographies are you currently in?

Mike: We’re in multiple states throughout the US and actually just signed up with an LP in Canada. We only launched the program in August of 2020, and today we’ve got partners California, Colorado, Ohio, Arizona, Missouri, Florida, soon to be Michigan, Illinois, and throughout Canada.

Aaron: Any plans for international expansion beyond North America?

Mike: We’re getting inquiries on a regular basis from all over the place, including internationally. We’re in conversations with some folks down in Brazil. Spain is actually a big cannabis market and we’re having some conversations with some folks there. The inquiries are coming in faster than we can process the relationships, but right now our major focus is on North America.

Aaron: What are your goals with Ammonite?

Mike: We are developing a category, right? So today, oil dispensing isn’t top of mind. Today, if you want oil, you go into a dispensary and say, “Hey, give me those syringes.” My goal is that a year from now, you can walk into Harborside in Oakland and you see a wall of different branded Dablicator™ oil applicators. The goal is to really turn the oil dispensing business into a category, and then position Dablicator™ oil applicator as the best and leading product in that category.

Aaron: What are you personally interested in learning more about?

Mike: Well, I’ve got two teenagers – two daughters, as a matter of fact, a freshman and a senior – and they’re being homeschooled right now. So that’s been quite an interesting development!

I think on the cannabis side, it’s just fascinating what it is as a business model. It’s the most recent multi-billion-dollar opportunity in consumer products. You only get a chance to participate in something like that maybe once in a lifetime. I’m really looking forward to seeing it become more adopted into the mainstream and it’s already becoming that way from a consumer perspective. I am watching the cannabis market become legal from a federal perspective, hoping that the social equity component of the industry really stays with it.

I’ve been in a lot of businesses over the years; I feel like one of the gray hairs in this business that is actually an operator versus someone who came over from the financial side. I am continuing to learn, grow and work with great people and this has been a really amazing experience for me.

Aaron: Okay, great. Mike, that’s the end of the interview. Thank you for your time today!

Due Diligence for Suppliers & Cannabis Supply Chain Partners

By Mark Slaugh
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Between the patchwork quilt of rules and regulations that is the modern cannabis industry, products pass through many hands before being sold to a customer. From sourcing, cultivating, manufacturing, distributing and vending, the relationships between a licensee and their vendors/partners up and down the supply chain is complex and touches many stakeholders along the way.

While the focus on quality packaging, dope labeling, delicious ingredients and consistently potent cannabis is a priority for most companies, what often isn’t thought about is the liability in bringing these components together in terms of compliance.

Compliance responsibility falls on licensees as a direct term and condition of licensure within their state. To operate, licensees must maintain and be able to demonstrate compliance with a plethora of rules and regulations. Compliance is the name of the game in cannabis.

While most operators understand this, what most do not think about is how the compliance or noncompliance of their vendors affects their own liability.

Sharing Noncompliance & Liability

Supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

Licensees are the only entities in the supply chain that can be fined, administratively held, suspended, revoked or even arrested due to noncompliance. This fundamental nature means that supply chain partners are automatically segregated by whether or not they are plant touching licensees or not.

In the case of mutual licensees such as a manufacturer and dispensary, the liability for compliance falls on both entities. A single manufacturer that makes an error on labeling language or a cultivator using the incorrect containers both pass on their liability to any downstream partners.

iComply has seen regulators quarantine hundreds of products among multiple dispensaries who never checked the compliance of the supplying manufacturer. Surprisingly, most dispensaries don’t think of the liability passed to them amid hundreds of SKUs and multiple manufacturers and cultivators. Confounding the issue further is that everyone in the industry can interpret the same rules in completely different ways.

Assuming your supply chain partners are 100% compliant is a dangerous pitfall.

By not checking noncompliance from supply chain partners, operators accumulate evidence dating back years. Like METRC being off, these issues tend to snowball until they seem overwhelmingly difficult to handle. And it doesn’t just stop at labeling issues. Noncompliance can fall on all supply chain partners and be left in the hands of a licensee in a variety of ways.

Business partners like security contractors can often run afoul of regulations and put their licensed partners at risk.

Even worse, are supply chain partners who don’t have a motive to be compliant as they do not own licenses and often have a poor understanding of cannabis compliance. A packaging provider, marketing company, CBD provider, security company, vending machine providers, waste disposal companies and other commonplace suppliers and partners can often run afoul of regulations and put their licensed partners at risk.

Since regulators can only enforce the licensed entity, many states have made it clear that licensees are ultimately and fully responsible for any actions of noncompliance taken by third parties contracted by the company – regardless if they touch cannabis or not.

Areas of Common Noncompliance in Cannabis

Like a game of “Hot Potato” (worth millions of dollars), we’ve seen common noncompliance liability get passed down the supply chain in the following areas of cannabis operations:

  • Product liability
  • Packaging and labeling
  • Test result manipulation
  • Expired licenses
  • Input or ingredient defects
  • Inventory tracking errors
  • Recordkeeping and manifest errors

Some of these areas of noncompliance rely with non-licensed supply chain partners such as packaging, ingredients or third party printed labels. Often, these folks simply don’t know what they don’t know and make mistakes – not knowing the thousands of dollars they could be costing their licensed partner down the line.

Other areas in which compliance should be expected from licensed partners lies in product liability, test result issues, inventory tracking, manifests and recordkeeping. No one usually wants to be out of compliance and usually these issues arise from licensed partners who are simply confused, mistaken or ignorant to the requirements of ongoing and changing rules.

It’s hard to keep all of one’s suppliers and supply chain partners on the same page over the long run and amid a multitude of changing rules. But what you resist, persists…

Managing Compliance in the Cannabis Supply Chain

Nothing worth it is ever easy; but it is possible to identify common areas of noncompliance in one’s cannabis operation and supply chain partners and to do something about.

To identify problem areas, iComply recommends conducting regular auditing at a macro level; but to also dive deeper into micro level audits of all of one’s books and records (covering vendor files) and packaging and labeling for at least 12 months.

You don’t know what you don’t know, so one must begin by investigating and understanding where liabilities are occurring between themselves and their supply chain partners. Once valid feedback and noncompliance is discovered, it can be remediated.

Like triage, you have to stop the bleeding before you can prevent further injury.

Consistency in quality standards requires meticulous SOPs

It is always more expensive and time consuming to continue reacting to noncompliance and trying to fix issues after the fact. This is how snowball effects happen until the problems seem so overwhelming, operators tend to simply ignore the liability. While it is human nature, it is also extremely dangerous and detrimental when multimillion dollar licenses are on the line.

