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Why Building Intellectual Property In The Cannabis Industry Is So Difficult

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In markets like technology, the idea of intellectual property (IP) is pretty well understood. Create a unique invention, patent it, and then enforce it against anyone who tries to copy you. There is a strong body of case law to back up claims and at this point, many courts are well-versed on the ins and outs of these kinds of patents.

But in the nascent cannabis industry, the art of creating and protecting IP is still evolving. Focused primarily around patents (on unique products and processes), trade secrets and trademarks (on branding), IP is critical for creating true differentiation between companies and their product and service offerings.

But as with everything in cannabis, IP comes with unique challenges. At my company, we are creating and licensing IP for products around the country, and we’re seeing firsthand how dealing with IP in cannabis requires an extra level of attention.

There can be serious consequences if companies don’t do adequate due diligence. The first cannabis-related patent infringement lawsuit (United Cannabis Corporation v. Pure Hemp Collective, Inc.) is currently pending in the United States District Court for the District of Colorado. In this case, United Cannabis is arguing that Pure Hemp Collective infringed certain claims of United Cannabis’ patent on cannabis extracts and method of preparing and using such extracts.

Many players in the cannabis industry are watching this case to get a glimpse of what the future of cannabis IP might look like. The challenge for cannabis entrepreneurs is that cannabis IP needs to be rigid enough to be defensible against infringement, but also flexible enough to be applied across 33 different state regulatory schemes. That’s not easy to balance.

This is especially true when federal law seems stacked against the cannabis industry. The biggest hurdle for securing a federal trademark registration is the fact that cannabis is still listed as a Schedule I drug (on par with LSD and heroin) under the Controlled Substances Act. U.S. federal law allows for a trademark to be registered for goods that are lawfully “sold or transported in commerce,” but that keeps cannabis products out of the game because federal law prohibits the manufacturing, distribution and sale of cannabis products. While the 2018 Farm Bill has now resulted in a small exception for registration of trademarks for “hemp” (cannabis plants and its derivatives containing no more than 0.3% THC on a dry-weight basis), all other cannabis products remain ineligible for federal trademark registration.

Cannabis companies can file for trademark registration in some states to protect their brands, but even that can create problems. A brand name registered in California may be owned by someone else in Maine. Without the ability to have nationwide rights through federal trademark law, issuing a “nationwide” license is extraordinarily difficult.

But difficult is not the same thing as impossible. Cannabis companies can work within the patchwork of state regulations, but they have to take some extra steps.

First, companies need to proceed with caution. The right lawyers can help ensure that any IP a company creates walks that fine line between protection and flexibility. Slowing down and putting in that extra effort can be hard for entrepreneurs, especially in an industry that is growing as quickly as cannabis. But in my time dealing with cannabis IP. I’ve found the extra effort is more than worthwhile.

Next, executives need to do due diligence. Again, this can slow development for companies tempted to move quickly but it’s time well spent. Making sure that any new products don’t violate existing IP will help keep business moving once the product hits the market.

Finally, executives might need to get a little creative. For example, some Colorado-based brands looking to expand into states like California have licensed their product to manufacturers in those states. Those local companies generally have fully built and compliant facilities and clearly understand the local requirements. They can use their infrastructure, customize the product to the Colorado company’s specifications and sell it locally in connection with the Colorado-based brand, while paying a licensing fee to the company that created the IP. Working together and sharing expertise can pay off for everyone involved. Such use of the Colorado-based brand in connection with sales of the products in California may, in turn, support obtaining a trademark registration for the Colorado-based brand in California.

Of course, the best solution to these problems would be for the federal government to legalize cannabis. That would allow for national trademark rights and immediately eliminate many of the complications the industry now faces. But until that time, it’s important to use caution and undertake extensive due diligence.