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Richard Naiberg
Quality From Canada

Protecting Intellectual Property in Canada: A Practical Guide, Part 4

By Richard Naiberg
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Richard Naiberg

Editor’s Note: This is the third article in a series by Richard Naiberg where he discusses how cannabis businesses can protect their intellectual property in Canada. Part 1 introduced the topic and examined the use of trade secrets in business and Part 2 went into how business owners can protect new technologies and inventions through applying for patents. Part 3 raised the issue of plant breeders’ rights and in Part 4, below, Naiberg discusses trademarks and how cannabis businesses should go about protecting their brand identity in Canada.

Trademarks: Protections For Brands And Goodwill

Cannabis businesses must not only protect their investments in their technical creations, but also must protect their brand identities. A cannabis producer can invest heavily in making a desirable, high-quality product, and can advertise and sell this product so as to generate customer interest and goodwill, but if the customer cannot distinguish the producer’s product from that of its competitor, this investment is for not. Trademarks become unenforceable when they are no longer distinctive.

A trademark provides its owner with the right to have the Court stop another entity from using the trademark, or using a similar trademark in a way that confuses the public. When the trademark is infringed, the Court can also make a monetary award in favor of the trademark owner.

Trademarks are identifiers of a particular source of manufacture and they can take virtually any form. Trademarks can be words, phrases, symbols, names, designs, letters, numbers, colors, three-dimensional shapes, holograms, moving images, modes of packaging, sounds, scents, tastes, textures, or any other distinguishing element. What a trademark cannot be is a mere descriptor of the goods or services themselves because such a trademark would prevent other entities from describing their products in their ordinary terms.

Trademarks can be registered, but they do not have to be. In choosing a trademark, the cannabis producer must balance competing impulses: the desire to choose a trademark that is suggestive of the product itself so as to have an immediate meaning to customers without need of an expensive marketing campaign; and the desire to coin a unique and striking trademark which is instantly eye-catching and memorable, but which must be advertised before customers can understand the product to which it refers.

For example, a depiction of cannabis leaf or a word that plays on the ordinary terms used to refer to cannabis will not make a strong mark that can be enforced against those who adopt something similar. On the other hand, a coined word, such as “Kodak”, may have no independent association with cannabis but, after a time, use of this mark in association with a cannabis product can create a very strong mark with a wider ambit of exclusivity.

All that said, even a very suggestive mark can serve as a trademark where the use of the mark is so longstanding and ubiquitous that the suggestive mark acquires a secondary meaning as an indicator of its source of manufacture. Cannabis producers can and should also consider adopting specific colors, scents or tastes of their products as trademarks, where appropriate.

Trademarks become unenforceable when they are no longer distinctive. For this reason, trademark owners must keep abreast of any use of trademarks similar to their own by third parties, and must act quickly to either license such uses or to restrain them.Cannabis businesses have been very busy applicants for trademarks. More than 1700 such applications are now on file, though a comparative few have yet been registered. 

Trademarks can be registered, but they do not have to be. When a company’s product or service becomes known to its customers or potential customers with reference to a mark through ordinary business use, a trademark has been created.

Registration does however provide certain advantages. Under the amendments to the Trademarks Act coming in 2019, a registered trademark can be obtained for without any proof of use or goodwill.  By contrast, and as noted above, an unregistered mark must be used and possess goodwill before it can be said to exist at all. A registered trademark provides protection for its owner across Canada. An unregistered trademark can only be enforced in the geographical area in which its owner has established its reputation. A registered trademark is protected from those who use it in a manner that is likely to depreciate the goodwill of the trademark. An unregistered trademark only protects against consumer confusion.

Registration under the Trademarks Act also makes it an offence to sell goods or services on a commercial scale in association with another’s registered trademark, or to traffic in infringing labels. Further, a trademark owner can request that the import or export of such goods in Canada be arrested. No similar rights accrue for unregistered trademarks.

Finally, a registered trademark is published at the CIPO web site, providing notice of its existence to new market entrants before these entrants commit to using a similar trademark. Unregistered marks are not always easily discovered and a new market entrant may commit to a mark before having any opportunity to discover that it is the unregistered trademark of another.

Registering a trademark is straightforward. The applicant prepares an application that identifies the applicant, the trademark and the goods and/or services with which the trademark is being used or is intended to be used. Once satisfied that the application complies with the Trademarks Act, CIPO publishes the application to allow potential opponents of the registration to come forward. If there is no opposition, or if an opposition proceeding is brought and dismissed, the trademark is issued.

