An important question for any cannabis business is: who owns the company’s intellectual property (IP)? The easy way to answer this question is to work it out before any dispute. The much, much harder way is to litigate. As noted in a famous oil filter commercial, “You can pay me a little now. Or you can pay him a lot later!”
The two most common situations where IP ownership disputes arise in a marijuana business are between the owners of a company, and between the company and its employees. Here are some tips on how to handle each situation.
IP ownership in an entity: IP is a capital asset of a cannabis company, and like all other capital assets, e.g., grow equipment, real property, office furniture, software, etc., should be owned by the cannabis company itself, as provided in the entity operating agreement. Issues can occur, however, when the entity wants to use IP that is already owned by a member/owner of the entity.
In particular, many operating agreements provide that a member contributes her IP as initial capital. There is nothing wrong with this, in theory. Intellectual property, like real property or other assets, can be contributed as capital provided that the operating agreement properly values and accounts for the asset. But problems can occur when the operating agreement does not legally transfer title in the IP to the entity. In such a situation, the “contribution” may be more like a license, which can be revoked. If the contributed IP is the primary brand name of the company, this could give the contributing shareholder undue leverage if she wants to withdraw from the entity after the company has built equity in the brand name. A significant number of operating agreements do not properly transfer title to the trademarks, copyrights, or patents that are being contributed. Without the appropriate transfer, this is a time bomb waiting to explode, in a courtroom near you.
IP ownership of employee creations: The conventional wisdom is that everything that is created by a company’s workers automatically belongs to the company as “work for hire.” While there is a federal copyright statute that refers to works for hire, the rules are much narrower than conventional wisdom suggests. This often causes conflicts between employers and employees about patents and copyrights, which in turn lead to litigation.
There is an easy way to avoid the work-for-hire minefield, called an employee IP agreement (“EIA”). An EIA is a written agreement that defines which creations are the employee’s, and which are the employer’s. For example, where a new employee has already created IP before her employment, the EIA could provide that the employee retains title to all disclosed preexisting IP, but is required to assign any future IP created in the scope of her work to the employer. EIAs also often address creations done outside of the workplace or outside of the scope of employment, and may provide for invention bonuses or other incentives. The key is that the EIA allows the parties to define their ownership of worker creations, without having to rely on the limited default rules that exist in federal and some state law.
IP ownership agreements: don’t leave the dispensary without one! For parts 1 – 3 of this series, check out the following: