Category: Cannabis

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Doobie-ous Competition: How a Cannabis Company Can Use Employment Agreements to Protect Intellectual Property

In our prior posts, we discussed the two issues that should be at the forefront of any branding strategy:

  • Avoiding potential trademark infringement claims, and
  • Protecting the business’ brand through trademarks

In this post, we briefly discuss how cannabis businesses can implement employment agreements to further protect their intellectual property.

Terminating an employment relationship carries certain risks for any new or rapidly growing business. Former employees might:

  1. Start a competing business
  2. Join a competitor and share the knowledge, skills, and trade secrets acquired at your business
  3. Begin soliciting your customers

Depending on the state in which your business operates, you may be able to use certain employee agreements to mitigate this risk, such as non-compete agreements, non-solicitation agreements, and non-disclosure agreements. Notably, most state laws treat these agreements harshly and with great scrutiny because they can restrict a person’s ability to engage in their chosen livelihood. So, these types of agreements must be carefully drafted to be enforceable.

The cannabis industry presents a unique opportunity for former employees to misappropriate a company’s intellectual property. In the trademark context, for instance, an employee can quit their job at a Michigan cannabis company, move to California, and establish an identical cannabis company—using the exact same trademarks and branding. In this example, if the Michigan cannabis company has not taken any steps to protect its marks in California, fewer remedies (if any) are available to stop its brand’s misappropriation. Thus, carefully drafted employee agreements can help to protect a cannabis company’s intellectual property rights on a broader, nationwide scale—despite the fact that federal (national) trademark registration is not yet available.

The legal landscape in the context of recreational cannabis remains murky and riddled with pitfalls for unassuming business owners. That is why it is important to hire attorneys with trademark experience, who know the cannabis industry and how to navigate its thorny trademark issues. For any questions relating to the subject matter of this article, contact Mark Jotanovic or Kory Steen at Dickinson Wright PLLC.

Related Services

Trademarks | Cannabis 

About the Authors:

Mark Jotanovic is a member in Dickinson Wright’s Troy office. He can be reached at 248-631-2050 or MJotanovic@dickinsonwright.com. His bio can be viewed here.

 

Kory Steen is an attorney in Dickinson Wright’s  Detroit office. He can be reached at 313-223-3623 or KSteen@dickinsonwright.com. His bio can be viewed here.

 

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How To Protect Your Cannabis Trademarks in a Legal Landscape That Is Half-Baked

In our previous post, we discussed how a cannabis business can take steps to avoid potential trademark infringement claims. In this release, we will discuss how a cannabis business can use trademarks for brand protection – despite the fact that federal law prohibits filing a cannabis-related trademark.

Acquiring State Trademarks

The most obvious (and widespread) option to protect a cannabis trademark is to obtain trademark registrations in all states where the mark is being used. In trademark law, the first use of a mark within a territory typically establishes trademark ownership in that territory.

Registering and policing a state trademark is relatively straightforward. In Michigan, for instance, a certificate of registration is admissible as evidence of an applicant’s right to use the mark throughout Michigan (MCL 429.34(3)). Suppose a trademark is registered with the state. In that case, the registration is prima facie evidence that the mark is valid, and the burden of production shifts to a defendant to demonstrate that the mark is not valid.

Although state registration can provide trademark protection, such protection is limited geographically. Thus, cannabis companies are incentivized to register in other neighboring states – as another company’s mark in a different state may be substantially similar or identical, thus precluding later competition and/or expansion into the different state. However, to get protection in differing states, actual use of the mark in that state is required. Given the federal implications of cannabis use, this can create hurdles for protection in the neighboring states. But the upside is significant as precluding a copycat business from getting started in another state mitigates the risk of a race for federal registration once Congress legalizes recreational cannabis at the federal level. Indeed, expansion plans may be limited or thwarted by a competing claim for trademark ownership in a different territory, so growing cannabis companies should seek to address these trademark issues sooner rather than later.

Trademarking Other Goods or Services

Although federal trademark protections remain unavailable for cannabis companies, ancillary goods and services that do not contain a federally unlawful substance could be eligible for federal trademark registration. Navigating such registration is tricky, though, as the USPTO often requires companies to declare that ancillary products will not be used to market marijuana.