There is an interaction between the Trademarks Act and the Plant Breeder’s Rights Act. As discussed above, when a denomination has been adopted for a plant variety under the Plant Breeder’s Rights Act, nothing similar can be adopted or registered as a trademark. This is so other traders may use the denomination in their sale of the variety after expiry of the plant breeder’s right.

Cannabis businesses have been very busy applicants for trademarks. More than 1700 such applications are now on file, though a comparative few have yet been registered. Trademark applications in this area are likely to increase further with the coming changes to the Trademarks Act and the removal of the requirement that applicants show use of the trademark prior to registration. Companies will be encouraged to apply for trademarks they may only be considering using, and for any trademarks that they think their competitors may be planning to use. There is some concern that the changes to the Trademarks Act will lead to the rise of trademark trolls.

Before adopting a particular trademark, the producer must do what it can to minimize the likelihood that a third party will assert that the trademark infringes the third party’s prior rights. Searches of Canadian and international trademarks, particularly United States trademarks, are advised. National intellectual property offices, such as CIPO and the United States Patent and Trademark Office, maintain easily searchable databases of registered and applied-for trademarks that should be reviewed. Search professionals can also assist in identifying trademarks that have never been the subject of a trademark application. With the result of the searches in hand, the cannabis producer can determine whether or not to proceed to adopt the contemplated mark and invest in its promotion.

In Part 5, Naiberg will explain how to use a copyright to protect works of creative expression. 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.
Laura Bianchi
Soapbox

Jeff Sessions’ Latest Moves Should be a Wake-Up Call for the Cannabis Industry

By Laura A. Bianchi
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Laura Bianchi

The legal cannabis industry was recently rocked to its core by the announcement that Attorney General Jeff Sessions would be rescinding the so-called “Cole memo” and several other Obama-era legal directives suggesting the federal government would leave state-by-state cannabis reforms more or less alone. Suddenly, it seemed the entire cannabis movement was in jeopardy. Laws legalizing medical and recreational cannabis could be at risk. A booming industry predicted to be worth $50 billion annually by 2026 could instead be going down in flames.

Here’s the good news: As a business transactions attorney who’s been working in the cannabis industry for eight years, I don’t see any cause for panic. The Cole memo and the other directives the Justice Department are rescinding were not laws, orders or even legal precedents – they were simply legal guidance, and murky at that. The memos provided guidance to federal prosecutors regarding cannabis enforcement under federal law, suggesting that federal prosecutors not focus resources on state-legal cannabis operations that weren’t interfering with other federal priorities, such as preventing the distribution of cannabis to minors and preventing revenue from the sales from going to criminal enterprises, gangs and cartels. Yes, federal prosecutors could take Sessions’ recent moves to mean it’s open season on medical and recreational cannabis businesses. But with medical cannabis programs of one form or another up and running in 29 states and Washington D.C., and recreational cannabis now legal in eight states and Washington D.C., dismantling the entire legal cannabis industry would require a Herculean federal effort that would come at the expense of a cornerstone of the Republican Party now in power: The vital importance of states’ rights.The best way to stay on top of those rules? Form relationships with your state program regulators

In other words, I don’t see the termination of the Cole memos as the end of the nascent cannabis industry. But I do think the development should be a wake-up call for all those people in the cannabis industry who have been playing fast and loose with their business operations. After all, if federal prosecutors do decide to make examples of certain cannabis operations, they’re going start with those who are not operating within the confines of the applicable state rules and regulations.  Any business that smells even slightly of tax evasion, interstate trafficking or the allocation of cannabis-derived revenue to benefit a criminal enterprise will end up at the top of that target list.

So how should well-meaning cannabis operators stay off the feds’ radar? Simple: Follow all the rules.

Unless you want orange to be your new black, you can’t afford to be sloppy with your business structure and financial records.For starters, you need a CPA who’s not just at the top of their game, but who also understands the very specific – and potentially debilitating – nuances of cannabis-specific tax liabilities. That’s because thanks to a quirk in the tax code called IRS section 280E, cannabis companies are utterly unique in that they are not allowed to deduct expenses from their business income, save for the costs of goods sold. You want an accountant who thoroughly grasps this issue, so they can help you plan for and (to the extent possible) minimize your tax liability. And you want to address such matters before you start to realize positive revenue, so you’re ready to handle an effective tax rate that can be upwards of 70 percent. Last I checked, the IRS doesn’t consider “But I can’t afford to pay my taxes!” a valid excuse.

