Cannabis attorneys

This past week — in the grand tradition of Trump Administration flip-flopping — DHS Secretary John Kelly changed his mind on pot. Kelly initially stood out as moderate on cannabis when he earlier in the week declared that “marijuana is not a factor in the drug war.” This statement led us to believe he had a somewhat more realistic view on cannabis than the rest of his cannabis hating colleagues. Give his quote above, that is no longer the case and it appears Kelly’s views mimic the Reefer Madness and D.A.R.E. ideologies we have come to expect from so many in the Trump Administration.

What do you see the Trump Administration actually doing about cannabis, beyond just voicing stupid opinions on it?

 

Cannabis business ownership lawsMany marijuana businesses include one or more people in their ownership group that contributed “sweat equity” to their business, rather than cash or other valuable assets. Because of the level of state regulations, even small cannabis businesses typically require a lot of capital to start. Many experienced entrepreneurs have had to team up with investors to get their cannabis businesses off the ground. Many other people looking to start cannabis businesses have had to entice experienced growers to help set up their facilities by offering equity in lieu of or in addition to salary.

But working relationships don’t always last. Whether it be for poor performance or for more serious issues (violating state regulations, stealing from the company, etc.), cannabis companies often find themselves wanting to part ways with senior employees that also have an ownership interest in the company.

For large publicly traded companies, this is no big deal because they can easily terminate employees that have received stock — even a large amount of stock. All the company must do is finalize the termination, stop paying salary, and determine whether there are any stock options or grants subject to a vesting schedule that need to be finalized. Then, the company and the employee simply go their separate ways. There is no reason for a large publicly traded company to worry about the stock already issued, as it is likely only a minute fraction of the company’s overall capitalization.

For small, closely held companies, however, stock grants and LLC membership interests held by employees can be far more complicated. The employment relationship and the ownership relationship tend to intermingle, especially if the owner/employee was also one of the company’s founders. Depending on the size of the ownership group, even a 10% share of the voting ownership interest can be significant and can handcuff owners trying to bring on more capital in the future while also trying to retain a voting majority.

First, it is important to decouple the ownership interest from the employment relationship. For businesses that are taxed as corporations (subchapter C or S), owner/employees likely receive a significant part of their compensation as standard W-2 employees. For businesses taxed as partnerships (how most multi-member LLCs are taxed), the employment portion of income is likely categorized as a guaranteed payment. Regardless, this is the issue that should be dealt with first. Company owners with work obligations should be treated like employees for purposes of those obligations. The company should set expectations for employment, and best practice is to have a written employment agreement specifically drafted for the owner/employee scenario. That employment agreement, or the LLC operating agreement or shareholder’s agreement, should determine who can decide to terminate an owner/employee. The decision will need to be made by a majority of either the company’s managers, members, directors, or stockholders. There is no cookie-cutter answer on how to do this as every situation is different.

Once the employment situation is handled, the next issue is what to do with the lingering ownership interest in the cannabis business. Inexperienced business owners that gave away equity as compensation too often treat it as something more temporary than it is. There are mechanisms to provide a worker with profit-sharing so long as that person is working, only for that profit-share to disappear when the person is no longer working for the company. But that is something different than standard ownership of stock or membership interests, which we see far more often. There is a property right in the stock or the LLC membership interest, and it isn’t just going to disappear.

One option is to let the departed employee keep the stock or membership interest. If there is no pressing need, there is nothing inherently wrong with having a former employee continue to have an ownership interest in your cannabis company. They are still entitled to their vote and to their distribution of profits, but that does not mean they need to play a day to day role in company business.

But for cannabis companies looking for a clean break, their easiest option is to have an agreement, either in the LLC operating agreement or in the corporation’s shareholders agreement, providing the company with a buyout option for owners that no longer work for the company. Making it optional helps the company if it does not want to be forced to make a significant cash payment, but the employee would likely want the buyout to be mandatory. The value can either be set by a mathematical formula or the agreement can refer to a third party appraiser. The payment terms are set, and the company is able to buy out the owner/employee.

