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Seeing Through the IP Haze

On December 20, 2018, US President Trump signed the Agriculture Improvement Act of 2018 (2018 Farm Bill), Pub. L. No. 115-334, into law. Most notably, the 2018 Farm Bill legalized industrial hemp as well as its extracts, by removing them from Schedule I of the Controlled Substances Acts of 1970 (CSA). Industrial hemp is a version of Cannabis Sativa L that contains no more than 0.3 percent tetrahydrocannabinol (THC), the intoxicating substance in cannabis, and therefore does not produce a “high.”

The 2018 Farm Bill sets out the legal definition for industrial hemp and a procedure for cultivating it legally, which the USDA anticipates will be in place by later this year. This was done against a backdrop of state-level legalization of both hemp and marijuana in the majority of states which, in turn, saw the maturing industry start taking intellectual property seriously.

In this article, we will provide a high-level overview of the various forms of intellectual property protection available to the cannabis industry and discuss what hemp legalization means for that market segment. We will use the terms hemp and marijuana to distinguish between the federally legalized plant versus the illegal plant.

Patents: Obtaining and practicing them

Those who vaguely remember their law school intellectual property class may recall that a patent is a statutory property right granted to an inventor by the US Patent and Trademark Office (USPTO) to exclude others from making, using, offering for sale, or selling, that invention in the United States for up to 20 years.

Importantly, it is not a right to actually use the invention. It is a right to exclude others from making, using, offering for sale, or selling the invention, and when the patent is infringed, it is the responsibility of the owner to enforce the patent in court (without the assistance of the USPTO).

Despite the illegality of marijuana, the USPTO has been traditionally willing to issue patents for cannabis-related inventions, going back at least as far as 1942. Now over 3,000 cannabis-related patents are on the books, with nearly two-thirds of them issued in the last decade alone (perhaps representing an overall bet by the industry that we will see federal level legalization sometime during the patents’ lifespan).

The real question, however, is whether these patents can actually be “practiced” (i.e., whether an inventor can sue someone for patent infringement). In his recent law review article, Professor Bill McNichol argues that under a long line of cases going back to 1725, the answer is “no” because any theory of recovery would require the court to allow the patent owner to sell profits that came from committing a crime.

Indeed, industry participants traditionally have been reluctant to bring patent cases for fear that a decision would create a spillover effect on the industry’s massive patent portfolio. Nevertheless, in 2018, United Cannabis Corp. sued Pure Hemp Collective Inc. for infringing its patent on liquid cannabinoid formulations. It should probably not come as a surprise that the case was brought in the District Court of Colorado (a cannabis-friendly state).

The case is viewed as a bellwether by the industry, and both sides have been careful not to raise the issue at the pleading or summary judgment phase. This past April the court ruled that the patents were not naturally-occurring phenomena and allowed the claims to proceed. The court did not mention illegality either (although McNichol argues that the courts should raise such issue sue sponte).

Importantly, this is not an issue for hemp, which is no longer illegal under federal law.

Trademark: Federal and state

Trademark protection ⁠— which prevents others from using a confusingly similar mark for competing goods, either nationwide (at the federal level) or in a smaller geographic area (for state-level trademark rights) — is another valuable intellectual property right for most companies. This is both because trademarks are much easier to secure than patents and because of their potentially perpetual existence. Cannabis-related trademarks are different though.

Generally speaking, the USPTO will not grant federal trademark protection for marks relating to the production, sale, or distribution of cannabis. As the USPTO Trademark Manual of Examining Procedure (TMEP) explains, an application cannot relate to the shipment or production of an illegal drug.

Specifically, TMEP Section 907 provides that the use of a mark in commerce must be lawful to qualify for federal registration. However, the USPTO does allow the trademark registration of brands for ancillary products and services. A prime example is the “RooR” brand of bongs marketed by Sream Inc. which, with federal registration in place, has pursued hundreds of cases against infringing products over the last three years.

Recently, the USPTO issued guidelines clarifying examination procedures for marks associated with hemp-derived goods with a THC level of 0.3 percent or less on a dry-weight basis (the clarification states less than 0.3 percent, but this appears to be a scrivener’s error as the 2018 Farm Bill refers to not more than 0.3 percent).

