Cannabis researchA few months ago, the National Academies of Sciences, Engineering, and Medicine published a study of studies, reporting on the cumulative research to date on marijuana in a paper titled “The Health Effects of Cannabis and Cannabinoids.” There was some initial buzz, but only recently has the media really dug into the report — including a well-written summary by Vox’s German Lopez as part of his 4/20 reporting.

The report examined both positive and negative health claims related to cannabis. First, here’s a look at some of the baseline conclusions:

  • Potential Negative Effects of Using Marijuana:
    • Research does not show cannabis increases the risk of cancer, except for one subtype of testicular cancer for which there is moderate evidence of increased risk.
    • No clear answer if cannabis has any effect on the cardiometabolic system (heart attacks, strokes, diabetes).
    • Smoking cannabis is associated with chronic coughs, but not clear if it leads to asthma or harms lung functioning.
    • Limited evidence regarding cannabis effects on the immune system.
    • Cannabis does increase the risk of automobile accidents.
    • Cannabis use by pregnant women is associated with lower birth weights in offspring.
    • Cannabis use by adolescents is related to lower level academic achievement and decreased future income.
    • Cannabis use likely slightly increases the risk of developing schizophrenia and other psychoses, but it does not increase the risk of developing depression, anxiety, or PTSD.
  • Potential Therapeutic Effects of Using Marijuana
    • Cannabis is effective as an antiemetic (anti-nausea) for people undergoing chemotherapy.
    • Patients with chronic pain consistently report a reduction in symptoms.
    • Patients with multiple sclerosis report a decrease in spasticity symptoms.

The report examined a bevy of other claimed therapeutic uses for marijuana, but the research did not generate sufficient information to back up those claims. For example, some of the primary data indicates cannabis use may decrease the size of certain brain and spine tumors called glioma, but with only one limited study to go on, the National Academies team didn’t have nearly sufficient evidence to show this was proven.

The overwhelming takeaway from the report was that significantly more research is needed to further understand cannabis’s effects on the human body. We have previously written about obstacles to cannabis research. There are reputational worries, where many universities still wring their hands over the politics of engaging in marijuana research. In 2014, the University of Arizona fired Suzanne Sisley, a psychiatrist studying cannabis use for PTSD, and Sisley has consistently maintained that her firing was simply because her research involved marijuana. Even when researchers have sufficient institutional backing to perform their work, the logistics of getting cannabis to study are extremely challenging. The marijuana available from the National Institute of Drug Abuse’s facility at the University of Mississippi sometimes does not even resemble marijuana as much as old dried out cooking herbs. Even though the DEA under President Obama took steps to allow other facilities to grow cannabis for research purposes, no other facilities have been approved.

All told, just about every reasonable person agrees more systematic cannabis research would be reasonable and helpful. On Saturday April 22scientists marched in Washington, DC and elsewhere in support of “robustly funded and publicly communicated science as a pillar of human freedom and prosperity.” March participants rallied for many topics, including marijuana research. The cannabis industry should continue to support these efforts — good science is always beneficial.

California cannabis trademarkOne of the biggest hurdles for California cannabis brand owners has been the inability to secure California state trademark registrations for their marks. This has been a point of confusion for many clients who have successfully registered their trademarks in states like Washington, Oregon and Colorado, and hoped to do the same in California.

Until recently, the California state government has been steadfast in refusing to register marks used on cannabis, despite cannabis having been legal in California since 1996. This policy was rooted in Sections 14270-14272 of the Model State Trademark Law of the California Business and Professions Code (CBPC), which are simply titled “Miscellaneous.” Section 14272 states the following:

The intent of this chapter is to provide a system of state trademark registration and protection substantially consistent with the federal system of trademark registration and protection under the Trademark Act of 1946 (15 U.S.C. Sec. 1051 et seq.), as amended. To that end, the construction given the federal act should be examined as non-binding authority for interpreting and construing this chapter.

Recall that there are three ways in which a brand owner can establish trademark rights:

  1. By using the mark in connection with their goods or services (legally) in commerce;
  2. By registering the mark with the United States Patent and Trademark Office (USPTO); and
  3. By registering the mark with an appropriate state trademark registry.