The important thing is that this is something that needs to be laid out ahead of time. If there is no buyout mechanism in an LLC operating agreement, there is no automatic right under most states’ LLC laws to remove individual LLC members. It is to both the company’s and the owner/employee’s benefit to figure this out up front when negotiating the original hiring. Once termination has started, it can be really hard for the cannabis company and the owner/employee being terminated to cooperate. If you set up from the outset what a break-up will look like both parties will have an easier time dealing with the change and moving on.

Buying and selling cannabis businesses We like to blog about buying and selling pot businesses. It’s a rich topic and the transactions can be memorable for both entrepreneurs and attorneys. In our recent posts, we have canvassed subjects from diligence items for buyers to checklist items for sellers. We also have covered important transactional topics such as how much your cannabis business may be worth and what you can actually sell. Today’s entry covers a structural part of many business sale agreements: the earn-out.

An earn-out is a contractual provision that entitles a seller to additional compensation in the future, if the business achieves stated financial goals. Earn-outs are used when the asking price for a business is more than a buyer is willing or able to pay up front. A well drawn earn-out can bridge the valuation gap between an optimistic seller (pretty much all of them) and a skeptical, cash-strapped, buyer (just some of them). It can also provide a buyer with additional financing. In an industry where hard money is the rule and bank loans are not available, that can be compelling.

The primary objective in an earn-out is to allow the buyer to make payments over time. The earn-out may also require the seller to step into a consulting role post-sale, and actually “earn” the post-transaction payments. In those cases, it is important to clearly outline the parties’ expectations. This scenario makes for a less clean break, but sometimes a seller has invaluable expertise and experience—particularly in a local marijuana market—that can be passed along with the sale.

In addition to seller support, there are many factors to consider in negotiating an earn-out agreement. Five important ones include: (1) the earn-out period; (2) payment structure; (3) payment schedule; (4) performance matrices; and (5) accounting standards. Earn-out payments may also be capped or uncapped, and the parties can stipulate that future events (like federal enforcement action, for example) will offset earn-out payments. Depending on the type and size of the deal, and the parties’ personalities, an earn-out can be simple or extremely complex.

If the goal is to keep things simple from both a payment and audit perspective, the parties will choose an easy-to-peg accounting and payment metric. For example, sellers often suggest an earn-out based on sales, because this line item is never disputed and the calculation is simple. A buyer, on the other hand, may push for an earn-out based on net income, as this metric accounts for all nuances of a business’ operations. A middle road would peg the earn-out at a multiple of EBITDA, usually over a certain number and in each relevant year. Ultimately, simpler calculations mean fewer disputes.

Given the nature of federal law, the earn-out metric for a pot business must also consider factors mainline businesses needn’t entertain. One of these is the oppressive effect of IRC 280E, the tax code provision that cuts into marijuana business profits. Another is licensing implications at play in the relevant state: readers of this blog know that states have strict rules on who can hold a financial interest in a pot business, and how that interest may be postured.

At the end of the day, many deals in the cannabis industry are structured to account for a lack of institutional financing. Like the marijuana sale-and-leaseback or the ubiquitous seller carry, an earn-out may be a way for a cash-light market entrant to gain a toehold in state-legal cannabis. We expect that earn-outs will remain an attractive option for the industry until things change at the federal level. Given the current shape of things, that could be a while.

Happy 4/20.

Canada cannabis marijuanaMaking good on Prime Minister Justin Trudeau’s 2015 campaign promises, Canada’s Liberal Party-led government last week announced a suite of bills to legalize recreational marijuana use throughout Canada. Also last week, I was on “To the Point” with Warren Olney to try to answer two big questions regarding Canada’s legalization plans: How will Canada legalize and what impact will that have on the United States?

First though, some history.

Canada already has legalized medical marijuana and its production, including production of “non-dried marijuana,” and some of its current producers, such as Tweed and Tilray, are well-recognized brands both within and outside Canada. What is little known about Canada’s medical cannabis regime, however, is that Canada never legalized medical marijuana distribution or dispensaries; Canadian medical marijuana patients order and receive their medical marijuana through Canada’s mailing system. Despite dispensaries being illegal, many operate relatively freely due to local law enforcement tolerance in certain Provinces. All of that will change when Canada legalizes marijuana, and the pending legalization bills are widely expected to pass.

