Seed to Sale: IP Considerations in the Cannabis Landscape

The cannabis industry is booming, with more and more states expanding the legal cannabis options available to the public. With that in mind, Womble Bond Dickinson has launched the Seed to Sale webinar series, which examines the legal and business needs of companies operating in the cannabis sector. In this installment, Womble Bond Dickinson attorneys Laura Kees and Karthika Perumal, Ph.D, discussed intellectual property basics in a conversation moderated by Celestial Wellness Executive Director Tylere White and Celestial Wellness Director of Operations Kylor Rife. 

Cannabis is still in the early stages as a regulated industry, but as cannabis entrepreneurs are discovering, they already need a wide range of legal guidance. 

Intellectual property is at the top of that list. Cannabis companies have similar needs for IP services as any other consumer product business, ranging from patents to protect their products to trademarks for protecting their brand. Copyrights and trade secrets also are highly useful forms of IP protection that should be considered in the cannabis sector.

“In addition to all the tangible, physical assets your company has, IP is the largest intangible assets you will have,” Perumal said.

Establishing IP protections differentiates a company in the market place and prevents competitors or others from using the IP owner’s innovation. Perumal said, “It protects your market share, it protects your revenue. And if you don’t control your IP, you lose the opportunity to capitalize on your innovations, including partnering opportunities with others.” 

However, it is important that cannabis companies secure their IP rights early on, in order to ensure those rights are properly protected. The more a company expands its operations and product offerings, the more valuable its intellectual property becomes.

Patent Protections a Must-Have for Cannabis Companies

Cannabis companies need all of types of IP rights to protect their innovations—patents, copyrights, trademarks, trade secrets, and data. But while all IP rights are important, patents, along with trademarks, make up the biggest source of IP protection for most cannabis companies.

So what is a patent? In short, “A patent gives you the right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States,” Perumal said. “Patent law requires you have to do three things to qualify for a patent: 1. It has to be patent-eligible subject matter, such as a process, machine, article of manufacture, or composition of matter. 2. It has to be new and useful or a new, useful improvement of an existing technology; and 3. It has to be non-obvious.”

A wide range of patents may be useful in the cannabis industry. For example, Perumal said. genetically modified plants may be eligible for plant patents, which the U.S. Patent and Trademark Office grants to inventors who have “invented or discovered and asexually reproduced a distinct and new variety of plant.”

Other examples of relevant patent categories include:

• Products, including cannabis-related specific extracts, food products, supplements, or cosmetics.
• Machines, such as devices used to cultivate and harvest cannabis plants, as well as packaging equipment and paraphernalia used to consume cannabis.
• Methods used to process active ingredients from cannabis plants or specific cannabis formulations used in the treatment of disease.

“Products of nature” cannot be patented, which creates issues in the cannabis industry. “But if we add additional ingredients or create a proprietary blend, such innovations would be patentable,” Rife said.

The U.S. is a first-to-file system, so cannabis companies should be filing for a patent early. These patent applications should still contain a detailed description and maybe some examples too. “I sometimes describe the process as building a fence of rights – you want your first posts to be strong and grounded,” Perumal said.

Also, only individuals who are inventors should be identified on the patent application with the USPTO, Perumal said. “Those who have contributed to the inventive process get to be listed as inventors—it’s not a reward for supporting the company,” she said. Listing the wrong inventors can invalidate a patent.

When filing a patent application, don’t:

• Publicly disclose or publish the invention before filing. 
• Share with a third party without a confidentiality agreement, no matter how much they are an integral partner of the company.
• Sell or offer to sell an invention before filing.

The Importance of Trademark Protection

As with patents, trademarks make up a critical component of IP protection for consumer companies, including those in the cannabis industry.

“What is a TM? If somebody thinks of your product, they think of the brand that goes along with the product and it creates goodwill for your company,” Kees said. This can be words, a slogan or a symbol. “You want to not just protect word marks, but your slogans and any images that go along with that.”

Kees said there are three basic steps to trademark protection:

1. Select a mark.
2. Clear the mark to make sure it’s not being used in the market already; and 
3. Protect it. 

The more distinctive a trademark, the more protectable it becomes. For example, brand names such as “Xerox” and “Haagen-Dazs” are made-up terms that are distinctive—and, thus, easier to protect than more generic trademarks (Ex: “Jones Cleaning”). 

Trademark clearance isn’t required, but it is highly recommended, Kees said. 

“We want to know from the very beginning if we have rights to this mark and can use it,” she said. Searches can range from basic, preliminary searches to comprehensive searches, which will find any possible conflicts (such extensive searches usually cost $1,500-$2,000).

“Trademark rights are nation specific, so just because you are cleared in the U.S. doesn’t mean you won’t have a conflict in other countries,” Kees said. 

There are risks involved with not doing a trademark search. “The first thing someone is likely to do is send a cease and desist letter,” Kees said. But a trademark conflict can go to court – with the other party seeking an injunction against using the trademarks in question or damages for trademark infringement. Plus, there are major business issues with trademark conflicts, including the cost of rebranding and negative publicity. 

“These are the reasons to make sure you have the rights and aren’t stepping on anyone else’s toes,” Kees said. So conducting a trademark search generally is a good investment that can prevent serious problems down the road.