An ounce of prevention is worth a pound of cure –Benjamin Franklin

By implementing proactive compliance measures, cannabis businesses can avoid costly noncompliance consequences and position themselves as proactive checkpoints of supply chain compliance. We recommend integrating the following procedures, documents, training and tools into one’s operational compliance infrastructure:

  • New vendor checklist
  • Packaging and labeling checklists by product type
  • Virtual review of labels/non-cannabis packaging
  • Calendar expiration dates for licenses and products
  • Compliance auditing of key vendors and strong contracts regarding liability
  • Input product checklists and tracking as per GMP compliance

This snapshot is just the tip of the iceberg when it comes to the depths of liability a cannabis business is exposed to by its supply chain partners. To truly manage compliance, one must be aware of shared risk and implement proactive measures to prevent suppliers and supply chain partners from inadvertently affecting the operational compliance of your cannabis business.

Selecting Supply Chain Partners

There are plenty of fish in the sea and plenty of suppliers vying to do business with you. iComply has seen the good, the bad and the ugly. We’ve been on the front lines of developing markets like California where we warned our clients to steer clear of companies like Kushy Punch long before they finally lost their license for noncompliance.

control the room environment
Preventing contamination can save a business from extremely costly recalls.

We advise our clients on the importance of being selective and conducting due diligence in vetting supply chain partners and vendors. Most fundamentally, how aligned are the values of potential partners? Are they in the business for the same reasons you are? What brought them to the cannabis space? How do they value relationships and what do they know about compliance?

Too often when focused on price or speed, people miss the more important fundamentals of relationships. We serve as vetters for our clients whether they are shopping for a POS provider, a bank or a waste disposal company. Beyond the cultural alignment, the more objective questions begin to take shape in vetting a potential partner. This can differentiate between license holding and non-holding supply chain partners.

For plant-touching licensed partners, we recommend answering the following before entering into business partnerships that affect your supply chain:

  • Copies of licenses, contracts, and a catalogue of products
  • For products being selected, prior to ordering a sample, obtain a copy of the label by email first. Or an EMPTY sample of product packaging and labeling to vet against a packaging and labeling checklist.
  • Search news articles on the company and ask if they have had compliance issues before. Obtain documentation if there have been compliance issues previously.
  • Ask how they manage their compliance and prevent noncompliance down their supply chain. Do they train their staff? Do they conduct regular audits internally? How often do they update SOPs and reconcile inventory?

For non-plant touching partners, we recommend answering the following:

  • Obtain any certifications for quality assurance or in credentials for services.
  • Ask for references from other customers who have cannabis licenses.
  • Discover how familiar they are with the cannabis industry AND the rules and regulations in your market.
  • Ensure they have an understanding of how they impact your compliance. Discover how they plan on preventing areas of concern together.
  • Make sure they know you are ultimately responsible for noncompliance and understand what they are willing to do to protect you.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. On more complicated deals, such as licensing IP or your brand to operators in new states or markets, we recommend that you mandate a compliance program that offers third-party validation to ensure the internal integrity of your partners. Too often, brand risk isn’t considered in the fast-paced expansion of the industry and operators must not only be vetted, but held accountable, when representing one’s brand and products.

For all intents and purposes, the wild web of the supply chain in cannabis is the industry. We are a collective of collaborators who all serve the goal of delivering high quality and safe products to cannabis consumers globally. For those committed to minimizing their risk to protect their profits, cannabis compliance is the key to success.

Ensuring accountability across the supply chain means selectively choosing partners who share the same values of integrity and professionalism. In doing so, the industry elevates its legitimacy and more effectively expands in a sustainable manner that protects all stakeholders involved.

Noncompliance affects licensees the most and they must be the most vigilant, but it takes a village to raise an industry. Compliance affects most everyone in the supply chain and the loss of any operator hurts the entire industry.

3 Ways IP Security Cameras Can Help Cannabusinesses Comply with COVID-19 Health Requirements

By Jeremy White
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The cannabis industry, like many others, felt the effects of the stay-at-home orders issued in March in response to the COVID-19 healthcare crisis. While medical cannabis companies were considered “essential” in most states, many recreational dispensaries had to close their doors, or pivot to a curbside pickup operations model. According to the State of the Cannabis Industry 2020 report, following a two-week spike in mid-March, as consumers stockpiled product ahead of stay-at-home mandates, sales took a temporary downturn.

The industry rebounded in a big way, however. The report notes that, since April 20, cannabis sales have steadily increased, and are, in fact, up approximately 40% from 2019. But while medical and recreational dispensaries are now open to the public and thriving, it’s far from business as usual.

Like any other retail store, cannabusinesses must follow local- and state-issued health and safety mandates designed to prevent the spread of COVID-19. Complying with these new requirements can be difficult for business owners and management teams on a normal business day – never mind in today’s climate, where demand for cannabis products continues to soar.

Turning to Technology

With more health regulations to follow than ever before and stores experiencing a consistent increase in daily foot traffic, it’s no longer realistic to expect managers to manually monitor every employee and customer to make sure guidelines are met. For example, it’s difficult to manage social distancing within the store – but there are commonly lines outside of cannabusinesses, where social distancing and mask-wearing precautions also need to be followed. Wouldn’t you rather have managers spend their time on customer service and initiatives that will deliver business value, rather than spending time making sure people are following safety protocols?

Technology can help mitigate these new health compliance challenges – and you may even already have the solution deployed: Internet Protocol (IP) security cameras. Often implemented by businesses as a security tool, IP cameras are now also an effective way to ensure employees and customers are following health and safety protocols.

Most IP cameras are equipped with artificial intelligence (AI) that can analyze information in real-time and make split-second response decisions. In the context of health compliance, they can be trained over time to recognize when requirements are not being followed and immediately alert the appropriate managers. This means managers only need to address violations, rather than observing everyone all the time, and they can resolve compliance gaps as they’re happening. In other words, AI takes on the compliance burden for you. And, as an added bonus, many AI-enabled surveillance systems give managers the ability to pull up live video feeds from their smartphone, so they can conduct compliance checks remotely, at any time. This is especially helpful to managers covering multiple stores (suddenly, they can be in more than one place at a time!).

Here are three specific ways IP security cameras can help dispensaries and other cannabusinesses ensure compliance with COVID-19-prompted health guidelines:

  1. Social distance monitoring

Six-feet social distancing rules are now the norm across the U.S., and IP security cameras are able to measure the space around employees and customers to detect when the six-foot rule is violated. For example, some systems place a ring around each person, and the ring’s color changes when people come within six feet of each other. This capability can be helpful when trying to do things such as supervise the line to get into your store, manage your checkout queue, or monitor the distance between customers browsing in store aisles.You can use IP security cameras to create a healthier and safer work environment

  1. Occupancy management

In many states, organizations must follow orders that restrict occupancy to 50% capacity. Rather than having an employee at your front door tallying the number of people going into and out of your store, IP security cameras can do the counting for you. With this capability, you can control foot traffic and keep the number of shoppers within defined occupancy requirements – without having to allocate personnel to do the task manually.

