Tag Archives: petition

Solutions & Alternatives to Bankruptcy for Cannabis Businesses

By Richard Ormond
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A Cannabis Related Business (or CRB), whether a plant-touching operation or a provider of goods and services to plant-touching operations cannot seek protection from the bankruptcy court as it is a federal court and cannabis remains illegal at the federal level. As such, a CRB does not have the benefit of a court approved restructuring as provided by Chapter 11 of the Bankruptcy Code and does not receive the benefit of an orderly liquidation as provided by Chapter 7 of the Bankruptcy Code. However, alternatives to bankruptcy do exist and are available to a CRB.

Historical Considerations

Before the emergence of the Bankruptcy Code, businesses and their creditors had very few options available to undertake a court-supervised restructuring or liquidation other than seeking the appointment of a court neutral, typically called a receiver or special master. That “neutral” would take the business or its assets into “legal custody” or custodia legis and begin the process of dissolving the entities, selling the assets or otherwise sell the business as a going-concern. In the 1880s and 1890s with the Gilded Age coming to an abrupt halt, this process was successfully used to restructure and recapitalize the failing network of over-extended railways and rail lines, leading to the consolidation in the market that remains to this day.

Cannabis businesses can be legal and now an “essential” business but, still cannot receive the benefits of bankruptcy court.During the Great Depression, the federal judiciary established “reference” courts to deal specifically with bankrupt businesses and individuals laying the foundations for the modern bankruptcy code which is still in effect today. Many of those first precedents used to establish the bankruptcy code and rules were drawn directly from the receivership case law and receivership statutes ever-present in the historical record of common law cases and common law countries, reaching all the way back to the Courts of Chancery in Britain established soon after the Norman invasion of the British Isles in 1066.

In the United States, the equitable power of courts to initiate receiverships or other insolvency proceedings and crafting orders and decrees based on equity, as opposed as based on law or statute, is codified clearly in Article III of the United States Constitution. Today, receiverships and special masters are still utilized by state and federal courts to remedy unique circumstances where a simple bankruptcy cannot address the inequities presented in that case.

State Court Powers & Financing of Receivership Estates

State courts in particular, and California especially, have a wide body of case law supporting the equitable powers of the court, the quasi-judicial immunity of the receiver and the many equitable tools available to receivers. These powers include the negotiation and transfer of liens, with liens attaching to proceeds of sales of assets, the dissolution of a business and the establishment of a claims process akin to a bankruptcy or assignment for benefit of creditors.

One of the many overlooked powers of a receiver is their ability to bring in outside financing or capital to fund the receivership estate to maintain a business as an ongoing concern or to provide short term leverage so that assets can be properly maintained, “dusted off” and sold.

This process of bringing in new capital is typically done by the issuance of receivership certificates. These certificates are approved, ahead of time, by the court and courts can authorize that such certificates prime all other claims (including sometimes administrative claims) and that these certificates can be reduced to a security interest recorded against real or personal property.

The Mechanics of a Receivership

However, because cannabis is approved at the state level, state courts retain their equitable powers and the power to appoint a receiver over a business in need of restructuring or liquidation. There are many avenues to get to court for this benefit, but the primary path to a receivership is either through a creditor (or group of creditors) filing a lawsuit and seeking the appointment of a receiver. This scenario can be done through cooperation and stipulation but can be hostile as well. The receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.Or, a legal entity, can seek dissolution protection from the state court and seek a neutral dissolution officer (a receiver) to manage that process which may include the infusion of new capital through receivership certificates, the sale of assets to third parties, the negotiation and payment of liens and claims through a claims process and the final restructure of dissolution of the legal entity in a manner similar to a bankruptcy or assignment for benefit of creditors. This voluntary petition is permitted by statute and case law and is a mechanism available to a business that is unable to file for bankruptcy protection but is in dire need of court supervision and authority to work through its insolvency problems. Further, by court order, a receiver is able to establish banking relations where a CRB may be unable.