With a desired goal of July 1, 2018 to get legalization off the ground, Canada is nothing if not ambitious. The legalization bills contain many interesting restrictions and standards, including the following:

  • The legal age to purchase up to an ounce of marijuana will be 18, but the Provinces are free to set higher age limits.
  • Individuals 18 and older can grow up to four plants per household for personal use.
  • Tourists cannot bring cannabis into Canada, but they can purchase and use it while there.
  • The provinces will almost exclusively regulate retail and marijuana distribution, as well as the retail price of marijuana. They can even own their own retail establishments if they wish.
  • Provinces will be able to decide whether alcohol and marijuana can be sold at the same retail location.
  • According to the federal government’s own press release, “those jurisdictions that have not put in place a regulated retail framework, individuals would be able to purchase cannabis online from a federally licensed producer with secure home delivery through the mail or by courier.”
  • Marijuana vending machines and self-service displays are banned.
  • The federal government will regulate marijuana producers.
  • Advertising, promotions, and marketing cannot appeal to children and they will be heavily regulated by the federal government, including the possibility of no branding at all on the production side.
  • Regulations regarding packaging and labeling are mandated, but they need to be debated by government first.
  • No federal taxes or licensing fees are contained in the bills.
  • Cannabis cannot be used to infuse alcohol, nicotine, or caffeine and vice-versa.
  • More than 2 nanograms of active THC in the blood is a criminal driving offense punishable with a fine and the presence of more than 5 nanograms is a more serious offense, and officers will test driving impairment by using “fluid” samples, including saliva and blood samples.

As these cannabis bills make their way through Canada’s Parliament, there will no doubt be robust debates among lawmakers and regulators on everything from potency limitations to the kinds of cannabis products that will be available to quality assurance testing requirements. One of the most grueling debates will likely be over whether the Provinces should be the ones running all marijuana retail establishments.

To date, the U.S. only has one city-owned marijuana retail store. Needless to say, the idea of government owned and distributed marijuana hasn’t taken off in the U.S., both because it’s still federally illegal here and because we simply do not have a tradition of government ownership of anything retail. So even if Canada does embrace a “government weed” model, it’s unlikely this will cause the U.S. to influence our own state-by-state legalization scheme with private marijuana markets.

Oregon cannabis laws

We recently discussed proposed legislation to prevent Oregon marijuana retailers from recording, retaining, or transferring any information “that may be used to identify a consumer,” such as a consumer’s name, birthday or address. Some marijuana retailers had been collecting and storing this information for marketing purposes, often without their customers’ knowledge. The Oregon legislature was concerned that this practice would create a paper trail the federal government could use against cannabis consumers in a federal crackdown on recreational marijuana.

As we predicted, the legislature moved quickly. Yesterday, Oregon Governor Kate Brown signed SB 863 into law less than two months after the bill was introduced. In a strong signal to Oregon’s marijuana businesses and consumers, the bill enjoyed broad bipartisan support and passed the Oregon Senate by a vote of 21-6 and the Oregon House by a margin of 53-5. The bill requires all Oregon recreational marijuana retailers to destroy existing customer personal information within 30 days and it prevents cannabis retailers from collecting personal information in the future without the customers’ informed consent.

The bill is an explicit response to the Trump administration’s recent comments calling for a crackdown on the recreational marijuana industry and it is widely viewed as part of Governor Brown’s commitment to protect Oregon’s marijuana consumers from federal intervention or harm. SB 863’s streamlined journey from bill to law was helped by Section 4 of the bill, which declared that the Trump administration’s regressive statements regarding marijuana legalization have created a state of emergency requiring immediate action to preserve the public peace, health and safety.

Oregon’s consumers can now rest a bit easier, knowing their local retailer will not be maintaining a database of personal information to which an unfriendly federal government may someday have access.

China counterfeit lawyers
There are a lot of fakes out there, in the cannabis industry too.

As we’ve previously written, my law firm, which does considerable international trade and China law work in addition to our regulated substances practice, has on all fronts been getting an influx of clients complaining about counterfeit cannabis goods and seeking our help in dealing with the problem. The problem of counterfeit goods in the cannabis industry has only continued to grow over the last year.

