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Every brand needs protection, and Alison extends her knowledge of intellectual property and corporate law to our cannabis clients, ensuring their businesses are protected.

California cannabis: think local
California cannabis. Think local.

To the excitement of many, California’s Medical Cannabis Regulation and Safety Act (MCRSA) does not include a residency requirement akin to those we’ve seen in other states, like Washington. Though in theory this could change, such an about face is unlikely given the proposed rules that dropped a few weeks ago. And though Chapter 5, Section 26054(a) of Proposition 64 (dealing with recreational cannabis regulation) does contain a residency requirement, it is likely the medical and recreational cannabis rules will ultimately be synced, eliminating that requirement. For reference, however, that section of Proposition 64 states:

“[n]o licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.”

That residency requirement will expire on December 31, 2019 unless the California state legislature renews it. Also important to note is that even if this residency requirement were to go into effect, it would apply only to “controlling persons.” But again, we believe that as the medical and recreational cannabis rules are finalized and synced up, the residency requirements of Proposition 64 will be eliminated.

But this has not stopped local jurisdictions, including cities and counties, from implementing varying levels of residency requirements, or de facto residency requirements, on their own. For example cannabis licenses in the City of Los Angeles will likely be limited to state residents since the City is issuing first round licenses only to Proposition M Priority eligible applicants (i.e., the ~135 Pre-ICO cannabis collectives currently operating in the City under Prop. D immunity from prosecution). In theory, at least, the proprietors of these businesses, who would have been required to possess qualified patient authorizations, would have needed to be California state residents. In other words, the City of Los Angeles is limiting licenses to those who have operated locally since at least 2007, which functions as de facto localism.

Los Angeles’ proposed regulations also require applicants provide a detailed plan for hiring local residents, including making an “ongoing good faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”

The city of Oakland has developed what is perhaps one of the most contentious residency requirements via its Equity Permit Program. This program aims to address inequity in the local cannabis industry by prioritizing permit issuance to those with roots in certain identified Oakland neighborhoods that have been historically impacted by disproportionate drug law enforcement, and to members of the Oakland community who have been arrested and convicted of cannabis crimes in Oakland in the last 20 years. The law moves qualifying Equity Applicants, defined as Oakland residents with an annual income at or less than 80% of the City average and who either lived in certain defined Oakland police beats for 10 of the last 20 years, or who have been convicted of a cannabis crime committed in Oakland within the last 20 years, to the front of the cannabis permitting line, and it also creates access to approximately $3.4 million in earmarked interest-free business loans and other assistance.

When issuing permits for any kind of cannabis business, the City must give half (i.e. maintain a 1-to-1 ratio) of all permits issued in its initial issuance phase to these Equity Applicants.  Oakland local law also requires dispensary staff be at least 50% Oakland residents, with at least half of those residents from areas identified as having high unemployment or low household incomes.

Other local jurisdictions are implementing or considering similar means of enacting residency restrictions, despite the state’s leniency on the issue. It is therefore imperative to review the local laws under which you intend to operate, particularly if you are not a California state resident.

 

 

 

California Cannabis Law Senate Bill 94
California just came out with its Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)

The California Legislature today passed Senate Bill 94, which effectively repeals the Medical Cannabis Regulation and Safety Act (“MCRSA”) and incorporates certain provisions of the MCRSA in the licensing provisions of the Control, Regulate, and Tax Adult Use of Marijuana Act (“AUMA” aka Proposition 64). As we’ve covered extensively, draft rules for the MCRSA dropped in late April, but speculation has been rampant that the state would integrate the rules for both medicinal cannabis (MCRSA) and adult use cannabis (AUMA). SB 94 does just that by creating the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).

Here are 10 of the most important highlights of today’s bill:

  1. The governing bureau will now be the Bureau of Cannabis Control (“the Bureau”).
  2. The types of licenses available for commercial adult-use cannabis activity and commercial medicinal cannabis activity will be the same. The licenses available under both the MCRSA and the AUMA will continue to be available for both kinds of activity, and for specialty cottage cultivation licenses and microbusiness licenses, and, commencing on January 1, 2023, licenses for large outdoor, indoor, and mixed-light cultivation will also be available for both medicinal and adult-use cannabis activity.
  3. Producing dispensary and transporter licenses will not be available.
  4. Quality assurance, inspection, and testing requirements of cannabis and cannabis products prior to retail sale will change. Distributors will be required to store cannabis batches on their premises during testing, testing lab employees will be required to obtain samples for testing and transport those samples to testing labs, and distributors will be required to conduct a quality assurance review to ensure compliance with labeling and packing requirements, among other things.
  5. Though the MCRSA limited the combinations of medicinal cannabis licenses a person may hold until January 1, 2026, the MAUCRSA will not apply these limits (other than that testing laboratory licensees are prohibited from obtaining licenses to engage in any other commercial cannabis activity);
  6. The residency requirements of the AUMA are repealed. In other words, out of staters and even residents of other countries can freely participate.
  7. Additional advertising requirements, including regulation of online advertising and the creation of a universal symbol for edible cannabis products will be implemented.
  8. The cannabis excise tax will be measured by the average market price (as defined) of the retail sale, instead of by the gross receipts of the retail sale.
  9. Applicants for cultivation licenses will need to identify the source of water supply.
  10. The Bureau will no longer have the authority to regulate and control industrial hemp.