Along the same lines, you need a business corporate attorney who’s well-versed in the world of cannabis. That’s because while it might seem exciting to jump headlong into the cannabis green rush, you’re not going to get very far if you don’t deal with the boring stuff first. I’m talking about start-up financing strategies, business contracts and agreements, profit and loss forecasts, cash-flow analysis, and long-term financial plans. Properly structuring your business from the get-go isn’t just important if you ever plan to seek capital or sell your business. It’s also necessary if you want to keep the feds happy. In other industries, regulators might cut first-time business owners some slack. Not so in cannabis. Unless you want orange to be your new black, you can’t afford to be sloppy with your business structure and financial records.

Jeff Sessions and Eric Holder
AG Jeff Sessions (left), the man responsible for the recent uptick in worries

Finally, make sure you’re playing by all the cannabis rules, regulations and requirements of your state and jurisdiction. While this suggestion might seem like a no-brainer, far too often cannabis brands hire hotshots from Fortune 500 companies who don’t know anything about cannabis regulations and how they apply to their business.

The best way to stay on top of those rules? Form relationships with your state program regulators. Here in Arizona, I am in constant contact with our regulators discussing nuances and new business concepts for which the rules are unclear, convoluted or simply silent. Working with the enforcers might not come naturally to many folks in the cannabis business, but we’re dealing with a new and evolving industry where there’s little or no business, regulatory or judicial precedent. We’re all in this together.

It’s exciting to be at the bleeding edge of a bold and booming new industry like cannabis, but to do so safely and legally, cannabis industry pioneers need to make sure they’re striking the right balance between daring innovation and sensible business security.

We shouldn’t expect Jeff Sessions to launch a new army of prohibition agents around the country to kick down doors of cannabis businesses. But it wouldn’t be a bad idea for cannabis entrepreneurs to start acting like he might.

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.

Cannabis M&A: Practice Pointers and Pitfalls When Buying or Selling a Cannabis Business

By Soren Lindstrom
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The Stage is Set

According to the Marijuana Policy Group, the U.S. cannabis industry is expected to reach more than $13 billion in sales by 2020 and create more jobs than the U.S. manufacturing industry. According to Viridian Capital’s Cannabis Deal Tracker, there were close to 100 M&A transactions in the U.S. cannabis industry in 2016 and approximately $1.2 billion was raised in equity and debt. As the cannabis industry has grown more mature and businesses begin to have more capital available, the M&A activity within the industry is poised to grow significantly over the next years to assist businesses gain necessary scale and take advantage of synergies and diversification.

The Obvious Wrinkle

U.S federal law has prohibited the manufacture and distribution of cannabis since 1935. The U.S. regulates drugs through the Controlled Substances Act, which classifies cannabis as a Schedule I drug (i.e., drugs determined to have a high potential for abuse with no currently accepted medical use and a lack of accepted safety regarding their use). Yet, more than 25 states have by now legalized cannabis for medical and/or recreational purposes and, as a result, there is a clear conflict between such state laws and existing federal law. To possibly help bridge that conflict, the U.S. Attorney General’s office in 2013 issued guidance directing the federal government not to intervene with state cannabis laws except in specific, limited circumstances, but, contrarily, the DEA has shown no desire to re-classify cannabis. To add to the confusion, President Trump and the new U.S. Attorney General have provided mixed statements and signals about their positions.

All of this means that it continues to be risky to acquire cannabis businesses. The requirements to legally grow, distribute, prescribe, and use cannabis for either medical or recreational purposes vary widely by country, state, and local jurisdiction, making it tricky to determine whether such businesses can be legally combined, in particular, across state lines.

Pick the Right Team of Advisors

When preparing to sell or buy a cannabis business, it is important to pick the right team of advisors. Your regular legal counsel, accounting firm or CPA may not be the right advisors for a cannabis M&A transaction. Choose a legal counsel that not only has experience with cannabis laws and regulations, but also has cannabis M&A experience and can offer expert advice on areas like IP, employment, tax matters, etc. Similarly, verify that your accounting firm or CPA has real experience with financial and quality of earnings analysis and due diligence.

Conduct Gating Due Diligence Up Front

In any contemplated M&A transaction, it is wise to prioritize your due diligence investigations. There will always be some more prominent risks and business objectives in a particular industry or with respect to a specific target business. It will be more cost and time effective if those specific risks and business objectives are prioritized early in the due diligence process. These can dictate whether you even want to pursue the target further before you dig into a deeper and broader due diligence investigation. Conducting gating due diligence up front is even more important in an industry like cannabis that contain complex and thorny regulatory hurdles.