I was interviewed earlier this year about the lawsuits brought by Roor pipes against nearly 200 smoke shops and convenience stores, alleging those stores are selling counterfeit Roor bongs in violation of Roor’s U.S. federal trademark registration. Though those lawsuits may be on uncertain ground from a federal trademark law perspective, Grenco Science, maker of the G-Pen brand vaporizer, recently found success in federal court against counterfeiters.

Earlier this year, Grenco sued more than 65 different online retailers for selling counterfeit G-Pen products. Most of the offending companies were based in China, which is consistent with the majority of the counterfeit cases my firm handles. Some of the lawsuits settled out of court, but many of the Chinese companies failed to respond to Grenco’s complaints filed in court – also a common occurrence when trying to pin down a Chinese company in U.S. court. In light of this, a federal judge in Illinois granted Grenco $47 million in damages, which equates to $1 million from each of the 47 companies found to have infringed Grenco’s federal trademarks, as well as injunctions against each of the companies ordering them to cease sales of the counterfeit goods.

Of course, getting a judgment against a Chinese company for trademark infringement is only half the battle – Collecting on these judgments is another matter. Oftentimes, U.S. judgments against Chinese companies are worth very little. A U.S. judgment against a Chinese company can lead to collection, but for that to occur, one must know about the operations of the Chinese company and one must be prepared to be legally creative in figuring out how and where to act in using the U.S. judgment to go after the Chinese company’s assets.  We’ve written extensively about this process on our firm’s China Law Blog, and you can read more about it here and here.

Given the difficulty in enforcing these judgments it is critical that you as a business owner take preventative steps to ward off counterfeiters, and to know what to do in the unfortunate event someone does counterfeit one of your goods. And as we tell all our clients: investing in these preventative steps now is always way less expensive than fighting a legal battle (and trying to enforce a judgment) in court down the road.

So what preventative steps should cannabis businesses take to address counterfeiting? Prevention hinges on first identifying your intellectual property (IP), determining what categories it falls into, and then protecting it accordingly in the relevant jurisdictions. The design of a novel device like a water pipe, for example, could be subject to patent protection. Though we’ve blogged extensively about the difficulty in obtaining federal cannabis trademarks, federal patent law does not contain the same “legal use in commerce” requirement, or a prohibition on “immoral or scandalous” matter. A patent is the grant of a property right to the inventor, issued by the United States Patent and Trademark Office (USPTO), and this property right gives the inventor “the right to exclude others from making, using, offering for sale, or selling the invention in the United States or importing the invention into the United States.” Patents are often the most powerful tool in fighting counterfeit goods.

Patent infringement is not the only way counterfeiters can rip off products. Oftentimes, when talking about counterfeits, we’re talking about trademark infringement (as in the G-Pen and Roor cases) rather than patent infringement. A counterfeiter could, for example, slap your logo on its vape pen, exploiting the goodwill and notoriety you’ve established through your brand. Of course, the best way to prevent trademark infringement is to register your trademark with the USPTO. Though it is not possible to obtain a federal trademark for use on goods that violate the Controlled Substances Act (CSA), it is often possible to obtain trademark protection for goods that do not violate the CSA, like many smokers’ accessories. A trademark gives the owner the exclusive right to use their mark on the specified goods in commerce, and it gives the owner a right to seek remedy in federal court in the event of infringement.

If you are having your products manufactured in China (or anywhere else overseas), as is the case these days with so many of our clients, you need to protect your IP there as well. Because if you don’t register your trademark or your design patent in China, someone else almost certainly will and then that someone else will be able to stop your products from leaving China because those products violate their intellectual property! For more on this, check out China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1 and China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 2. You should also check out Your China Factory as your Toughest Competitor for the contractual steps you need to take to prevent your own manufacturer in China from selling your product worldwide, and likely at prices far lower than you can ever match.

But logistically, how does enforcing your IP rights against counterfeiters play out? Typically, it doesn’t make sense to take the alleged infringer straight to court. Litigation is expensive, and there is often room to negotiate. When you know who the infringing party is, your attorney can contact them with a cease and desist letter directly. But when the party is, for example, a third party seller on a larger platform like Amazon or Alibaba, tracking down the infringer is much more difficult. See also China Counterfeiting: 8 Common Myths and Alibaba and Small Business Owners.