The above is only a rough summary of the new legislation. We will be breaking down the details in the coming days so stay tuned.

California cannabis edibles: just say no to butter
California cannabis edibles: just say no to butter

If you missed our webinar last week on California’s new medical cannabis rules and you just can’t wait for us to publish the recording here on the blog (coming soon!), this post will deal with California’s proposed medical cannabis manufacturing rules for edibles, on which we received a ton of great questions. To get started, a couple of key definitions from the rules:

“Manufacture” means the production, preparation, propagation, or compounding of cannabis products. The term “manufacture” includes the following:

  • Extraction processes;
  • Infusion processes;
  • Packaging or repackaging of manufactured medical cannabis or medical cannabis products.

“Edible Cannabis Product” means manufactured cannabis intended to be used, in whole or in part, for human consumption.

In addition to extensive sanitation, recall, customer complaint and operational requirements for edibles manufacturers, the proposed rules include quite a list of prohibited products and based on our experience in other states with regulated cannabis, we anticipate the list will only grow over time. Here is a sampling of some of the products that will not be allowed under the proposed manufacturing rules:

  1. Cannabis-infused alcoholic beverages;
  2. Cannabis products containing any non-cannabinoid additive that increases potency, toxicity or addictive potential, or that would create an unsafe combination with other psychoactive substances, including nicotine and caffeine;
  3. Cannabis products that must be held below 41 degrees Fahrenheit to be safe for human consumption;
  4. Vacuum packed products;
  5. Canned cannabis products;
  6. Cannabis-infused juice;
  7. Perishable bakery products that must be held at temperatures below 41 degrees Fahrenheit, including cream or custard-filled pies, pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings, or meat-filled pies or pastries;
  8. Dairy products of any kind (yes, this appears to include butter);
  9. Meat products;
  10. Seafood products.

For obvious reasons, the issue of whether or not cannabis-infused butter will be allowed is a big one. Though cannabis butter would be prohibited under the current draft rules, we’ve seen other states, like Washington, carve out exceptions for products  made with cannabis butter. However, even Washington prohibits selling cannabis butter as a stand-alone product.

One other glaring omission from the current rules is a prohibition on cannabis products that appeal to children, although this legislation is likely coming down the pipeline. Many states prohibit products like gummy bears and lollipops that mimic candies appealing to children. Though California seems to be taking a less restrictive approach than other states in which my firm’s cannabis lawyers work, it’s highly unlikely it will leave this issue completely unaddressed. In this vein, California’s proposed rules do prohibit licensees from manufacturing cannabis products by applying cannabinoid concentrate or extract to commercially available snack candy or food items. Though the definition of “commercially available” is not entirely clear, at least part of the intent here is to prevent consumer confusion between cannabis-infused and non-cannabis products present in many homes – children are often the ones confused in this manner.

Ultimately, many California cannabis manufacturers will need to rethink the types of products they offer for sale once they begin operating with a state license. Many of the products currently on the market here simply will not comply with the new rules, and a thorough understanding of what products are prohibited will be critical to developing a viable business plan as a cannabis manufacturing licensee.

 

 

California cannabis priority licensingAs part of our series on the initial rules implementing California’s Medical Cannabis Regulation and Safety Act (“MCRSA”), this post will break down the issue of “priority” in licensing – meaning, whose state medical cannabis license applications will be processed first once the licensing window opens early next year. Under the MCRSA, and pursuant to AB 266, at Article 4, Section 19321:

“In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.”

This language left us with a couple of questions, including how to define “operation” and “in good standing with the local jurisdiction.” But the Bureau of Marijuana Control provided answers to these questions in the proposed text of the regulations applicable to all medical marijuana license applicants and licensees. In keeping with, and expanding upon, the above statement from the MCRSA, the proposed rules state:

“Priority review of the application shall be given to applicants that were in operation and in good standing with the local jurisdiction by January 1, 2016, and whose business ownership or premises are currently the same as they were on January 1, 2016. Priority applications shall be processed for review in the order in which they are received.”