  1. Face mask detection

AI-enabled IP security cameras can also help businesses comply with mandatory face mask orders. The technology can be trained to detect employees and customers who aren’t wearing face masks or other required personal protective equipment, and then alert appropriate management personnel.

A Dual Purpose – Security and Compliance

IP security cameras now have a dual purpose. Beyond simply helping organizations protect their premises from crime, they now also empower them to ensure compliance with health and safety requirements. You can leverage the technology to remediate compliance issues in real-time and demonstrate to public officials that your business remains in compliance with all health mandates. Most importantly, you can use IP security cameras to create a healthier and safer work environment – and, in these uncertain times, this is a certainty you can count on.

Soapbox

Cannabis Shifts to a Luxury Brand

By John Shearman
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This year, many issues have gotten put on a shelf as the world has dealt with the COVID-19 pandemic. The legalization of cannabis in many states has been one of those issues. But this time on pause has given the industry a chance to identify how it would like to move forward as an emerging market that has many benefits across medicine, from mental health to the economy.

For many of these reasons, cannabis use is coming out of the shadows and there has clearly been a shift in recent years from cannabis being an illicit item to becoming a boutique product in many circles. The transition of cannabis’ image from that of the stoner in his parent’s basement to the “it” consumable for the jet set has as much to do about science as it does sophisticated branding.

americana dummiesApproximately 24 million Americans in 2019 have used cannabis, about 10% say they consume it for medical purposes based upon a growing body of evidence supporting the use of medical cannabis for a number of conditions. There are also economic reasons why legalizing cannabis makes sense including increased revenue for the government, job creation and more.

As cannabis becomes legal across America—11 states have adopted laws allowing for recreational use, while 22 others permit only medical cannabis—it’s finally becoming the sprawling business its proponents have long envisioned.

And this has moved the mainstreaming of cannabis in today’s society from a taboo illicit drug to now being openly discussed at dinner tables.

PlantTag
A plant tagged with a barcode and date for tracking

First of all, our hats need to be taken off to the cannabis advocates who over the last 20 years have shaped an emerging industry, educating society and the government on the benefits cannabis can offer based on science.

The global cannabis community has collaborated with regulatory bodies to establish compliance and regulations as a starting point to help the general public understand sourcing products from legal entities is a safer way to get quality product to consume that is not compromised from unregulated producers.

In addition, technology advancements within the cannabis space have led to sophisticated track and trace solutions of raw materials and products through the supply chain. The data captured within these systems allows cannabis brands to tell a compelling authentication story to end consumers based on scientific facts.

This all leads to an emerging market that has open transparency, full traceability and establishing trust with consumers. The early master growers now work hand in hand with designer laboratories, perfecting and protecting their IP. A sophisticated supply chain has been put in place so consumers know where their cannabis was grown and by whom. Consumers understand which strains have been harvested and what hybrid models have been created. This is certainly no longer a bag of weed you purchased from a neighborhood friend, but a complex, innovative industry with established brands that have celebrities, ex-politicians and well know business executives involved now and the advocates that has been leading the charge for over 30 years are still the backbone to educate the masses on the benefits cannabis and hemp will bring to mankind over time.

The Ultimate Guide to Intellectual Property Protection for Cannabis Businesses

By Roger Bora
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As of this writing, one cannot register trademarks with the U.S. Patent and Trademark Office (USPTO) for cannabis products and services that “touch” the cannabis plant (i.e., cultivate, manufacture or dispense cannabis products), with the recent exception for certain hemp-based products and services, because use of trademarks must be lawful under federal law for federal trademark registration eligibility. Brand owners may, however, secure federal trademark registration protection for their brand names for certain cannabis-related products and services that are currently legal under federal law in advance of what could be the full legalization of cannabis at the state and federal levels.

Federal trademark registration provides brand owners with valuable benefits beyond common law (unregistered) and state registered trademark rights, including the preservation of national expansion rights and presumption of trademark ownership and validity. For those reasons, securing federal trademark registration protection for trademarks is a prudent business strategy.

This article summarizes certain laws and regulations for securing federal trademark registration protection for cannabis products (including cannabidiol (CBD) products) and services. It also identifies other forms of intellectual property protection for  cannabis businesses.

What Are Cannabis, Marijuana, Hemp and CBD?

  • Cannabis is a plant of the Cannabaceae family and contains many biologically active chemical compounds, including the well-known delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD) compounds.
  • Parts of the Cannabis sativa plant are controlled under the Controlled Substances Act (CSA) under the drug class “marijuana.” The CSA is a federal law that regulates drug policy for the manufacture, importation, possession, use and distribution of certain substances. Marijuana is currently listed as an illegal Schedule I drug under the CSA, along with cocaine and heroin, due to its high potential for abuse, which is attributable mainly to the psychoactive effects of THC and the absence of a currently accepted medical use in the United States.
  • Marijuana, a term the CSA uses, is the dried leaves of the cannabis plant. It is derived from the cannabis sativa and cannabis indica species and is used primarily as a psychoactive drug.
  • Hemp is derived only from the cannabis sativa species and has historically been grown primarily for its strong fibers used for industrial purposes, including for making fabrics, clothing and rope.
  • There is a significant difference between marijuana and hemp with respect to their concentration of THC, which gives the plant its psychoactive effect. While marijuana can reach THC levels of 30%, THC levels in hemp are typically 0.3% or less.
  • The low level of THC in hemp is a reason why federal authorities recently removed it from the legal definition of marijuana, which means that cannabis plants and derivatives such as CBD derived from hemp that contain 0.3% or less of THC on a dry-weight basis are no longer considered controlled substances under the CSA.
  • Cannabidiol (CBD) is an active ingredient in the cannabis plant and is derived primarily from the hemp plant. CBD has been touted for its many health benefits, including for the treatment of insomnia, pain and anxiety, and it has become a widely used ingredient in many types of products, including foods, cosmetics, building materials, industrial oils, plastics and textiles.

Relevant Laws and Regulations

Controlled Substances Act (CSA)

Under the CSA, the drug class marijuana is defined as “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin” (subject to certain exceptions). 21 U.S.C. §802(16).

The CSA prohibits, among other things, manufacturing, distributing, dispensing or possessing cannabis that meets the definition of marijuana, including CBD derived from marijuana.