So, before you spend money and time on a broader legal, business and financial due diligence investigation, have your legal counsel analyze and confirm that the potential transaction is feasible from a regulatory perspective. This will include whether it is possible to obtain or transfer necessary local and/or state licenses and whether a combination or sale can occur across state lines if necessary. Early on in the process, It is also advisable to request that the target business complete a legal compliance questionnaire or discuss with the target its regulatory compliance program, policies and training. Such up front due diligence will either clear a path to negotiations and broader confirmatory due diligence or flush out “red flags” that may kill a possible deal or require the buyer to investigate further before proceeding.

Important Terms and Pitfalls in the M&A Agreement

Generally, a sale or purchase agreement for a cannabis business does not appear to vary much from a similar agreement in any other industry. However, the complex environment and the premature nature of the industry impacts certain deal terms and processes in different ways from most other developed industries.

Here are few examples to keep in mind when preparing and negotiating a sale or purchase agreement:

  • Third Party and Governmental Consents: Buyer’s legal due diligence must focus on the consents that may be required from seller’s suppliers, customers, landlords, licensors or other third parties under relevant contracts. Additionally, the due diligence should focus on consents and approvals required by local and state regulators as a result of the sale. The M&A agreement should contain solid seller representations and warranties about all such consents and approvals and any such material consents and approvals should, from a buyer’s perspective, be a condition precedent to closing of the transaction.
  • Legal Compliance: A buyer should not agree to a boilerplate seller representation about the target’s compliance with laws. Be specific and tailor seller’s legal compliance representation to relevant state and local cannabis laws, regulations and ordinances. From a seller perspective, be careful and thoughtful about any appropriate exceptions (including the federal prohibition) to be disclosed to buyer in the disclosure schedules underlying the sale or purchase agreement.
  • Financial statements: The cannabis industry is very fragmented and consists of many small businesses. Many of these small businesses do not have financial statements prepared in accordance with GAAP and may consist of only management prepared financials. In that scenario, a buyer should have its financial advisor do an analysis of the financials available and ask seller to provide a representation and warranty about the accuracy and good faith preparation of the provided financials.
  • Escrow: Typically, a buyer will request some part of the purchase price be placed with an independent financial institution for a period of time post-closing as a source of recovery for losses as a result of breaches by seller of any of the representations and warranties in the definitive sale or purchase agreement. Due to the federal cannabis and banking regulations, many of the larger commercial banks will not provide financial services to cannabis businesses, in particular if the business touches the plant. The parties must therefore consider alternatives, including local financial institutions with more relaxed compliance requirements or perhaps place the escrow in a trust account of a law firm or other independent party.
  • Working Capital Dispute Procedures: Similar to the escrow, larger accounting firms generally do not provide services to cannabis businesses. Due to the rapid evolution of cannabis related regulations, if the terms of the transaction include provisions for a post-closing working capital/purchase price adjustment and related dispute procedures, it is advisable to not name an arbiter in the agreement. Instead, parties should agree to mutually select the arbiter if and when a dispute should arise.
  • Indemnification: Because of the tricky legal environment of the cannabis industry, it may be prudent for a buyer to request, at the very least, that certain parts of seller’s legal compliance representation and warranty not be subject to the “regular” caps, deductibles and other indemnification limitations. Also, if a buyer has unearthed a significant issue in its due diligence investigation, it should consider asking seller for a special indemnity for such issue that would be indemnifiable regardless of buyer’s knowledge of the issue and not be subject to the general indemnification limitations.
  • R&W Insurance: If there’s a lot of competition for the purchase of a target, particularly in a bidding process, it is now common for buyer to offer to purchase a representation and warranty insurance policy (“R&W Insurance”) to possibly gain an advantage by limiting the seller’s post-closing indemnification exposure. The good news is that many of the R&W Insurance carriers do offer such insurance in connection with the sale and purchase of cannabis businesses. However, typically, R&W Insurance cannot be obtained for insured amounts of less than $5 million. Experienced M&A counsel can advise of the advantages and disadvantages of R&W Insurance and assist in the negotiation of the related terms.