The protocol for dealing with online retail platforms in taking down counterfeit goods will vary depending on the company. With every online retail platform with which our lawyers have worked (be they in the United States or in China), the process is expedited greatly when our client alleging a counterfeit is able to offer up proof of its own IP rights. This is particularly true with trademarks, where infringement is often apparent, and the retail platform can quickly decide to suspend a counterfeiter’s account. Without verifiable IP rights, the retail platform is put in a difficult position of having to figure out who has the right to sell what. This involves complicated legal analysis, and takes substantial time and resources, as well as back-and-forth with both parties. In the meantime, you’re likely losing business. See How To Remove Counterfeits From Alibaba.

So the lesson here is two-fold. First, make sure you’ve identified your intellectual property and that you’ve taken every step possible to register and protect it. Second, if you suspect a company is selling a counterfeit of your product, contact your attorney immediately and develop a strategy for blocking the counterfeit sales, whether through direct communication with the counterfeiter, or by working with the relevant online retail platform. There is often much that can be done to stop a counterfeiter before resorting to filing a lawsuit, and ending up with potentially un-collectable judgment.

Donald Trump is expected to announce Representative Tom Marino (R-Pa.) as our country’s next director of the Office of National Drug Control Policy, colloquially known as the US drug czar. As drug czar, Marino would evaluate and coordinate domestic and international our country’s anti-drug efforts and advise the President on U.S. anti-drug efforts. The whole drug czar “thing” is bad news and Marino himself is even worse. He is “just another anti-marijuana, pro-pharma” extremist.

Tom_Marino_Official_Portrait,_112th_Congress

Marino began his professional career as a prosecutor who sought to do his part on in the “war on drugs” by prosecuting drug offenders. Since 2010, Marino has served in the U.S. House of Representatives and consistently opposed measures to reform federal cannabis law.

Marino voted against the Rohrabacher-Farr amendment which prohibits the Department of Justice from using federal funds to prevent states from implementing medical marijuana laws. He also voted against a measure allowing Veterans Affairs doctors to recommend medical cannabis to their patients and he opposed measures to ease federal restrictions on hemp and CBD. When asked about marijuana legalization, Marino stated he would consider legalizing cannabis only “if we had a really in depth-medical scientific study,” and if medical cannabis were available only in “pill form.” In other words, if it has anything to do with liberalizing our cannabis laws, Marino is against it.

 

According to the “Office of National Drug Control Policy Reauthorization Act of 1998” the drug czar “shall ensure that no Federal funds … shall be expended for any study or contract relating to the legalization (for a medical use or any other use) of a substance listed in schedule I” of the Controlled Substances Act and “take such actions as necessary to oppose any attempt to legalize the use of a substance” listed in Schedule I. Cannabis is still a Schedule I substance and therefore subject to this blanket prohibition on legalization and research.

Marino is no friend of cannabis legalization and Trump’s having has tapped someone with such outdated views is concerning. But even more concerning is the mandate that any drug czar must oppose all marijuana legalization efforts. More than half the states  have legalized medical marijuana and eight states have legalized recreational cannabis, with more to come. With legalization, the evidence that it works better than prohibition is piling up. This country’s director of drug policy should have the discretion to consider this evidence and draw his her own conclusions on cannabis prohibition. As things now stand, the role of our drug czar is not so much to craft policies based on changing realities, but to ensure that our drug policies remain stuck in another era. This is bad policy and it makes no sense and it needs to change.

Earlier this year, the Trump administration considered cutting the Office of National Drug Control Policy entirely. Unfortunately, the President’s tapping Marino as the next drug czar indicates he is now heading in a very different direction. Who needs a drug czar anyway? Trump had it right initially. This office should be eliminated and fast.

Cannabis lawyers and marijuana lawyers

Sherrilyn Ifill made the above comment earlier this week in response to Jeff Sessions’ recently praising drug enforcement policies of the 80s and 90s. According to Sessions, the drug prevention campaigns from those eras deserve applause for “telling the terrible truth about drugs.” But as has become absolutely typical for Mr. Sessions, he ignores the facts. Sessions fails to acknowledge that these abstinence-focused campaigns were both dreadfully expensive and a complete failure. Not surprisingly, Sessions also fails to mention how they increased imprisonment for drug-related crimes and disproportionately targeted people of color and the poor. Sessions’ also sloppily but deliberately lumps cannabis in with drugs like heroin, willfully ignoring that cannabis can be used medicinally and is not chemically addictive and is therefore — at least for anyone who looks at things at all objectively — very different.