2018 Farm Bill Removes Hemp from the Definition of Marijuana

The 2018 Farm Bill signed into law on December 20, 2018, amended the Agricultural Marketing Act of 1946 and changed certain federal laws and regulations concerning the production and marketing of “hemp,” defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”

  • Those changes included removing hemp from the CSA’s definition of marijuana, which means that hemp and its derivatives, such as CBD derived from hemp, that contain no more than 0.3% THC on a dry-weight basis, are no longer controlled substances under the CSA.
  • The recent change in the classification of hemp allows brand owners that legally manufacture and sell certain hemp-based products, including certain hemp-derived CBD products, to federally register their associated trademarks.
  • However, the 2018 Farm Bill explicitly preserved FDA’s authority to regulate certain products containing cannabis or cannabis-derived compounds, even if derived from hemp, including CBD derived from hemp. Thus, federal laws, including FDA regulations, must still be considered for product legality before introducing products into commerce.

Food and Drug Administration (FDA)

Even with the removal of hemp from the CSA’s definition of marijuana, not all hemp-derived products are lawful following passage of the 2018 Farm Bill because certain products may still violate the Federal Food, Drug, and Cosmetic Act. For example, certain hemp-derived CBD products, including human foods, beverages, dietary supplements and animal foods, still violate FDA laws absent FDA approval.

The FDA monitors and investigates the sale of products that violate FDA laws, including CBD products promoted for therapeutic uses and treating diseases. When the FDA detects such violations, it may send warning letters to the violating parties as a first step in the enforcement process.

On December 20, 2018, the then FDA Commissioner Scott Gottlieb, M.D. made the following statement on that point:

“We’ll take enforcement action needed to protect public health against companies illegally selling cannabis and cannabis-derived products that can put consumers at risk and are being marketed in violation of the FDA’s authorities. The FDA has sent warning letters in the past to companies illegally selling CBD products that claimed to prevent, diagnose, treat, or cure serious diseases, such as cancer. Some of these products were in further violation of the FD&C Act because they were marketed as dietary supplements or because they involved the addition of CBD to food.”

Furthermore, in a recent letter to a company selling CBD products, the FTC sent a joint letter with the FDA, and that letter included the following statements and warnings:

  • “The FTC strongly urges you to review all claims for your products and ensure that those claims are supported by competent and reliable scientific evidence.  Violations of the FTC Act may result in legal action seeking a Federal District Court injunction or Administrative Cease and Desist Order.  An order also may require that you pay back money to consumers.

  • You should take prompt action to correct the violations cited in this letter. Failure to promptly correct violations may result in legal action without further notice, including, without limitation, seizure and/or injunction.”

What about using hulled hemp seed, hemp seed protein powder and hemp seed oil in human food?

  • In December 2018, the FDA generally recognized as safe (GRAS) hulled hemp seed, hemp seed protein powder and hemp seed oil. Accordingly, the FDA’s current position suggests that those products may legally be marketed in human foods for the uses described in the notices, provided they comply with all other requirements. To date, the FDA has not received any GRAS notices for the use of hemp-derived ingredients in animal food.
  • Hemp seeds are the seeds of the Cannabis sativa plant. They do not naturally contain THC or CBD. The hemp seed-derived ingredients that are the subjects of the GRAS notices contain only trace amounts of CBD and THC. The FDA has reported that “[c]onsumption of these hemp seed-derived ingredients is not capable of making consumers ‘high.’”
  • Those GRAS conclusions do not affect the FDA’s position on the addition of CBD and THC to food.

U.S. Trademark Registration Eligibility

Trademarks Must Be Used for Lawful Activities

A trademark’s use must be lawful under federal law for federal trademark registration eligibility. Whether activities associated with cannabis and/or cannabis-related goods or services are lawful under federal law requires review of various federal laws, including the Federal Food, Drug, and Cosmetic Act.

Federal law controls federal trademark registration eligibility, period.

If a trademark application is filed for goods or services that violate federal laws, including for marijuana products and/or services or certain products that feature CBD, such as foods and nutritional supplements, the USPTO Examiner should refuse the application. Furthermore, filing an “intent-to-use” trademark application cannot obviate that refusal.

What does that mean? It means that filing a trademark application based on an “intent to use” the trademark “in the future” in anticipation of federal law legalizing cannabis still violates current law (the law as of the application filing date), and thus the application should be rejected because the applicant does not and cannot have a “bona fide intent” to use the applied-for mark for a legal purpose.

The USPTO Examination Guide 1-19 for examining cannabis marks states that:

“[r]egistration of marks for foods, beverages, dietary supplements, or pet treats containing CBD will still be refused as unlawful under the FDCA, even if derived from hemp, as such goods may not be introduced lawfully into interstate commerce.”

The following is an excerpt from an issued Trademark Office action refusing registration of a mark on the basis the listed cannabis goods are unlawful:

“Registration is refused because applicant does not have a bona fide intent to lawfully use the applied-for mark in commerce.

To qualify for federal trademark/service mark registration, the use of a mark in commerce must be lawful. Gray v. Daffy Dan’s Bargaintown, 823 F.2d 522, 526, 3 USPQ2d 1306, 1308 (Fed. Cir. 1987) (stating that “[a] valid application cannot be filed at all for registration of a mark without ‘lawful use in commerce’”); TMEP §907; see In re Stellar Int’l, Inc., 159 USPQ 48, 50-51 (TTAB 1968); Coahoma Chemical Co., Inc. v. Smith, 113 USPQ 413 (Com’r Pat. & Trademarks 1957) (concluding that “use of a mark in connection with unlawful shipments in interstate commerce is not use of a mark in commerce which the [Office] may recognize.”). Thus, the goods and/or services to which the mark is applied must comply with all applicable federal laws. See In re Brown, 119 USPQ2d 1350, 1351 (TTAB 2016) (citing In re Midwest Tennis & Track Co., 29 USPQ2d 1386, 1386 n.2 (TTAB 1993) (noting that “[i]t is settled that the Trademark Act’s requirement of ‘use in commerce,’ means a ‘lawful use in commerce’”)); In re Pepcom Indus., Inc., 192 USPQ 400, 401 (TTAB 1976); TMEP §907.

Here, the items or activities to which the proposed mark will be applied are unlawful under the federal Controlled Substances Act (CSA), 21 U.S.C. §§801-971.”

USPTO Guidelines for Marijuana and Hemp Products: Key Takeaways

  • Trademark registrations for marijuana and marijuana by-products, including CBD derived from marijuana, are still unavailable.
  • Trademark registrations for certain hemp products are available. If an applicant’s goods are derived from hemp, as defined in the 2018 Farm Bill, the identification of goods must specify that they are derived from hemp and that the products contain less than 0.3% THC. Thus, the scope of the resulting registration will be limited to goods compliant with federal law.
  • Trademark applications covering certain CBD infused products, including foods, beverages, dietary supplements and pet foods, are still refused, even if derived from hemp, because such goods may not be introduced lawfully into commerce without FDA approval.
  • The USPTO is currently approving trademarks for skin care preparations and cosmetics that feature hemp ingredients, including CBD derived from hemp, as long as the application complies with the 2018 Farm Bill and USPTO filing requirements.
  • If a pending application’s filing date is prior to December 20, 2018 (the effective date of the 2018 Farm Bill), the applicant must amend the filing date to a date later than December 20, 2018 before the application may proceed. Once the date has been amended, a new search is conducted for any prior pending confusingly similar marks.
  • Trademark applications for hemp cultivation and production, if allowed, will require proof of authorization and licensure in accordance with a plan approved by the U.S. Department of Agriculture.