The above are just some examples of what to expect in a cannabis M&A transaction. Every M&A transaction will have its unique issues that will need to be appropriately reflected in the sale or purchase agreements and good M&A practices will continue to evolve with the industry. If you are an owner of a successful cannabis business, buckle your seat belt and be prepared for an exciting ride as the industry gets closer to significant consolidation.

PA Cannabis Banking Committee Announces Formation

By Aaron G. Biros
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The Hoban Law Group announced today the formation of a committee to address banking access issues for the Pennsylvania cannabis market. Steve Schain, Esq., nationally recognized consumer finance litigation, banking law and cannabis law expert practicing with national cannabis law firm Hoban Law Group, is the committee’s spokesman and chair.

Steve Schain, Esq. practicing at Hoban law Group and chairperson of the committee.
Steve Schain, Esq. chair and spokesperson of the committee.

Limited access to banking is an ongoing issue plaguing cannabis businesses due to its federally illegal status. According to Steve Schain, cannabis businesses across the country are forced to pay their vendors, utility bills, payroll, taxes and insurance in cash. “At any time, a dispensary or cultivation operation could have up to $200,000 in cash on site- not having a place to bank opens opportunities for criminal activity,” says Schain. It also presents operational issues for business owners like record keeping or even personal bank accounts getting shut down.

“All of those issues could mean less jobs, less economic activity and less tax revenue for the state,” says Schain. “Fully compliant operations should not have to deal with this.”

Schain formed the committee for a number of reasons, including “Setting the table and starting a dialogue. We want this to be scalable. In the past, the great flaws in banking efforts for cannabis were a lack of cohesion and operating credibility- we hope to approach it from a multi-disciplinary angle and change that,” says Schain.

State Senator Daylin Leach introduced the bill
State Senator Daylin Leach

The committee’s members include three PA politicians: Daylin Leach, State Senator of the 17th District, who introduced the bill that legalized medical cannabis in Pennsylvania, Derek Green, Philadelphia City Councilman and Mary Jo Daley, Representative of the 148th District. Tom Fleming, former assistant director of the Office of Compliance at the Treasury Department’s Financial Crimes Enforcement Network, is also a member of the committee.

A number of committee members are actively involved in the legal cannabis industry and cannabis banking initiatives. Sundie Seefried, a member of the committee, is the chief executive officer of Partner Colorado Credit Union, which is

Lindy Snider, advisor at Greenhouse Ventures and KIND Financial
Lindy Snider, advisor at Greenhouse Ventures and KIND Financial

currently handling over half of Colorado’s estimated billion-dollar cannabis banking market, according to Schain. Lindy Snider, founder and chief executive officer of LindiSkin, advisory board member of KIND Financial and Greenhouse Ventures, is also listed as a member of the committee.

“According to the treasury department, only 301 financial institutions have reported banking cannabis cash,” says Schain. “Few federally chartered banks or credit unions will work with cannabis businesses, but two states-Washington and Maine- have banking regulators sensitive to cannabis banking and we have found 36 banks and credit unions providing financial services to cannabis enterprises.”

The goal with forming this committee is to change that and create an environment where banking for cannabis businesses is much easier. “We plan on drafting a white paper with best practices on compliant and profitable banking on behalf of cannabis-related businesses and financial institutions,” says Schain.

Working from a banker’s perspective is the key here, says Schain. They want to create a working, compliant and profitable system for banks to do business with cannabis cash. One of the problems in the meantime is the high-risk nature of dealing with cannabis companies, leading to an inability to get insurance on those accounts. In the eyes of the federal government currently, conducting cannabis-related transactions may be deemed money laundering and highly illegal. “The real issue is with the federal government and I strongly suspect this is not an issue at the top of the Trump White House agenda.”

Soapbox

Why are Business Professionals Hesitant to Enter the Cannabis Industry?

By Tyler Dautrich
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I recently had a discussion with a colleague of mine on how the cannabis industry lacks business sophistication. There are not many MBA level, or proven business professionals, that have made a living and name for themselves in another industry, entering the cannabis space. At first glance, you would think there should be, primarily because they can leverage their previous expertise and success into a new, multi-billion dollar space. Instead, those professionals are watching from afar and eying a move to enter the industry five to ten years down the line.

It just so happens that the individual I was speaking to is in the situation described above, so I asked why? Why not leverage your success and make a name for yourself in this industry where there is clearly an opportunity? This individual is coming from a legal background so this piece will focus on that area primarily. However, the story is the same for many others that come from different professional backgrounds.