Sessions wants to turn back time and employ ineffective and outdated drug enforcement policies and his reasons for wanting to start a new war on drugs are probably no different from Richard Nixon, who started that war to increase racial divides and thus scare white people into voting for him and his cronies (remember, Sessions was at one time deemed too racist to be a federal judge). No matter what the reason for Jeff Sessions’ by now perpetual hatred for marijuana and his aversion to telling the truth about it, our job as citizens is to resist. We probably already are at the point where Sessions’ statements will have little more impact than coyotes howling at the moon, but the more states that legalize, the more we can be sure that will be the case. We must continue pushing forward until cannabis is legalized all across the country and then we can merely laugh or ignore comments from people like Sessions.

California cannabis San BernardinoCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Yuba County, and before that, Marin CountyNevada County, the City of Lynwood, the City of CoachellaLos Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Location. Ah, San Bernardino County, part of the fearsomely named Inland Empire. The county is located in southern California and it is the fifth most populous county in the state and the twelfth most populous county in the United States. With a geographical area covering 20,105 square miles, San Bernardino County is the largest county by area in the United States. When you fly into San Bernardino County for the first time you’ll probably take a second look at your ticket when you see Ontario as your destination. You will also notice the majestic San Gabriel Mountains and you’ll also feel the winds whipping off of them and making you wish you had driven and not flown.

History with Cannabis and Current Cannabis Laws. In 2011, the San Bernardino Board of Supervisors adopted ordinance No. 4140 banning medical marijuana dispensaries and outdoor cultivation in the Count’s unincorporated areas, with a minor exemption for one or two people to cultivate their own cannabis indoors. It wasn’t then surprising that the Board of Supervisors moved in 2016 to ban all commercial cannabis activities within San Bernardino County with ordinance 4309 (now Chapter 84.34 of the County Code). Section 84.34.040 of this new ordinance provides for the following exemptions:

The prohibition concerning commercial cannabis activity does not apply to a person with an identification card cultivating cannabis for his or her personal medical use or to a primary caregiver cultivating cannabis for the personal medical use of no more than five specified persons with identification cards, subject to the following requirements:

(a)     The cannabis is not sold, distributed, donated, or provided to any other person or entity.

(b)     A primary caregiver may only receive compensation in full compliance with Health and Safety Code § 11362.765, subdivision

(c)       Cultivation may only be conducted indoors at the private residence of the person with an identification card or the primary caregiver of the person with an identification card.

(d)       Cultivation shall be limited to no more than:

(1)         Twelve cannabis plants per person with an identification card or primary caregiver per private residence; and,

(2)       An aggregate total of 24 cannabis plants per private residence when more than one person with an identification card or primary caregiver lives at the private residence.

Proposed Cannabis Laws. Though San Bernardino County still stubbornly maintains a restrictive stance towards marijuana, the residents of the City of San Bernardino voted for Measure O on November 8, 2016. Measure O, known as the San Bernardino Regulate Marijuana Act of 2016, authorizes the City of San Bernardino to regulate both medical and recreational cannabis businesses consistent with California State law. Measure O’s implementation has however been delayed by two lawsuits asserting that its zoning restrictions too narrowly constrict the areas within the city in which a cannabis business can operate. Though it is unfortunate these lawsuits are delaying the issuance of City of San Bernardino cannabis licenses, it is at least good to see progress being made on cannabis in the Inland Empire. San Bernardino County and many of its cities still prohibit marijuana businesses but we see many other cities within the county and the rest of Inland Empire following the City of San Bernardino’s lead within the next year.

 

 

Cannabis trademark lawyerWe advise our cannabis clients regularly on how to choose a brand name that is eligible for trademark protection. For example, the strength of a mark depends on its distinctiveness – fanciful and arbitrary marks are protectable, while merely descriptive marks are not. But the other key component to choosing a brand name that can be successfully registered as a trademark is choosing a mark that is not the same as, or confusingly similar to, an existing registered trademark.