Federal Trademark Registration Considerations and Options

Although marijuana products and services (i.e., products and services that “touch the plant”) and certain hemp-based products are currently illegal under federal law, making their associated marks ineligible for federal trademark registration protection, there are still certain cannabis-related activities that are legal and thus eligible for federal trademark registration.

Examples of legal activities include:

  • Providing informational services related to cannabis or marijuana-related goods and services.
  • Clothing, including t-shirts and hats, featuring a cannabis-related trademark.
  • Educational programs in the fields of cannabis and CBD, including for health benefits and therapeutic uses of medical cannabis and CBD.
  • Providing an internet news portal featuring links to current events, information, commentary, non-downloadable publications in the nature of brochures, articles, and non-downloadable multimedia files containing video, audio or text in the fields of cannabis or cannabis news.
  • Online journals, namely blogs featuring information about cannabis.
  • Entertainment services, namely, providing podcasts featuring medical and industry experts in the field of cannabis and medical marijuana.

If a brand owner secures federal trademark registration protection for marks for legal activities, including those listed above, those trademark registrations and rights may arguably preserve future product and service expansion under the same registered mark for “related” goods and/or services that are unlawful as of the trademark application filing date, but later become lawful, including CBD infused foods and nutritional supplements and marijuana itself.

Why? Because trademark law protects consumers from “source confusion.”

  • For example, if a brand owner adopts the trademark N-DuraRun for running shoes, another party may not adopt the same or confusingly similar mark for running pants because consumers would likely be confused as to the source of running shoes and running pants if offered under the same trademark by different parties.
    • It is not confusion as to what a consumer is buying (“I thought I was buying running shoes… instead I mistakenly purchased running pants…”). Rather, it is confusion as to the source of the products (“I purchased EnDuraRun brand running pants because I thought they were made by the same company that makes N-DuraRun brand running shoes!”).
    • A question to ask is “Would the average consumer reasonably believe that the parties’ respective goods are of the type that would originate from the same source?”
      • If the answer is “yes” and if the parties’ respective marks are confusingly similar, there may be a likelihood of consumer confusion as to the source of the parties’ respective goods.

For example, if a company provides informational services in the field of cannabis and cannabis derivatives, including CBD infused foods, and/or provides foods and nutritional supplements featuring hemp seed protein powder and hemp seed oil, and it secures federal trademark registration protection for its trademark for those goods and/or services, that existing federal trademark registration and rights may arguably preserve the brand owner’s right to use and register the same mark for “related” goods and services, which could include CBD-infused foods and nutritional supplements if/when those goods become legal. That is so because the average consumer would arguably believe that informational services about CBD infused foods and CBD infused foods themselves would originate from the same source and also believe that foods and nutritional supplements featuring hemp seed protein powder and hemp seed oil and foods and nutritional supplements featuring hemp-derived CBD would originate from the same source.

Source confusion is the crux of trademark law.

Therefore, securing federal trademark registration protection now for goods and services that are lawful can preserve future trademark rights for cannabis-related products and services that are currently unlawful and may avoid losing valuable trademark rights to third parties.

As companies prepare for the potential federal legalization of all forms of cannabis, securing federal trademark registration now for brand names for goods and services that are currently legal is vital for protecting valuable company assets, current and future business opportunities, and future growth, and it is possible as long as brand owners understand the current status of the regulatory landscape and the intricacies of trademark law.

Other Forms of Intellectual Property Protection

In addition to trademark and federal trademark registration protection, there are other intellectual property protections available for marijuana, hemp and cannabis businesses, including:

  • State trademark filings. In states that have legalized cannabis, state trademark registrations may be available.
  • Common law trademark rights. In states that have legalized cannabis, common law trademark rights may be available.
  • Patent protection. Patent protection may be secured for various inventions, including plants, such as new strains of the cannabis plant, and methods of cannabis hydration and lighting.
  • Trade secrets. Trade secrets can protect certain aspects of a business, including formulas, processes or methods, that are not generally known or reasonably ascertainable by others and that can help a business obtain an economic advantage over competitors or customers. To be eligible as trade secrets, however, a business owner must take the necessary steps to legally protect them or they will be lost.
  • Copyrights. Copyright protection may be secured for certain company creative works, including trademark logos (artwork), written materials, photographs and software.

As the laws governing the cannabis industry continue to evolve, including trademark, FDA and banking laws and regulations, all interested parties, including cannabis business owners, law firms and investors, must stay abreast of the rapidly changing legal landscape to maximize business growth opportunities, ensure proper legal and regulatory compliance, and avoid having their businesses go up in smoke.

Notice: This article is for educational purposes only, is not legal advice and should not be substituted for retaining an attorney.

Richard Naiberg
Quality From Canada

Protecting Intellectual Property In Canada: A Practical Guide, Part 1

By Richard Naiberg
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Richard Naiberg

Cannabis producers are making large investments in new technologies to improve their plant varieties, production know-how and product formulations. At the same time, producers are working hard to create and promote more compelling, top-of-mind brand identities for their improved products. The series concludes with a 9-point outline of specific steps cannabis producers need to consider taking to protect their key intellectual property assets. 

The value of these investments cannot be realized if competitors are allowed to copy and exploit the producer’s successes. Canada’s intellectual property laws can and should be used to protect cannabis producers from such predation. Invoking Canada’s laws to this end is not difficult and does not have to be expensive. It does, however, require specific, deliberate and early action.

This series of articles outlines the principal means of protecting intellectual property rights in the core technologies and marketing programs of cannabis companies. The series also highlights what any cannabis company must do to ensure that its own activities do not run afoul of another’s rights. No company wants to begin a new venture only to face a lawsuit for intellectual property infringement.

The series concludes with a 9-point outline of specific steps cannabis producers need to consider taking to protect their key intellectual property assets.

Trade Secrets: Protection For Confidential Know How

A trade secret is specific, commercially valuable information and know-how that is kept confidential within the company and cannot generally be reversed-engineered by outsiders. A trade secret provides protection over any type of information or know-how and is not subject to any expiry date. Trade secret protection is lost only when the information or know-how becomes available to the public.

As a best practice, defining the trade secret in a confidential document can be useful as a way of restricting access to the secretCannabis producers generate all kinds of valuable know-how that cannot be appreciated simply from an inspection of the vended product. Examples would include methods of crossbreeding, cultivation, harvesting, extraction and processing. Customer lists and other internal business structures and information may also qualify as trade secrets.