The rules define “operation” as the date on which the applicant began actively conducting the same commercial cannabis activity as the license type for which the applicant is applying. And for purposes of the rule, “actively conducting” means “engaging in the transportation, distribution, testing, or sale of medical cannabis goods as authorized by the local jurisdiction.” So if you merely had an entity formed by January 1, 2016, or were operating in contravention of local law, you will not qualify for priority review under the proposed rules.

To prove the date on which an applicant began actively conducting commercial cannabis activity, the applicant must attest to the date under penalty of perjury, and must provide evidence of the date operations began, which may include:

  1. Articles of incorporation;
  2. Certificate of stock;
  3. Articles of organization;
  4. Certificate of limited partnership;
  5. Statement of partnership authority;
  6. Tax form;
  7. Local license, permit, or other written authorization;
  8. Receipts; or
  9. Any other business record.

The proposed rules also provide clarification as to what an applicant will need to provide to show “good standing” with their local jurisdiction. Proof of good standing must be evidenced by a document issued or signed by the local jurisdiction that contains the following:

  1. Name of the applicant;
  2. Address of the premises to be licensed;
  3. License type that the applicant is applying to the bureau for;
  4. Name of the local jurisdiction;
  5. Name of the local jurisdiction office that issued the license, permit, or other authorization for the applicant to conduct commercial cannabis activity in the jurisdiction as required by Business and Professions Code section 19320;
  6. Name and contact information for the person authorized by the local jurisdiction to sign on its behalf;
  7. Signature of the person authorized to sign on behalf of the local jurisdiction; and
  8. A statement to the effect of: “The above named party has been issued a license, permit, or other authorization from this jurisdiction to conduct commercial cannabis activity. The above named party began operation and was in good standing in this jurisdiction on or before January 1, 2016.”

Of course, the proposed rules wouldn’t be complete without at least some ambiguity. The rules not only state that an applicant must have been operating and in good standing with the local jurisdiction prior to January 1, 2016, but also that the applicant’s “business ownership or premises are currently the same as they were on January 1, 2016.” We are still seeking clarification from the BMCR on this one, as it is unclear whether the entity structure and ownership must be exactly the same, whether a board member of a non-profit mutual benefit corporation could apply on behalf of that company, whether ownership doesn’t matter so long as the premises are currently the same as they were on January 1, 2016, etc. This provision leaves room for interpretation, and we anticipate having a better idea of what this requirement will entail by the time the rules are finalized.

Even though there is some ambiguity in the proposed rules, if you think you may qualify for priority review in licensing, now is the time for you to begin gathering your documentation to prove the date on which you began operating, as well as proof that you were in compliance with local law.

California cannabis cultivation license
California cannabis cultivation licensing procedures. Maze-like.

The Medical Cannabis Regulation and Safety Act (“MCRSA”) left us with many questions regarding how cannabis cultivation would be regulated. But now that the California Department of Food and Agriculture (“DFA”), through its CalCannabis Cultivation Licensing division, dropped 58 pages of proposed regulations for the Medical Cannabis Cultivation Program we have plenty of answers. Though these rules are not final, they provide us with the general framework for the forthcoming medical cannabis cultivation (and processing) licensing regime in California.

“Cultivation” means any activity involving planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. And “Processing” means all activities associated with drying, curing, grading, trimming, storing, packaging, and labeling of nonmanufactured cannabis products. The rules define “Nonmanufactured cannabis product[s]” as dried flower, shake, leaf, and pre-rolls intended to be sold for use by medical cannabis patients. Nurseries are also encompassed within the cultivation rules, and are defined as licensees that produce only clones, immature plants, seeds, and other agricultural products used specifically for the planting, propagation, and cultivation of medical cannabis. The rules governing cannabis manufacturing, including extraction and infusion, were developed by the Department of Public Health.