California cannabis companies have, to date, needed to rely on federal trademarks registered with the USPTO (if they could get them for ancillary goods or services), and common law rights that may not even exist in California, given Section 14272 of the CBPC.

But Assembly Bill 64 will change all this. Recognizing the inconsistency between current state trademark law provisions and the new cannabis regulations, AB 64 states the following:

This bill, for purposes of marks for which a certificate of registration is issued on or after January 1, 2018, would, notwithstanding those provisions, authorize the use of specified classifications for marks related to medical cannabis and nonmedical cannabis goods and services that are lawfully in commerce under state law in the State of California.

This is great news for California cannabis companies, but there are a few things to keep in mind:

  1. State trademarks will not be available until January 1, 2018, and then only for cannabis companies that operate in compliance with California state law. Unlicensed cannabis businesses will not be eligible for California state trademark protection;
  2. The same difficulties surrounding cross-state IP licensing deals will still exist in California (see Cannabis IP Licensing: It’s Complicated); and
  3. Federal trademarks are still unavailable for goods and services that violate federal law, so developing a brand protection strategy that involves federal trademark registrations for ancillary goods, and state trademarks for cannabis goods, will still be key. See Cannabis Trademarks: Back to the Basics

Though the protection afforded by a state trademark is geographically limited to the state of registration, state trademarks do provide some level of protection greater than common law rights. And AB 64 will give California cannabis business owners much greater flexibility in developing a brand protection strategy that encompasses their cannabis products.

 

 

Oregon marijuana lawyer

Oregon Senator Floyd Prozanski’s bill to prohibit Oregon employers from restricting or penalizing off duty marijuana consumption will not pass this session. As originally introduced, Senate Bill 301 would have prevented employers in Oregon from banning marijuana consumption by their employees during nonworking hours, provided that the consumption did not lead to on duty impairment. Additionally, collective bargaining agreements could still have prohibited off-duty use of marijuana without running afoul of the new law.

The bill ultimately died because of strong opposition from industry on two general grounds relating to worksite safety and federal law. In written testimony before the Judiciary Committee, representatives from the Oregon Association of Hospitals and Health Systems and the Oregon Columbia Chapter of Associated General Contractors, focused on federal law preemption and more specifically on the federal Drug-Free Workplace Act. These representatives argued that SB 301 would force employers that either contract with or receive grants from the federal government to choose between violating federal law or violating Oregon state law.

These representatives also testified that the impairment exception was meaningless, noting that there are no available technologies for reliably testing for marijuana impairment. Since marijuana remains present in the body long after use, employers contend it is simply not possible to determine whether employees are under the influence of cannabis while on their jobs.

Supporters of the bill dismissed these concerns, arguing that the various exceptions would still have permitted employers to restrict marijuana use by employees working on federal contracts and pursuant to collectively bargaining agreements. Beth Creighton, of the Oregon Affiliate of the National Employment Lawyers Association, testified that “[t]hese exceptions create a balance between the rights of Oregonians as individuals to engage in legal activities and the rights of employers to provide a safe workplace.“

Senator Prozanski sought to salvage the bill by amending it to cover only medical marijuana cardholders. This watered-down version managed to squeak through the Senate Committee on Judiciary, but Oregon’s Senate Democrats ultimately decided it would not be able to pass the full Senate and they pulled it from consideration.

We will have to wait until next session to see if Senator Prozanski, or someone else, takes up this cause once again. In the meantime, in Oregon, as in most states, employees can relatively easily be terminated for consuming cannabis during off-hours.