Typically, it is recommended that any receivership filing whether by creditors, claimants or the business itself, be guided by a well-written, explicit order that outlines the parameters of the receivership, the funding requirements and limits, the rights of claimants and some sort of stay of claims against the receivership estate to give the receiver the time needed to work through all of the issues in that receivership estate. Further, outside funding can be pre-approved by the court and the priority of that funding can be established through the open process that the court provides, much akin to a debtor in possession (DIP) financing motion in bankruptcy court.

Because of the unique circumstance that CRBs find themselves in here in California, where they are a legal and now an “essential” business but still cannot receive the benefits of bankruptcy court, the receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.

Unique Issues With Cannabis-Related Patents & Their Enforcement

By Michael Annis, Liam Reilly
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While enforcement of cannabis patents through litigation is common, there are other alternatives to litigation. Here we discuss some of the unique cannabis-related issues that could arise before the Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (USPTO).

The growth and evolution of the cannabis industry in the U.S. are not slowing. However, the cannabis industry – with its tremendous upside – is still beset with uncertainty and limited legal guidance curbing its full potential. Intellectual property law, including patent protection, has emerged from the murky legal and regulatory landscape as a reliable business strategy with developing certainty.

A pioneering cannabis patent case in Colorado has progressed without any indication that cannabis patents are to be treated differently than other patents. Relatedly, PTAB recently upheld the validity of a cannabis-related patent as part of a post-grant proceeding. However, although the courts and the USPTO are not discriminating against cannabis patents because of their illicit subject matter, the true strength of these newly issued patents could be suspect.

The fledgling nature of cannabis businesses and the fact that cannabis is just now emerging from its statutorily imposed dormancy combine to highlight certain weaknesses of the USPTO and its mechanisms meant to strike spurious patents.

For several reasons, it is possible that applicants are propelling cannabis patent applications of questionable validity through prosecution beyond the point that similar applications could proceed. The USPTO’s experience with cannabis patents is limited. The universe of prior art available to patent examiners is also limited. There are only about three thousand active cannabis patents, which would only account for 0.6 percent of the total issued patents in 2015. The legal status of cannabis has also likely deterred the broadcasting of public use as prior art, and enabling publications or other public disclosures covering cannabis (e.g., published scientific studies) are limited as well. Taken together, patent examiners considering applications for cannabis patents are at a disadvantage compared to other applications that the USPTO considers in other fields.

Additionally, the post-grant proceedings before PTAB established to review issued patents of questionable validity are not designed to handle the historical context and unique issues of cannabis patents. The difference in the procedural rules and requirements of two common inter partes mechanisms for challenging issued patents, post-grant reviews (PGRs) and inter partes reviews (IPRs), creates a gap in coverage that is particularly salient to cannabis patents.

Although the cannabis patent case in Colorado is first of its kind, we can expect more to follow in its wake.Where a PGR petitioner is free to challenge an issued patent on effectively any ground, an IPR petitioner is limited to validity claims for lack of novelty or non-obviousness based solely on patents and printed publications. However, the PGR petitioner must be diligent, because it only has nine months from the issue date of the challenged patent to file a PGR petition. After those nine months, the challenger will have to rely on litigation or an IPR, with its limited basis for invalidity.

What this means for a cannabis patent is that unless a challenger – likely, a competitor in the cannabis space – can timely file a petition for a PGR, the basis for challenging the patent before PTAB are limited to those types of prior art that are especially rare in the cannabis space: patents and printed publications. What is more, meeting the nine-month requirement to file a PGR is no trivial task. The cost and time required to research and prepare a petition for PGR are particularly problematic for the cannabis industry with its lack of access to traditional forms of business financing.

As a result, it is reasonable to question the validity of contemporary cannabis patents. Further, because of PTAB’s enforcement gap, a patent challenger will likely have to resort to litigation to bring its invalidity arguments unrelated to claims of lack of novelty and non-obviousness based on patents and printed publications. Such broader invalidity arguments could include lack of patentable subject matter – which is an appealing challenge for patents that stem from naturally occurring plants or products, such as cannabis – or lack of novelty and non-obviousness based on other prior art.