They informed me that entering the cannabis industry could risk them potentially losing their license to practice law. They practice law in a state that does not have any form of cannabis legalization. So even if this person wanted to actively pursue working in the cannabis industry (where legal), they run the risk of potentially losing their license and not being able to practice law again. This creates a difficult decision for someone considering an emerging industry that still has an uncertain future.

Beyond putting professional careers and relationships in jeopardy, the cannabis stigma affects personal lives. It amazes me that there is still an extremely negative stigma that surrounds this industry. No matter the level of professionalism the industry demonstrates, many still think working with cannabis could be considered unprofessional.

I know from first hand experience in talking with a handful of professionals that are working in the industry, they do not tell everyone what their job is. Or they use their job title from their other current, or previous, job outside of the industry. They do not want certain individuals to know they are in the industry because they know it will damage their current reputation in certain groups.

This is one of the recurring issues with startups not only going through Greenhouse Ventures accelerator program, but throughout the industry. Many lack that level of business sophistication to have the know-how and ability to scale and grow their startup. Yes, they are the founding team and they have the idea and the vision, but they are not the team that investors put their faith and capital in.

My question is, what needs to happen to start attracting these business professionals into the cannabis space? We have already seen a few of the more risk averse professionals jump ship, but a majority are still hiding in the shadows or watching from the sidelines.

Marijuana Matters

Time to Litigate: The Defense That Helps the Client but Hurts the Industry

By David C. Kotler, Esq.
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From time to time, lawyers that service the cannabis industry find themselves representing a client with a litigation matter. By anecdotal evidence, it appears that there is an up-tick in cannabis related litigation over the past year and a half, mostly in circumstances where respective promises made have not been lived up to or those who have invested money are seeking its return. Perhaps a partnership formed within the last few years is simply becoming unraveled.

In the world of litigation, we see defenses, or what are known as affirmative defenses, may be filed in response to a particular lawsuit or claim. One such affirmative defense often utilized in litigation is that a particular contract or agreement may be void based on illegality or void as against public policy.

In fact, this particular grounds for dismissal was at issue in a case in Maricopa County, Arizona wherein a judge in April of 2011 dismissed a lawsuit seeking enforcement of a loan agreement where two Arizona business people loaned $250,000.00 each to a Colorado-based medical marijuana dispensary. The agreement in that case specifically stated that the loan was for “a retail medical marijuana sales and growth center.” Colorado had the foresight in 2013 to legislate against this type of defense when their general assembly passed a law indicating “a contract is not void or voidable as against public policy if it pertains to lawful activities authorized by” Colorado’s constitutional and statutory cannabis law.

The issue becomes germane in emerging states wherein the legislatures and courts have not been dealing with cannabis related matters for any length of time. This is particularly true and ripe for problems in states such as Illinois and Massachusetts that have recently moved forward with cannabis programs and experienced an influx of out of state consultants and companies looking to partner with and work with local residents for licensure purposes. In Florida alone, there have been at least three lawsuits in the past year dealing with cannabis related civil disputes.

To my knowledge, none of those disputes were defended upon, nor did the court address, the legality of the underlying subject matter. However, the question arises whether the lawyer’s obligation to their client necessitates raising this as a defense, for instance, to an action for non-payment of a promissory note for a loan to fund cannabis related business. If the lawyer practices and seeks clients in the industry and hopes to move the industry forward in a positive manner, is it incumbent upon the lawyer to assist the client by making the best legal argument or protect the industry and greater good? As an aside, the answer is to zealously represent the client. Potentially, an adverse ruling in a particular jurisdiction could ultimately affect enforceability of cannabis related agreements in that jurisdiction. It is possible that having a court ruling, even if it is a trial level court within the jurisdiction, at least provides some precedent and a basis for the industry moving forward in that particular jurisdiction. If the ruling is unfavorable like the Arizona precedent mentioned earlier, perhaps planning for jurisdiction and venue to be in more favorable environs is key to document drafting on the front end. For investors, knowing the enforceability of their agreements in a particular jurisdiction could mean the difference between investing in a venture in a particular state or not.

Ultimately, I believe that as advocates, we must do whatever is in our power to protect the client even if it means testing the legal bounds by making an argument that at first blush may hurt the industry. However, having courts develop precedent by which the industry can govern itself in business dealings is important and takes away uncertainty, which in turn allows for good decision-making on the front end. Hopefully, in the near future this will be moot as the federal government moves forward to take actions that provide more certainty and uniformity in dealings within the cannabis space.