There are no statutory pre-conditions that must be met to obtain a trade secret. A trade secret is acquired simply upon the generation of valuable information or know-how that is kept confidential. As a best practice, defining the trade secret in a confidential document can be useful as a way of restricting access to the secret, and as evidence in proceedings as to the scope of the trade secret (an issue that is frequently in dispute in such cases).

For the trade secret to be maintained, the producer will need to take steps to ensure that access to the know-how and associated documents is restricted only to those who need to know the secret for purposes of carrying out their functions at the company. All personnel with access to the trade secret will need to be bound to confidence by employment agreement and/or by separate contract. When employees leave, they ought to be reminded of their obligations of confidentiality and must be prohibited from removing any documentation regarding the trade secret from the company. All outside companies who need access to the secret must sign non-disclosure agreements. It is typical for owners of trade secrets to be vigilant in their market surveillance and to engage private investigators when they suspect a trade secret has been stolen.

A trade secret’s very confidentiality provides its principal value. A competitor cannot copy what it has no ability to discern. However, when someone with access to the secret ‘goes rogue’, such as by using the know-how for his or her own account or for that of a new employer, the owner of the trade secret must act quickly and bring the matter before the Court. The Court has a broad discretion to stop the rogue and any persons or companies who learn the secret from the rogue from further dissemination or exploitation of the trade secret. The Court also has a broad discretion to craft an appropriate remedy to compensate the trade-secret owner for the wrong. If the action is brought before the trade secret is broadly disseminated, the trade secret may be reinstated and enforceable in the future. If the owner of the secret acts too slowly and the dissemination of the trade secret becomes too broad, the trade secret may be lost forever.

Adopting the use of trade secrets to protect know-how in the cannabis business does suffer from the fragility of the right itself. One disclosure, however inadvertent, can destroy the protection. In addition, a trade secret will not protect a company from a competitor who independently derives the know-how. Further, theft of the trade secret can be difficult to spot because, by its nature, the trade secret is exploited within the walls of the competitor company and is not evident in the marketed product. The owner of the secret will need to watch its competitors for telltale shifts in business direction and product offerings, particularly when those competitors hire the ex-employees of the owner of the trade secret. It is typical for owners of trade secrets to be vigilant in their market surveillance and to engage private investigators when they suspect a trade secret has been stolen.

Editor’s Note: In part 2 of this series, which will be published next week, Richard Naiberg will take a closer look at patents and how business can protect new and inventive technology in Canada’s cannabis industry. Stay tuned for more!

David Kluft headshot

How to Protect Your Trademarks When You Can’t Protect Your Trademarks

By David Kluft
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David Kluft headshot

Federal trademark registrations are invaluable tools for emerging businesses. They put the world on notice of a company’s name; they can secure nationwide priority over others using similar names; they distinguish a product in the marketplace; they provide crucial advantages in trademark infringement lawsuits; and they are instrumental in building goodwill. But if you sell cannabis, a federal trademark registration will not do any of those things for you … because you can’t get one.

Someday, the USPTO policy may change and there could be a gold rush for federal cannabis trademark registrations.The United States Patent and Trademark Office (USPTO) continues to refuse to register federal trademarks for cannabis businesses, even if the sale of cannabis is legal in the state where the businesses are located. The USPTO’s reasoning goes something like this: federal trademark law allows for the registration of trademarks associated with goods in “lawful” commerce, which means that the goods are not illegal under federal law. Cannabis, and its psychoactive component, THC, remain Schedule I substances under the federal Controlled Substances Act (CSA). Therefore, irrespective of state laws to the contrary, and irrespective of whether the federal law is actually enforced, the manufacture and sale of cannabis is not “lawful” commerce.

This reasoning is of fairly recent vintage. In 2009, by which time about fifteen states had legalized medical cannabis, Attorney General Eric Holder announced that the Drug Enforcement Administration would cease raids on state-sanctioned medical cannabis facilities. The USPTO followed Holder’s lead in 2010 and created a new category of acceptable goods and services for marks related to “medical marijuana.” Within months, however, the USPTO had retreated from this “mistake” and changed its practice manual expressly to preclude such registrations.

David Kluft headshot
David Kluft, partner in the Boston office of Foley Hoag, LLP

Many argue that the USPTO’s position is unjustifiable as a matter of public policy. Making it easier to infringe the trademarks of state-sanctioned businesses does not advance the purposes of the CSA, and it directly undermines a key goal of trademark law, which is to prevent the proliferation of confusingly similar trademarks. But the merits of these arguments have been lost on the USPTO, which continues to refuse to register marks for anything it perceives to be prohibited by the CSA.

So if you own a cannabis business, what can you do to protect your goodwill while the federal government maintains its current policy? Below are some ideas. Admittedly, none of them– individually or collectively – is a substitute for federal registration. But each of them is better than nothing, and all of them may help to establish your ownership and priority when and if the USPTO changes its policy.

  1. State Trademark Registrations. Each state has its own trademark registration system. State registration may offer protection from infringers within the state, or at least within the parts of the state where the registrant operates, and for that reason alone it is probably worth the small cost involved. However, state registration will have little to no efficacy outside the state. You cannot use a State A registration to file a lawsuit in State B, or to stop infringement in State B, or even to prevent conflicting registrations in State B. Additionally, most state trademark registrants, unlike federal registrants, do not benefit from presumptions of validity and ownership in the litigation context.
  2. Related Federal Registrations. Many cannabis businesses also pursue federal registrations for whatever aspects of their business are not prohibited by the CSA. For example, even though the USPTO refused the POWERED BY JUJU mark for cannabis vaporizers (because it was CSA-prohibited “paraphernalia”), it allowed the same company to register the same mark for “vaporizers for smoking purposes not for use with cannabis.” The USPTO has also allowed registrations for cannabis-related business consulting (e.g., CANNACARD; PRAIRIEJUANA); investment analysis (e.g., FORTUNE420); clothing (e.g., CANNABIS COUTURE, THE MARIJUANA COMPANY); and for CBD – as opposed to THC – derivatives (e.g., CBD LIQUID GOLD). Once the USPTO permits federal registrations for cannabis marks and the inevitable disputes over ownership arise, such federal registrations for these related products and services are likely to be highly persuasive evidence in the registrants’ favor. Moreover, even in the current legal climate, federal registrations (especially when cited in a demand letter) are of great practical use in convincing others not to use confusingly similar marks.
  3. Common Law Unfair Competition. Unfair competition is a state common law cause of action that was a precursor to modern trademark law, and it is still available to protect commercial goodwill even in the absence of a state or federal trademark registration. However, unfair competition law has similar territorial restrictions as state registration. In some cases, the protected territory may be even narrower, limited only to the area within which the plaintiff can prove consumer recognition of the mark.
  4. Other Intellectual Property Protection. Copyright law, unlike federal trademark law, has no “lawful” commerce requirement, and the U.S. Copyright Office regularly issues registrations for cannabis-related copyrights. While copyright will not protect a short phrase such as a business name, it will protect a creative logo design or original packaging, and can be very effective when it comes to getting infringing uses taken down from the internet. Note also that the USPTO does not appear to have the same qualms about legality when it comes to patents, and it often grants patent protection to useful, new and non-obvious inventions related to the cannabis industry.
  5. Save stuff. Finally, if you do nothing else, save stuff. Document that first sale; keep a copy of that first shipping invoice; and save that file containing your original packaging design. Someday, the USPTO policy may change and there could be a gold rush for federal cannabis trademark registrations. Your lawyer is going to ask you for proof of your first uses of the mark, and you don’t want your response to be a glassy stare. So keep your eyes on the eventual prize and stay ready.