Although the cannabis patent case in Colorado is first of its kind, we can expect more to follow in its wake. And, because of the weaknesses at the USPTO and PTAB, invalidity arguments in these early cases will likely be of increased strategic importance than in typical patent cases.

Hoban Law Group Files Lawsuit Against DEA

By Aaron G. Biros
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The Hoban Law Group filed a petition on behalf of three clients against the DEA in the U.S. Court of Appeals for the Ninth District on January 13th, according to a press release. The clients represented by Hoban Law Group in the suit are Hemp Industries Association, RMH Holdings, LLC and Centuria Natural Foods, Inc. The companies are based in California, Colorado and Nevada respectively and are all active in the legal hemp trade. The press release says RMH Holdings “sources its products from industrial hemp lawfully cultivated pursuant to the Agricultural Act of 2014 (also known as the Farm Bill).”

San Francisco's United States Court of Appeals for the Ninth Circuit Photo: Ken Lund, Flickr
San Francisco’s United States Court of Appeals for the Ninth Circuit
Photo: Ken Lund, Flickr

In December, the DEA published a ‘Final Rule’ that classifies cannabis-derived extracts, such as CBD oil, in their own category with a code number to “better track these materials and comply with treaty provisions.” The announcement by the DEA ultimately serves to make any cannabis extract a Schedule 1 narcotic. “Extracts of marihuana will continue to be treated as Schedule I controlled substances,” says the document.

BobHobanAttorney
Bob Hoban, managing partner

Bob Hoban, managing partner of Hoban Law Group says the action is clearly beyond the DEA’s authority. “This Final Rule serves to threaten hundreds, if not thousands, of growing businesses, with massive economic and industry expansion opportunities, all of which conduct lawful business compliant with existing policy as it is understood and in reliance upon the Federal Government,” says Hoban.

The lawsuit states that they want a judicial review of the DEA’s actions “on the grounds that the Final Rule is (1) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, e.g. the CSA, the Farm Bill, and the DEA’s regulations; (2) contrary to constitutional right, power, privilege, or immunity; (3) in excess of statutory jurisdiction, authority, or limitations; and, (4) without observance of procedure required by law.” The suit also claims that the ‘Final Rule’ conflicts with other federal laws like the Data Quality Act, Regulatory Flexibility Act and Congressional Review Act.

According to Garrett Graff, associate attorney at Hoban Law Group, the entire Cannabis genus is not unlawful and the DEA is overstepping its authority. “As the Ninth Circuit found in 2003 and 2004 there are certain parts of the plant like the stalk and seed that are congressionally exempted from the Controlled Substances Act and thus the DEA’s rulemaking authority,” says Graff. “By creating a drug code for ‘marihuana extract’, the DEA is saying that they are a controlled substance, but that goes against a number of existing laws.”

Garrett Graff, associate partner at Hoban Law Group
Garrett Graff, associate partner at Hoban Law Group

The definition of ‘marihuana extract’ under the ‘Final Rule’ also references extracts containing one or more cannabinoids, which goes beyond the realm of cannabis altogether, according to Graff. “The DEA and many other sources have acknowledged and confirmed that cannabinoids can be derived from other varieties of flowers, cacao and other sources, making it virtually impossible to distinguish which cannabinoids would be subject to this drug code,” says Graff. “The DEA’s rule effectively makes the presence of cannabinoids a determinative factor of a controlled substance, which is inconsistent with what Congress has said.”

The petition filed is essentially the initiation or commencing of a lawsuit. Graff says their case is rooted in statute. “We hope to accomplish a striking of the rule, permanent injunction of the rule and for the DEA to engage in the appropriate processes and procedures when making rules in the future,” says Graff. “Alternatively, an amendment to the rule to make the definition of ‘marihuana extract’ consistent with existing law and reflect those portions and varieties of the plant which are in fact lawful could be considered.” It may still be roughly 30 days before the DEA responds with briefing and possibly an oral argument to follow on the various issues surrounding the petition, says Graff. The Ninth Circuit petition, including briefings and hearings, is likely to take at least several months.