If a cannabis business’ trademark is already inextricably intermingled with products that contain cannabis, a related strategy is registering cannabis-related goods in states where recreational cannabis is still illegal – then later extending the trademark to goods that contain cannabis once it is inevitably legalized in that state. This strategy draws on trademark law’s “zone of expansion” doctrine.

The “zone of expansion” doctrine allows the first applicant to file and receive trademark protection in any product line to have priority over an intervening user in a new product line – so long as expansion between the two product lines is considered “natural.”  This is because trademark protection extends to products that customers reasonably expect the trademark owner to later sell and expand into (i.e., the “natural zone of expansion”). Thus, some cannabis companies sell CBD products, cannabis-related apparel (i.e., made from hemp and/or displaying cannabis-related graphics), and smoking accessories—and use these marks at trade shows and business conferences to build a foundation for their trademark, which will later encompass their cannabis products once legalized.

Using USPTO Filing Procedures and Loopholes to Gain Priority for Federal Trademark Registration

There are other strategies that cannabis companies can take advantage of, at the federal level, that are higher-risk and more aggressive—but the risk may be rewarded. For instance, cannabis companies can file an intent to use (ITU) application, which allows an applicant to secure its place in line without having to actually use the mark in commerce. After an ITU application has been granted allowance, the applicant has six months to file a statement of use, transforming the ITU allowance into a federal trademark. Significantly, ITU application can be extended for three years. So, a cannabis company can file an ITU application now, declaring that cannabis-related goods and services will be lawful, and then hope that the statement becomes true before the three-year window lapses. Notably, certain federal lawmakers have continued to signal that legalization is on the horizon, so a cannabis company would have an incentive to file such an application soon – given the lengthy timeline of examination/extension. If timed successfully, this tactic would confer a considerable head start to cannabis companies seeking nationwide, federal priority for their cannabis trademarks.

Alternatively, yet similarly, cannabis companies can apply for federal trademark registration, wait for an “Office Action,” respond, wait for a “Final Office Action,” and then, before the final response is due, refile the application to keep the application going (indefinitely). This would also confer priority over competing marks.

These tactics (and others like them) are just a few ways to ascertain widespread trademark protections, even though cannabis trademarks receive varying treatment throughout US jurisdictions. Competent trademark counsel can make all the difference when navigating through these murky areas of the law.

The trademark landscape in the context of recreational cannabis remains murky and riddled with pitfalls for unassuming business owners. That is why it is important to hire attorneys with trademark experience who know the cannabis industry and how to navigate its thorny trademark issues. For any questions relating to the subject matter of this article, contact Mark Jotanovic or Kory Steen at Dickinson Wright PLLC.

Related Services

Trademarks | Cannabis 

About the Authors:

Mark Jotanovic is a member in Dickinson Wright’s Troy office. He can be reached at 248-631-2050 or MJotanovic@dickinsonwright.com. His bio can be viewed here.

 

Kory Steen is an attorney in Dickinson Wright’s  Detroit office. He can be reached at 313-223-3623 or KSteen@dickinsonwright.com. His bio can be viewed here.

 

 

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Avoiding a Bad Trip: How Cannabis Companies Can Mitigate the Risk of an Infringement Lawsuit

Over a decade has passed since recreational cannabis began to see legalization at the state level. Yet cannabis businesses continue to grapple with protecting their brands, as trademark protection at the federal level remains unavailable. The current hodgepodge of state trademark regimes will undoubtedly result in litigation and a race to register federal marks once Congress legalizes cannabis. While there is no indication that Congress intends to account for cannabis trademark issues when passing legislation to legalize recreational cannabis at the federal level, these issues will undoubtedly affect businesses’ bottom lines and result in litigation.

For instance, in the aftermath of CBD trademarks becoming legal at the federal level, CBD companies from different states that had used similar marks quickly resorted to federal trademark litigation as in CBD Industries, LLC v. Majik Medicine, LLC, 2021 WL 6198664, February 12, 2021, WDNC, (litigation over the use of “CBD MD” trademark).

As cannabis businesses continue to evolve, two issues should be at the forefront of any branding strategy:

  • Avoiding potential trademark infringement claims
  • Protecting the business’ brand through trademarks

In this post, we will discuss how to avoid infringement claims. In subsequent posts, we will discuss how a cannabis business can use trademarks for brand protection as well as how a business can implement employment agreements to further protect their intellectual property.

