Whether they realize it or not, every single one of my law firm’s cannabis clients owns some sort of intellectual property. And for those clients who do realize it, most of them seek not only to protect it, but to exploit and monetize it. Even our clients without well-developed brands are regularly solicited by companies claiming to have brands and other intellectual property (IP) to license to them. The race is certainly on to become the “national brand” or the “household name” of cannabis.
But these licensing deals are complicated, and in our experience, always fraught with unique cannabis-related issues. Many companies come to us with such licensing deals expecting the biggest hurdle to be state cannabis law compliance. And though this is certainly a major concern, it is important to take a step back and start at square one, analyzing the validity and strength of the IP itself. With any licensing deal, the first step should be determining who actually owns what intellectual property. This is especially true when it comes to the cannabis industry, where information, strain names, and industry terminology have been shared freely since long before state level legalization.
Ownership of IP in the cannabis industry is a tricky issue, in large part because the USPTO will not issue federal trademark registrations for cannabis-related marks. Far too regularly, cannabis companies come to us with proposed licensing deals where basic due diligence quickly reveals that the licensor simply does not own what it claims to own. If you are looking to get a license for another company’s IP, here are the most basic questions you should be able to answer about that other company and its IP:
- Does the licensor own any federal trademark registrations?
- If so, what goods and/or services do those trademark registrations cover?
- Was the description of goods and/or services filed with the USPTO accurate and true? Were there possible misrepresentations?
- Are the trademark registrations based on actual use, or upon intent-to-use?
- What representations and warranties is the licensor making (or, often more importantly, not making) regarding the marks?
- If the licensor doesn’t own any federal trademark registrations, is it licensing someone else’s trademarks?
- Does the licensor have a master licensing agreement? Do the terms of any proposed sub-licensing agreement mirror that master licensing agreement?
- What quality control standards will you be held to by the trademark owner?
- Has the trademark owner warranted to keep all USPTO filings up-to-date?
- Does the licensor own any state trademark registrations?
- If so, has the licensor made lawful use of its mark in commerce in the state of registration?
- Does the licensor have any common law trademark rights? Can the licensor even legally acquire common law trademark rights in your jurisdiction?
This is a substantial list, but it only scratches the surface of the issues you and your cannabis IP counsel must consider before you enter into any IP licensing deal. Parties are often quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist. Just like with any other type of property, like a house or a car, a licensor of intellectual property must actually own the rights to that property to be able to confer those rights to another party. Seems basic, but it’s truly shocking to see the deals we’ve seen put together by attorneys who either do not know cannabis or, more often than not, do not know the intricacies (or even the basics) of intellectual property law.
And of course, even after you resolve the fundamental IP issues, you still must resolve the state cannabis law issues. Just by way of an example, in Washington State, traditional royalty payments based on sales are generally not allowed, because anyone sharing in the profits or revenues of a licensed cannabis entity must be declared to the Liquor and Cannabis Board as a true party of interest, which requires residency and vetting by the Board.
Fortunately, the news isn’t all bad. Though these licensing deals are complicated, there are certainly creative and effective solutions to all of these problems, but those take a firm understanding of both IP and state marijuana laws from the outset.