Protecting Your Cannabis Plant IP

By Brian J. Amos, Ph.D, Charles R. Macedo, M.S
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You’ve bred a new strain of cannabis, or perhaps discovered an excellent new hybrid outgrowing the other plants in your cannabis plot. Can you claim the new plant as yours and legally protect it? The short answer is potentially yes. The long answer follows below:

Plant Patents


Since a 1930s’ Act passed by Congress, the US government has permitted a person land, and (ii) asexually reproduces that plant, to apply for a Plant Patent. If granted, the Plant Patent will protect the patent holder’s right to “exclude others from making, using, selling, offering for sale and importing the plant, or any of its parts.” In other words, if you have a Plant Patent, you have a monopoly on that particular plant and its progeny plants, as long as they are asexually reproduced (for example, from cuttings – i.e. a clone). There is a hole in the protection – once you’ve sold or given anyone the plant they can use the seed or pollen from it without your permission.

Originally this sort of coverage was thought to be useful for things like new apple varieties, which are often from spontaneous new mutants found by farmers in their orchards (i.e. “cultivated land”). But is it possible this coverage can be extended to cannabis plants? The answer is yes. Unlike the traditional refusal of the US Patent & Trademark Office (USPTO) to register “offensive” or “disparaging” trademarks on moral grounds, US patent law does not have any well-established “morality exception.” And, indeed, Plant Patents have already been issued for cannabis strains. In December 2016, US Plant Patent No. 27,475 was issued for a cannabis plant called “Ecuadorian Sativa.” This plant is said to be distinct in its exceptionally high level of a particular terpene (limonene) at levels of 10 to 20 times the usual range, and is a single variety of a cross between what are commonly named as Cannabis sativa and Cannabis indica.

How do you get a Plant Patent? Firstly – a Plant Patent is not automatically granted. The application has to be written correctly, and the USPTO will examine it to determine if your plant is new and distinct (non-obvious) from other known varieties, that it is described as completely as is reasonably possible, and that it has been asexually propagated. In addition, if the plant was “discovered” as opposed to “invented” then the USPTO will need to be shown that it was found in a cultivated area. A plant discovered simply growing wild cannot be patented. If you pass these hurdles, you will have a Plant Patent that lasts for 20 years.

Utility Patent
 

Another type of patent that can protect your new cannabis plant, and much more besides that, is a Utility Patent. Utility Patents have a longer history than Plant Patents in the US and, while they may be harder to obtain, a Utility Patent gives you broader protection than a Plant Patent. A Utility Patent can cover not only the plant itself, but if properly written can also cover parts of the plant, uses of the plant, methods used to create the plant, methods for processing the plant, and even edibles (like brownies) that contain an extract from that plant. If granted, the Utility Patent will protect your right, for 20 years from the date you filed the application, to “exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.” An additional protection is that if the invention you claim in the patent is a “process,” you can assert the Utility Patent to exclude others from importing into the United States any products made by that process. Of course, given that present U.S. federal law regards cannabis as a DEA Schedule 1 drug, this importation blocking right is currently irrelevant. Nevertheless, it should be remembered that utility patents have a 20-year term, and Federal law may shift during that time.

Utility Patents are harder to obtain than Plant Patents. The USPTO will examine your application to determine whether what you are claiming protection on (for example: plants, cells, methods or processes) is new and non-obvious, does not cover a naturally occurring product or process, and is fully described. The simple description used in a Plant Patent is not enough for the more rigorous description needed in a Utility Patent. In addition, meeting the “enablement requirement” of a Utility Patent may require you to have the plant strain deposited with a recognized depository which will maintain that specimen plant – and you must agree that the public is permitted to access that deposit if a Utility Patent is granted to you.

So has the US government granted any patents on cannabis plants? Yes it has, multiple patents. A recent example is US Utility Patent No. 9,095,554 granted to Biotech Institute LLC (Los Angeles), which covers hybrid cannabis plants of a particular type with a CBD content of greater than 3%, as well as methods of breeding or producing them. Biotech Institute was also granted claims in the same Utility Patent for cannabis extracts from those plants, and edibles containing the extract. In this case, the plant samples were deposited with the NCIMB, which is a recognized depository in Aberdeen, Scotland. It should be noted that while the depository has to be internationally recognized, it does not have to be in the US. Another corporation, GW Pharma Ltd. (a UK firm), was early in the game and, according to USPTO records, has more than 40 U.S. Utility Patents issued relating to cannabis in some form or another, the earliest dating back to 2001.

Plant Variety Protection Act


A third type of protection is potentially available under the Plant Variety Protection Act (PVPA) if you breed a new cannabis plant by sexual reproduction. Colloquially, this protection is more often known as “breeder’s rights” and the USDA administers it. This right is not mutually exclusive with other protections – in 2001 the U.S. Supreme Court ruled that that sexually reproduced plants eligible for protection under the PVPA are also eligible for Utility Patents.

In theory, obtaining a PVPA certificate is a relatively straightforward procedure for seed reproduced plants, which are new, distinct, uniform and stable. If you are granted a PVP certificate it will last for 20 years from the grant date. You can bring a civil action against someone who sells, offers for sale, delivers, ships or reproduces the covered plant. So have any PVPA Certificates been issued for new cannabis strains? We have reviewed the USDA published certificates for the last two years and have not found any. Why is this? One obstacle may be what happens after you file your application. The US code governing these certificates states that a seed sample “will be deposited and replenished periodically in a public repository.” However, the government body that administers the PVPA, the USDA, specifically requires that all applicants submit a seed sample of at least 3,000 seeds with an 85% or more germination rate within 3 months of filing the application. Sending cannabis seeds in the mail to a federal agency – that’s a deterrent given current uncertainty. Ironically, the location that the seeds must be sent to is Fort Collins in Colorado, a state where cannabis has been decriminalized. The USDA’s published PVPA guidance describes courier delivery of the seed sample to the Fort Collins repository, but does not mention hand delivery of the seed samples. We contacted the seed depository and were informally told that seed samples can be deposited by hand delivery – but this still entails handing over to a federal agency actual seeds of a plant which is a DEA Schedule 1 drug. In any event, no PVPA Certificates that have yet been issued for new cannabis strains. It is possible that a new federal administration might deschedule cannabis, permitting an easier route to PVPA coverage. But for the present at least, PVPA protection may be hard to obtain.