To register a federal trademark with the US Patent and Trademark Office (USPTO), a trademark must be “lawful” under federal law. Therefore, marks used to identify cannabis products violate federal law (as cannabis is still a controlled substance at the federal level) and cannot be federally registered. And, notably, although trademarks for hemp-derived CBD products containing no more than 0.3% tetrahydrocannabinol (“THC”) are lawful under the 2018 Farm Bill, the Food and Drug Administration (FDA) has held that it is illegal under federal law to add CBD to any food or dietary supplements.

While federal trademark protections may be unavailable to cannabis companies, these companies are still at risk for federal trademark lawsuits. Indeed, cannabis companies are increasingly under scrutiny for using famous marks, which is a common practice in the cannabis space. For example:

  • Subway IP LLC v. Budway, Cannabis & Wellness Store (cannabis mark parodying famous Subway mark)
  • Wrigley Jr. Company v. Roberto Conde, et al. (cannabis mark parodying famous marks, such as “Skittles”)
  • Robert Kirkman, LLC v. The Toking Dead (cannabis company parodying the famous “Walking Dead” television marks).

Significantly, as cannabis companies grow, they need to be mindful of the fact that a larger customer base brings more public spotlight, which makes any instances of trademark infringement easier to identify (increasing the risk of trademark litigation). It is common for a growing business to be targeted by brands looking to make a statement and enforce their marks.

Sometimes, trademark infringement lawsuits are motivated by the concept of “dilution by tarnishment.”  Dilution by tarnishment occurs when the reputation of a famous mark is harmed through association with another similar mark or trade name. However, two relatively recent Supreme Court decisions have made it possible to potentially challenge the constitutionality of the dilution provisions set forth under federal trademark law (i.e., the Lanham Act). Unsurprisingly, the owners of famous marks usually police them vigorously, and, in many instances, these owners will balk at any perceived association or endorsement between their renowned mark and a cannabis product.

Put simply, cannabis companies should consider conducting due diligence before investing in brands that play off a parody. The longer the parodied product is on the market, the higher the exposure. Thus, the duration of the lifecycle of parodied products may be one of the most critical factors for cannabis companies to consider. Proper due diligence can keep a company apprised of potential trademark infringement claims relating to their business and product lines – especially as these companies grow their business and their products become better known. Indeed, the tendency of cannabis products to reference popular culture or parody a famous mark can create serious risks of potential trademark claims. Cannabis companies should be proactive about trademark infringement risks, or they will likely end up entangled in a trademark lawsuit.

The trademark landscape in the context of recreational cannabis remains murky and riddled with pitfalls for unassuming business owners. That is why it is important to hire attorneys with trademark experience, who know the cannabis industry and how to navigate its thorny trademark issues. For any questions relating to the subject matter of this article, contact Mark Jotanovic or Kory Steen at Dickinson Wright PLLC.

Related Services

Trademarks | Cannabis 

About the Authors:

Mark Jotanovic is a member in Dickinson Wright’s Troy office. He can be reached at 248-631-2050 or MJotanovic@dickinsonwright.com. His bio can be viewed here.

 

Kory Steen is an attorney in Dickinson Wright’s  Detroit office. He can be reached at 313-223-3623 or KSteen@dickinsonwright.com. His bio can be viewed here.

 

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Nevada’s Cannabis Industry Takes Another Step Forward

Four significant bills that will undoubtedly impact cannabis regulation in Nevada were recently signed into law by Nevada State Governor Joe Lombardo (R). The legislation makes a series of amendments to the state’s existing cannabis laws, including minimizing penalties and fees, reforming sales tax law, doubling the legal personal possession limit, consolidating licensing rules, and enabling participation in the market by people with prior felony convictions.