The DFA will offer 14 different cultivation licenses (including the initial application fee – a higher annual license fee will also be required), as follows:

  1. Specialty Cottage Outdoor ($65) – an outdoor cultivation site with up to 25 mature plants;
  2. Specialty Cottage Indoor ($100) – an indoor cultivation site with 500 square feet or less of total canopy;
  3. Specialty Cottage Mixed-Light ($285) – a mixed-light cultivation site with 2,500 square feet or less of total canopy;
  4. Specialty Outdoor ($130) – an outdoor cultivation site with less than or equal to 5,000 square feet of total canopy, or up to 50 mature plants on noncontiguous plots;
  5. Specialty Indoor ($1,070) – an indoor cultivation site between 501 and 5,000 square feet of total canopy;
  6. Specialty Mixed-Light ($555) – an indoor cultivation site between 2,501 and 5,000 square feet of total canopy;
  7. Small Outdoor ($265) – an outdoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  8. Small Indoor ($1,935) – an indoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  9. Small Mixed-Light ($1,105) – a mixed-light cultivation site between 5,001 and 10,000 square feet of total canopy;
  10. Medium Outdoor ($765) – an outdoor cultivation site between 10,001 square feet and one acre of total canopy;
  11. Medium Indoor ($4,260) – an indoor cultivation site between 10,001 and 22,000 square feet of total canopy;
  12. Medium Mixed-Light ($2,435) – a mixed-light cultivation site between 10,001 and 22,000 square feet of total canopy;
  13. Nursery ($60) – cultivation of cannabis solely as a nursery; and
  14. Processor ($310) – a cultivation site that conducts only trimming, drying, curing, grading or packaging of cannabis and nonmanufactured cannabis products.

The basic background and corporate information required for the cultivation license application will be nearly identical to the information required of applications for manufacturing, retail, distribution and transportation licenses. Once the application becomes available in early 2018, applicants will need to submit required background information on all owners. An “owner” is the CEO or any person or entity within a publicly traded company that has, in aggregate, greater than a 5% ownership interest and, for all other business entity applicants, “owner” means any individual who has, in aggregate, greater than a 20% ownership interest (excluding the ownership of a security interest in, lien on, or any other encumbrance of the business entity applicant). And if there’s a business that has an ownership stake of greater than 20% in the entity applying to the state, its CEO and all directors are considered owners. Finally, an individual is considered an owner if he or she participates in directing, controlling, or managing the applicant. This includes “discretionary powers” to, among other things, direct and/or control the hiring and firing of personnel, contracting for the sale of goods on behalf of the applicant, and making policy decisions on behalf of the applicant.

As with the other license types, if an owner is married, their spouse does not need to go through the rigorous background check process or get fingerprinted, so long as he or she is not an Owner of the applicant, as defined above, although the spouse must nevertheless be disclosed to the state.

Applicant owners will need to provide the state with a detailed description of any criminal convictions, excepting juvenile adjudications and traffic infractions. Cultivation license applicants must also provide a statement of rehabilitation for each conviction. This statement must be written by the owner and contain all evidence the application would like the DFA to consider that demonstrates the owner’s fitness for licensure. Such evidence may include a certificate of rehabilitation under Section 4852.01 of the Penal Code, or dated letters of reference from employers, instructors, or professional counselors that contain valid contact information for the person providing the reference.

With regard to the cultivation site, applicants must provide evidence that the applicant has the legal right to occupy and use the proposed location. If the applicant is the owner of the location, this evidence should include a copy of the title or deed to the property. If the applicant is not the owner of the property, the applicant shall provide the DFA with the following:

  1. A document from the property owner that states the applicant has the right to occupy the property and acknowledges that the applicant may use the property for commercial cannabis cultivation;
  2. Property owner’s mailing address and phone number; and
  3. Copy of the lease or rental agreement, or other contractual documentation.

All cannabis cultivation sites must be located at least a 600-foot radius from a school, as defined by Section 11362.768 of the Health and Safety Code. Applicants will also need to show they have a valid seller’s permit, or are currently applying for a seller’s permit, have obtained a surety bond in the amount of not less than $5,000, payable to the DFA, have permits issued by the applicable Regional Water Quality Control Board or State Water Resources Control Board (the rules contain very detailed requirements for proving that water for cultivation is properly sourced), and have conducted a hazardous materials record search of the EnviroStor database for the proposed premises, among many other requirements.

Importantly, applicants will also need to show that they are either operating in compliance with, or that their location will comply with, applicable local law, and that the necessary local permits and approvals have been obtained. With local regulations varying widely from city to city, and county to county, it will be critical to get a head start on ensuring local law compliance for your cultivation business.

The details on “priority status” can be found here, and for cultivation businesses that do not meet the requirements for priority status, but were operating prior to January 1, 2018, the state will provide a grace period for operations during the license application status. If a cultivation business was in operation prior to January 1, 2018, it may continue to operate while its application is pending if a completed application is submitted to the DFA no later than 5:00 pm PST on July 2, 2018, and the continued operations of the applicant are the same activities in which the applicant is seeking licensure. If the license application is denied, the applicant must cease operating until a license is obtained.