If a search determines that a trademark isn’t available, there still is plenty a cannabis company can do. For example, companies can select an alternative mark or modify the proposed mark to make it unique. Or, if the obstacle mark isn’t in use, it may no longer be a problem. If the two companies are in different lines of business, they might be able to negotiate a co-existence agreement with the other company. But Kees warned that seeking such an arrangement means “you’ve pretty much admitted that you’re so similar that you need a co-existence agreement.” Finally, a company can simply try to buy the obstacle mark, assuming the other party is willing to sell.

Also, “Just because you get a trademark doesn’t mean you have rights in every industry,” Kees said. For example, Delta Airlines and Delta faucets are so different that they don’t need a co-existence agreement.

How is a trademark protected? Kees said that in the U.S., trademark rights are based on use, and as soon as a company starts to use that mark, they are establishing rights within their geographic area.

As with clearance searches, trademark registration is not required, but is highly recommended. There are three ways to acquire trademark rights for cannabis products:

1. Federal—The owner must show lawful use or intent to use in commerce. This gives the holder national rights to control a trademark. “If I’m representing you and you’re interested in another brand, seeing that ® symbol next to it means they care about it enough to protect it in federal court, so you probably want to stay away from it,” Kees said. Companies also can file an “Intent to Use” application up to three years before they start using a trademark.
2. State—Accepted in most states where cannabis is legal. Having state trademark gives a company state-wide trademark rights.
3. Common Law.

Companies also can apply for incontestable status with the United States Patent and Trademark Office, which is much more difficult to challenge. Such marks must have been in use for five consecutive years.

“The best thing about trademark registration is that it lasts forever, as long as you use it,” Kees said. “You just have to renew it every 10 years.” However, she said companies must “Use it or lose it” – they can’t warehouse trademarks or fail to police their marks.

So the big question for cannabis companies is: Can cannabis products be federally trademarked, since the legality of such products varies from state to state and aren’t federally legal yet?

Kees says it can be done, but companies need to be creative in protecting their brand. Companies can file federal applications for certain cannabis products as long as the following disclaimer is included: 

“all of the foregoing for use with plants and herbs other than cannabis, fruits and vegetables, and with cannabis with a delta-9 THC concentration of not more than 0.3 percent on a dry weight basis.”

Also, cannabis companies can protect ancillary products and services. For example, a cannabis company that uses its logos and branding with educational services, software or even onhats, jackets, and other non-cannabis items can protect those goods and services through filing a federal trademark application.  

Even though these filings may not protect the actual cannabis product, “[t]hat’s going to be a deterrent for anyone else trying to use your brand,” Kees said. She also recommends state registration in states where cannabis is legal. 

Trademark tips:

• Do informal web searches for competitors using similar marks.
• Hire a company to conduct a formal trademark watch (U.S. or international).
• Send cease and desist letters to owners of infringing marks.
• Oppose filed applications of similar marks 
• Lawsuit against trademark infringement.

Copyrights in the Cannabis Sector

Copyright protects “works of authorship fixed in a tangible medium of expression.” Copyright protection covers both published and unpublished original works of authorship including literary, dramatic, musical and artistic works, such as poetry, novels, movies, songs, computer software, websites, product manuals, and architecture. Copyright does not protect facts, ideas, systems or methods of operation, although it may protect the way these things are expressed. 

“Software is a good example of something that can be protected both through patents and copyrights,” Perumal said. Doing so provides different types of protections, she said, giving a company stronger defenses against possible infringement.

Copyright is protected from the moment of creation. But a recent Supreme Court decision said that companies cannot sue in federal court until they have a registration. Registration also is highly beneficial in receiving statutory damages (of up to $150,000 per violation for a willful infringement) if someone infringes on that copyright.

“That gives great teeth to a cease and desist letter, and it holds up well in court,” Kees said. “That $80 copyright registration can really pay off.”

Cannabis and Trade Secrets

If a company has confidential business information, and takes reasonable steps to protect that information, Perumal said it can be classified as a trade secret. Usually, three criteria must be met:

1. The information is not generally known or ascertainable;
2. The information provides independent economic value; and
3. The owner has taken reasonable measures to keep such information secret.

There are several advantages to trade secret protection, Perumal said. They are in effect immediately, before any paperwork is filed. Some things may not be eligible for patent or trademark protection, meaning trade secrets is another way to protect them. And there is no time limit on trade secret protection, as long as the information remains secret.

The major disadvantage is that unlike patents, trade secrets don’t protect against reverse engineering or independent development of similar products. They only guard against illegitimate use of this information (i.e. a former employee taking proprietary information to a competitor). 

“You have to maintain a trade secret and be vigilant about it. You have to make sure your employees know it is a trade secret and don’t put it on their Facebook or Instagram or whatever,” Perumal said.

Once you discover there has been a misappropriation, there is a three-year federal statute of limitations for seeking damages.

Protecting client/customer lists as trade secrets is tricky, Perumal said. In some states, they are considered trade secrets. In other states, they aren’t. Also, it may depend on the level of information provided.

“It’s always good to have non-disclosure agreements to protect your confidential information,” she said.

As the cannabis business is new, most companies in this industry are at the right point to examine their IP needs and plan an intellectual property strategy that will help the company grow while also helping it avoid expensive disputes. Again, exploring multiple forms of IP protection is the best way to build a solid strategy. 

“It’s good to cover different types of IP protection because companies have all types of assets. You need to weave a web of protection,” Perumal said. “In a worst-case situation, you need the back-up of having multiple IP defenses protecting you. Always talk to your legal advisers to see what is the best way to move forward.”