  1. SB 195 – Penalties and Fees

Effective upon adoption, SB 195 was advanced successfully by the Nevada Cannabis Association with solid backing from cannabis operators, citing the need to address certain burdensome and costly practices implemented by the Nevada Cannabis Compliance Board (the “Board”). These changes aim to alleviate economic burdens on operators and incentivize operator compliance and collaboration. Cannabis operators hope SB 195 and other changes during the session will provide more certainty and fairness in the disciplinary process. Highlights include:

  • The maximum civil penalty the Board may impose may not exceed $20,000 for a single violation. Previously, the most serious violations carried civil penalties of up to $90,000 for a single violation.
  • The Board must characterize certain conduct as a “single alleged violation” instead of multiple separate violations based on the facts and circumstances to prevent stacking violations.
  • The Board may bill only costs and charges expressly authorized by statute to an operator and eliminates the practice of “time and effort” invoicing for ongoing activities of the Board, such as routine inspections, audits, or non-application-based investigations.
  • Identifies “mitigating circumstances” the Board must consider concerning a disciplinary matter, including whether the operator self-reported the violation, the corrective action taken, history of prior good faith efforts to avoid the violation in question, and cooperation during the investigation.
  1. AB 430 – Cannabis Sales Tax

AB 430 reforms the calculation of wholesale excise tax imposed on the sale of cannabis, applying the tax to the first wholesale sale and calculating the amount of the tax as 15% of the actual sales price in an arm’s length transaction. Historically, the tax was 15% of the “fair market value” set by the Nevada Department of Taxation, with the procedure for setting the FMV criticized as flawed and resulting in an inflated value. While the “fair market value” calculated by the Nevada Department of Taxation will still be applied to affiliates’ transfers, proponents believe this change will allow for a lower and more fair wholesale tax structure.

  1. SB 277 – License Consolidation

SB 277 calls for medical and adult-use cannabis licenses to be merged into one license category (unless adult-use is not permitted by local jurisdiction) and aligns the fee structure for medical and adult-use licenses to the lower amount paid for a medical license. Additionally, the bill provides a mechanism for individuals with “excluded felony offenses” who have, up until this point, been excluded from owning, controlling, or working in a cannabis establishment to petition the Board to allow an exemption to participate in the industry. The Board may only grant such an exemption if doing so would not pose a threat to public health or safety or negatively impact the cannabis industry. Other highlights include:

  • SB 277 increases the possession limit and daily purchase limit of cannabis from 1 ounce to 2.5 ounces and doubles the limit for cannabis concentrates.
  • The fees for initial licensing and renewal of an adult-use cannabis license were reduced, except for the initial issuance of an adult-use retail license, which remains unchanged at $20,000.
  • The initial and renewal fees for other categories of adult-use licenses were reduced to mirror the medical fees. For example, the initial application fee for an adult-use cultivation establishment was reduced from $30,000 to $3,000, and the renewal fee was reduced from $10,000 to $1,000.
  1. SB 328 – Unlicensed Cannabis Activities

SB 328 requires the Board to adopt regulations providing for investigating unlicensed cannabis activities and imposing penalties against persons who engage in such activities.

Historically, Nevada’s regulated cannabis scheme has not provided the Board (or its predecessors) with any enforcement authority to address unlicensed cannabis operations, with the scope of authority extending only to licensed operators. Proponents believe this is a small but crucial first step in reducing the number of illicit operators in the Nevada marketplace and preserving market share for licensed operators.

  • SB 328 eliminates the Board’s exemption from NRS 233B, known as the Nevada Administrative Procedure Act (the “Act”).
  • The Board will now be required to submit regulations to the Legislative Counsel Bureau for formal review and revision before adopting any new regulations.
  • In contested matters, the Board will be subject to the adjudication procedures outlined in the Act, including judicial review afforded by the Act.
  • Staggers terms of Board members, limits the term of Board Chair to two years, and eliminates the Board’s authority to appoint and remove an Executive Director, with that authority now in the hands of the Governor.

Proponents of SB 328 believe these changes will improve the Board’s accountability and provide guardrails on its authority.

For more information, please get in touch with one of our Cannabis attorneys.

Related Practice Areas

Cannabis

About the Author

Melissa Waite is a member of the firm’s Las Vegas office. She advises clients on emerging legal issues related to marijuana establishments and ancillary marijuana businesses and regularly works with state and local agencies, monitoring new policies and changes in the law in order to help clients stay at the forefront as the cannabis industry continues to evolve. Melissa can be reached at 702-550-4435 or  MWaite@dickinsonwright.com. Visit her full bio here.