Notice

The views expressed herein are those of the authors and do not necessarily represent those of Amster, Rothstein & Ebenstein, LLP, or its clients. Nothing in this article is to be construed as legal advice or as a substitute for legal advice.

Enforcing Your Patent Without Litigation

By William H. Honaker
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Patent litigation can be costly; the median cost can be more than $3 million. Even as the owner of a patent, you should explore all options before deciding to file an infringement suit. Litigation should be your last resort, even if your lawyer is convinced you can win. Winning a patent lawsuit is not likely your true goal. Remind your confident lawyer that the stronger your case, the greater your options.

Patent litigation is expensive and distracting for everyone. The expense is astronomical. A recent survey by the American Intellectual Property Law Association, “2017 Report of the Economic Survey,” stated that the median cost to litigate a patent case is $3,000,000. In addition to the out-of-pocket costs, there are the distractions that keep you from running your business. Patent litigation means years of endless meetings, depositions, document productions, and days in court.

William H. Honaker, member and attorney at Dickson Wright

Patent litigation is also uncertain. Like my 92-year-old father who recently was cut off on the highway. He chased down the young guy at a red light, jumped out and pounded on the guy’s window, and said. “ONE of us is getting his ASS kicked.” Patent litigation is the same; someone is getting their ass kicked. Many surprises can develop in a patent case leaving the outcome a question.

As cannabis-related businesses grow and enter the business main stream, patent litigation will increase. More businesses will get patents. Patents are valuable to businesses: they protect margins, protect market share and increase the asset value of the business. They do this by preventing competition.

The winds of change are blowing, as I read the article by Walters, G. “What a Looming Patent War Could Mean for the Future of the Marijuana Industry.” The article referenced United States Patent No. 9,095,554, stating:

“On August 4, 2015, US officials quietly made history by approving the first-ever patent for a plant containing significant amounts of THC, the main psychoactive ingredient in marijuana, according to the patent’s holders, their lawyers, and outside experts in intellectual property law.”

At first, this made me acutely aware that we are on the threshold of a brave new world, where legalized cannabis is driving great changes in the way we look at a now-legitimate industry.

Then, I had a little chuckle when I read the words of a longtime cannabis activist:

“It’s going to be a mess,” said Tim Blade, a longtime grower and activist who founded California’s annual Emerald Cup cannabis competition. “Marijuana growers developing new varieties are going to have to spend a lot of money on attorneys.”

It’s clear Mr. Blake was starting to see through the haze of an unregulated industry that’s been under the radar until now. And what he saw was going to be a real buzz-kill. So how can you avoid litigation?

Both sides of the lawsuit will suffer. Typically, litigation should be avoided if at all possible. The good news is there are alternatives. You can take advantage of your patents without suing for infringement.

By knowing what you want, you can then know the options you have.The Myth About Patent Litigation

Before we explore alternatives, you may find some comfort in the fact that about 90% of patent suits are settled; (see Pridham, D. “The Patent Litigation Lie”, found in Forbes. Of those not settled, only 1% to 5% are litigated, (see LaBelle, M. “Against Settlement of (Some) Patent Cases” found in Catholic University of America, Columbus School of Law, 2014.) The cases not settled and not litigated are concluded through summary judgment or other motions prior to trial. But, even though only 1% to 5% make it to trial, getting to settlement or other non-trial resolutions is still uncertain, expensive and distracting.

Avoiding Patent Trials

Options open up when you understand what you want, and what you are willing to accept. First, you must know what you want to achieve, what you will sacrifice and how that will affect the accused infringer. Maybe you want to put the accused infringer out of business. You might be satisfied if they changed their product. You may want then to pay for their infringement, or only sell in certain geographic areas. By knowing what you want, you can then know the options you have.

Simple Agreement

Talk to the accused infringer and discuss your position and listen to theirs. You may be able to come to terms. I represented a client who was faced with asserting their patents against a competitor. The product was a huge success, and the patent was very strong. The competitor was clearly cornered, and like any cornered animal, it had no alternative but to fight. But there was an alternative. The client realized this and offered the competitor a different design. Not as good, but acceptable. The two agreed to the re-design, saving both millions in litigation costs and giving both certainty in the outcome.To avoid the loss of the patent, the owner decided to license, rather than sue, infringers.

License Agreement

Work out a license. As the patent owner, you have the ability to grant others the right to use your invention, for a fee or other terms. You define the terms and allow the accused infringer to continue their activities, or a variation of them. You can limit sales to certain industries, geographic areas, customer size, charge a royalty, allow for a specific time period to continue selling, etc. You can even cross-license technology with the accused infringer.

A client had a very successful product, but it was protected by a weak patent. Weak because others could challenge the patent and likely win. To avoid the loss of the patent, the owner decided to license, rather than sue, infringers. That allowed the owner to remain in control of the patent and receive a stream of income from the licensees. The licensed parties were limited to geographic areas, and not permitted to expand beyond them.

Mediation

Agree to have an independent third-party mediator consider your case. Mediation is an opportunity to have one or more independent mediators review the evidence and provide a decision. Every aspect of the process is agreed-upon by the participants. The parties can agree to the type of evidence that can be presented, the length of time of the mediation, the number of witnesses if any, the effect of any decision, whether evidence can be used later in a trial, whether the proceeding is confidential, whether the decision is advisory, etc.Getting the full value from a patent doesn’t always require litigation

At a minimum, mediation gives everyone an independent view of the case. This independent view can lead to more informed negotiations. It can show both parties what an independent evaluator considers the strengths and weaknesses of each side’s case.

Mock Trial

A variation of mediation is a mock trial. Again, the parties can set the rules. The difference is the Mock Trial would use actual jurors to hear each side’s case, normally a very short summary. This summary can take the form of a closing argument, brief testimony from key witnesses, or the reading of their statements. Mock trials are usually used to give the parties an idea of what a typical jury thinks, and help the parties better understand their respective positions.

Getting the full value from a patent doesn’t always require litigation. Historically, only a tiny fraction of patents are litigated. To avoid litigation as a patent owner, keep the lines of communication open with the accused infringer. Think about your actual goal. It’s rarely winning a lawsuit (that’s the goal of a lawyer, not a business person). Your goal is more likely a beneficial result that business people will both understand; a result that works for both of you.