The guidelines state that applications filed before December 20, 2018 (the date on which hemp was removed from the CSA’s definition of marijuana), which identify goods or services including cannabis products will be refused due to unlawful use or lack of bona fide intent to use in lawful commerce under the CSA.

In response, an applicant may (1) respond on the merits to the refusal; (2) abandon the application and file a new application; or (3) amend the filing date of the application to December 20, 2018, clarify the intended use is under the 2018 Farm Bill, and amend the identification of goods and specify the product contains 0.3 percent or less THC.

For those brands that are unable to take advantage of federal registration, one avenue is to secure state-level marks under those states’ various regimes. Such rights are generally viewed as much less valuable (and are in fact rarely utilized outside the industry as a primary form of protection).

Registration of cannabis-related trademarks is permitted in most states where medical use is legal and in all states where recreational use is legal. However, these marks are of limited geographic scope (sometimes not even statewide) and cannot be obtained on an intent to use (as opposed to already in use) basis.

Trade secrets and unfair competition

Finally, another way to protect a company’s intellectual property (such as customer and supplier lists, or business methods or processes) is by using various states’ trade secret laws.

The Federal Defend Trade Secrets Act of 2016, which codifies trade secret law as it has developed at the state level in states that have adopted the Uniform Trade Secrets Act (as well as other states that use the common law approach, like New York), defines a trade secret as information that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information,” for which the owner has taken “reasonable measures to keep such information secret.”

If a trade secret is misappropriated by a competitor (a type of unfair competition), a plaintiff will need to prove: (1) that the information was secret, (2) that it was reasonably protected, and (3) that it derives its value from secrecy. With respect to the cannabis industry, courts have recognized that the identities and needs of key customers and decision makers, as well as lists of suppliers, can constitute a trade secret.1

In addition to implementing adequate controls to preserve the secrecy of such information — by, for instance, requiring key employees to sign non-disclosure agreements — businesses disclosing information to state authorities as part of an application for a license should be diligent in requesting confidential treatment by state authorities. This is because such applications (and the information they contain) are a matter of public record and disclosure may destroy the trade secret.

While law on the issue is sparse, federal courts (at least in certain circuits) appear to be willing to entertain such claims, notwithstanding federal prohibition of cannabis. Their reasoning is rather straightforward: one violation of federal law does not excuse another.2

That is not to say Federal courts are wide open to companies operating in the space, as Bankruptcy courts have generally been unwilling to extend the protections of the code to state-legal cannabis businesses at the urging of the United States Trustee (which is an arm of the Justice Department). However, this is not an issue for hemp under the new law.

NOTES
1 See Surterra Fla., LLC. v. Fla. Dep't of Health, 223 So. 3d 376, 380 (Fla. Dist. Ct. App. 2017) (A “list of suppliers” can qualify as a trade secret according to section 812.081(1)(c)); Siva Enters. v. Ott, No. 2:18-cv-06881-CAS(GJSx), 2018 U.S. Dist. LEXIS 223854, at *14 (C.D. Cal. Nov. 5, 2018) (declining to dismiss a theft of trade secrets case where the allegations “predominantly focused on defendants’ alleged theft of plaintiffs’ client lists and client information”).
2 See Siva Enters., 2018 U.S. Dist. LEXIS 223854, at *13 (finding defendants’ misappropriation plaintiffs' proprietary business information, and misuse of plaintiffs' identity and reputation, was a cognizable claim), citing Greenwood v. Green Leaf Lab LLC, No. 3:17-CV-00415PK, 2017 U.S. Dist. LEXIS 125143, 2017 WL 3391671, at *2-3 (D. Or. July 13, 2017) (“just because an employer is violating one federal law, does not give it license to violate another.”)

About the Authors

Kristen-ChittendenKristen Chittenden is general counsel and corporate secretary at Lykes Bros. Inc., and chair of the ACC Small Law Department network.

Alex MalyshevAlex Malyshev is co-chair of Cannabis, Hemp & CBD Industry Practice at Carter Ledyard & Milburn LLP in New York, and the chair elect of the Young Lawyers’ Advisory Board at Meritas Law Firms Worldwide.


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