This “likelihood of confusion” standard often confuses business owners trying to brand their cannabis and ancillary products. Not only can you not use a mark that is the same as a registered trademark, you cannot use a mark confusingly similar to a registered trademark.

The Ninth Circuit, in AMF Inc. v. Sleekcraft Boats, developed the following eight-factor test for determining whether one mark is confusingly similar to another:

  1. Strength of the mark
  2. Proximity of the goods
  3. Similarity of the marks
  4. Evidence of actual confusion
  5. Marketing channels used
  6. Type of goods and degree of care likely to be exercised by the purchaser
  7. Defendant’s intent in selecting the mark
  8. Likelihood of expansion of the product lines.

Some of these factors are clear-cut, and some are highly subjective. The Ninth Circuit has repeatedly reaffirmed that this is a flexible test, but it is useful to consider these factors when choosing a name for your brand that may be similar to another registered mark. For example, if the other, similar mark is a well-known brand, or a household name, your risk of infringement goes up. If the goods you are selling are similar to the goods provided by the other brand, your risk goes up. Likewise, if the marks are very similar, if similar marketing channels are used, or if either company intends to expand into the market of the other, your risk of infringement goes up. You will notice that the court also considers the intent of the defendant. This means that if you knew from the outset that your mark was similar to a registered mark, the court is less likely to look favorably on your case.

Last month, the Trademark Trial and Appeal Board (“TTAB”) dealt with the issue of likelihood of confusion in Margaritaville Enterprises, LLC v. Rachel A. Bevis, where the Applicant had applied to register the mark MARIJUANAVILLE for “T-Shirts, Hats, Sweat Shirts, sweat pants, Jackets, Socks” and “Drive-through retail store services featuring coffee and related goods; Retail apparel stores; Retail clothing stores.” Margaritaville Enterprises, LLC, the Opposer, opposed the registration of the MARIJUANAVILLE mark on the ground of likelihood of confusion with its registered MARGARITAVILLE trademark. The MARGARITAVILLE trademark is owned, in part, by Jimmy Buffet, and is a coined term based on Buffet’s famous “Margaritaville” song.

In determining whether a likelihood of confusion exists between MARGARITAVILLE and MARIJUANAVILLE, the TTAB first noted that the fame of the prior mark plays a dominant role in balancing the likelihood of confusion factors. “Margaritaville” was released in 1977 and inducted into the GRAMMY Hall of Fame in 2016. The TTAB concluded that the MARGARITAVILLE mark had been the subject of sustanined and widespread media and popular culture exposure, and was indeed famous, weighing heavily in the Opposer’s favor.

In comparing the similarity of the marks, the TTAB points out that “[t]he proper test is not a side-by-side comparison of the marks, but instead ‘whether the marks are sufficiently similar in terms of their commercial impression’ such that persons who encounter the marks would be likely to assume a connection between the parties.” Furthermore, “the focus is on the recollection of the average purchaser, who normally retains a general rather than a specific impression of trademarks.” This is an important distinction to keep in mind when selecting a trademark.

Here, the Opposer argued that the two marks were similar in sound, appearance, connotation and commercial impression, and the TTAB agreed. The opinion found “both marks are similar insofar as they are single-term 14 letter marks comprised of five syllables, each commencing with the same letter string ‘mar-‘ and ending with the suffix ‘-ville.’ As to their connotation and commercial impression, the record shows a public association between the two terms as representing a similar ‘state of mind’ induced by either a cocktail or marijuana.” On this basis, and after analyzing the other likelihood of confusion factors, the TTAB rejected the MARIJUANAVILLE trademark application.

The lesson to be learned from this (and other cases) is that choosing a mark for your cannabis or ancillary brand that won’t infringe an existing trademark is not as simple as avoiding identical marks. The analysis for likelihood of confusion is nuanced, and it’s important to conduct a full-fledged trademark clearance search with the help of an experienced trademark attorney (preferably one who knows the cannabis industry) for marks that are the same and similar to your proposed mark before you file your trademark application and before you invest in brand development and marketing.