Washington State cannabis lawyers

The Washington State Legislature recently passed SB 5131, which contains many tweaks to Washington’s cannabis laws. The measure now awaits signature by Washington Governor Jay Inslee. Here are ten ways SB 5131 could change Washington’s marijuana market if Governor Inslee signs it into law:

  1. Homegrown Marijuana. SB 5131 would allow licensed marijuana producers to sell immature cannabis plants, clones, and seeds to qualifying patients who enter the state’s medical marijuana database. Patients who choose not to enter the database may grow up to four plants in their homes under current Washington law and it’s not clear how those patients would legally acquire immature plants, clones, or seeds in light of SB 5131. Additionally, the Washington State Liquor and Cannabis Board (“LCB”) must examine the viability of allowing recreational users to grow their own marijuana in a way that complies with the enforcement priorities outlined in the Cole Memo.
  2. Retail License Ownership. Under this bill, a retailer or individual “with a financial or other ownership interest in” a retail license can own up to five retail licenses. Current Washington State law limits an individual from having an ownership interest in more than three licensed retailers.
  3. Forfeiting applications. The bill would require the LCB forfeit retail licenses that have been issued but are not operational and open to the public after two years unless the delay in opening and getting operational is due to circumstances beyond the licensee’s control. However, the LCB may not require forfeiture if the licensee has been unable to open because of a town or county’s moratorium prohibiting a retail cannabis store or because zoning, licensing or other regulatory measures prevent the retail store from opening.
  4. Processing Hemp. The LCB must study the viability of allowing licensed processors to process industrial hemp grown in Washington. This could eventually lead to legislation that would allow processors to purchase cannabis plant material from farmers licensed to grow industrial hemp. Currently, processors may only purchase products from licensed cannabis producers or other processors.
  5. Advertising. SB 5131 would make the following substantial changes to cannabis advertising laws in Washington.
    1. Advertising to Kids. The bill would prohibit marijuana licensees from taking “any action directly or indirectly to target youth in the advertising, promotion, or marketing of marijuana and marijuana products, or take any action the primary purpose of which is to initiate, maintain, or increase the incidence of youth use of marijuana or marijuana products.” This includes prohibiting using toys, movie or cartoon characters, or other images that would cause youth to be interested in marijuana. It also prohibits using a “commercial mascot” which is defined as “a live human being, animal, or mechanical device used for attracting the attention of motorists and passersby so as to make them aware of marijuana products or the presence of a marijuana business.” This includes inflatable tube displays, persons in costumes, and sign spinners. Cities and counties would be free to further restrict marijuana advertising.
    2. Outdoor Advertising. Billboards visible from any street, road, highway, right-of-way, or public parking area cannot be used to advertise cannabis, except that a marijuana retailer may use a billboard solely to identify the name or nature of  its business and directions to its retail store. Outdoor signs could not contain depictions of marijuana plants, products, or images that appeal to children. Outdoor advertising would be prohibited in “arenas, stadiums, shopping malls, fairs that receive state allocations, farmers markets, and video game arcades.” A limited exception would allow outdoor advertising at events where only adults are permitted.
  6. Gifting Marijuana. Adults twenty-one and over would be allowed to deliver marijuana to other adults so long as the marijuana is offered as a gift without financial remuneration and so long as the amount of marijuana gifted is no more than the amount an adult can legally possess in Washington — one ounce of useable marijuana flower.
  7. Licensing. This bill would allow a licensed marijuana business to enter into licensing agreements or consulting contracts “with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation” for goods or services, trademarks, and trade secrets or proprietary information. Licensees would be required to disclose these agreements to the LCB.
  8. Public Disclosure. SB 5131 would exempt trade secrets and other proprietary information of a licensed marijuana business from disclosure under Washington’s Public Disclosure Act.
  9. “Organic” Weed. The bill instructs the LCB to adopt regulations for marijuana similar to products certified as organic under federal regulations. The organic standard is granted pursuant to federal regulations and because marijuana is illegal under federal law, it cannot qualify under those federal standards. The LCB would adopt regulations so that marijuana could be grown in a way that mimics organic products. The products then could be labeled as compliant with the state’s standards.
  10. Tribal Oversight. SB 5131 would require the LCB receive approval from a federally recognized Indian Tribe before granting a license on tribal land.

Governor Inslee is likely to sign SB 5131 into law, though he may veto certain parts of the bill. Stakeholders in Washington’s cannabis market should keep an eye on this legislation and prepare to make changes necessary to comply with SB 5131 if and when it gets signed.

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.