The DFA will not restrict the total number of cultivation licenses a person is authorized to hold, so long as that person’s total licensed canopy does not exceed 4 acres. Unless a person has a Producing Dispensary license, that person shall be limited to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license. Additionally, the rules state that multiple cultivation licenses and license types may be located on the same property, but each licensed premises must have a unique entrance and immovable physical barriers between each uniquely license premises.

We’ll be delving more deeply into the additional requirements for cannabis cultivation licenses in the coming weeks, including operational and site requirements. And we’ll also be breaking down the rules for cannabis transportation, distribution and retailers in a forthcoming post.

Stay tuned.

Cannabis licensing dealsAs we wrote a few days ago, the Washington State Legislature recently passed SB 5131, which updates Washington’s cannabis laws and includes a provision that explicitly addresses licensing agreements. The bill has yet to be signed by Washington Governor Jay Inslee, but we are nevertheless exploring what the implications of these new regulations will be for our clients with existing and pending intellectual property licensing deals.

Section 16 of the bill reads as follows:

Sec. 16.   A new section is added to chapter 69.50 RCW to read as follows:

  • A licensed marijuana business may enter into a licensing agreement, or consulting contract, with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation, for:
    • Any goods or services that are registered as a trademark under federal law or under chapter 19.77 RCW;
    • Any unregistered trademark, trade name, or trade dress; or
    • Any trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to a marijuana business,
  • All agreements or contracts entered into by a licensed marijuana business, as authorized under this section, must be disclosed to the state liquor and cannabis board.

On its face, this provision does little to change things for those with existing licensing deals, except that those deals will now need to be disclosed to the licensee’s enforcement officer. But the provision does validate the position that these types of licensing agreements were permissible under the rules all along, which provides some level of security to the parties as to the legitimacy of the contracts.

The big question that remains unanswered is whether the State’s acknowledgement of the permissibility of “licensing agreement[s]” is also an acknowledgement of the permissibility of standard trademark licensing practices, including royalties. Currently, it is impermissible under the rules for a licensor to receive a royalty based on sales or profits from a licensee, where that licensor has not been vetted by the Liquor and Cannabis Board (LCB) as a true party of interest. Undisclosed true party of interest relationships are grounds for license cancellation by the LCB, so it’s important to structure these deals so they do not implicate Washington’s true party of interest rules when dealing with an out-of-state licensor, or a licensor that simply would not meet the state’s requirements.

Even if state cannabis law reform in Washington makes the state law compliance piece of any trademark licensing deal more straightforward, these deals are still by no means as cut and dry as your typically IP licensing deal. Ownership of IP in the cannabis industry remains a tricky issue, in large part because the USPTO will not issue federal trademark registrations for cannabis-related marks. Cannabis companies routinely come to us with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it purports to own. As a refresher, if you are looking to get a license for another company’s IP, here are the most basic questions you should be able to answer about that other company and its IP:

  • Does the licensor own any federal trademark registrations?
  • If so, what goods and/or services do those trademark registrations cover?
  • Was the description of goods and/or services filed with the USPTO accurate and true? Were there possible misrepresentations?
  • Are the trademark registrations based on actual use, or upon intent-to-use?
  • What representations and warranties is the licensor making (or, often more importantly, not making) regarding the marks?
  • If the licensor doesn’t own any federal trademark registrations, is it licensing someone else’s trademarks?
  • Does the licensor have a master licensing agreement? Do the terms of any proposed sub-licensing agreement mirror that master licensing agreement?
  • What quality control standards will you be held to by the trademark owner? Could these standards amount to impermissible control over a licensee under Washington’s cannabis rules?
  • Has the trademark owner warranted to keep all USPTO filings up-to-date?
  • Does the licensor own any state trademark registrations?
  • If so, has the licensor made lawful use of its mark in commerce in the state of registration?
  • Does the licensor have any common law trademark rights? Can the licensor even legally acquire common law trademark rights in your jurisdiction?

This is a substantial list, but it only scratches the surface of the issues you and your cannabis IP counsel must consider before you enter into any IP licensing deal. Parties are often quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist. Just as with any other type of property, like a house or a car, a licensor of intellectual property must actually own the rights to that property to be able to confer those rights to another party. Seems basic, but it’s truly shocking to see the deals we’ve seen put together by attorneys who either do not know cannabis or, more often than not, do not know the intricacies (or even the basics) of intellectual property law.

Though cannabis IP licensing deals remain complicated, it’s encouraging to see the Washington State Legislature acknowledge and condone their existence. We’ll be following this bill closely to see whether its passage results in any changes to the current difficulties surrounding a royalties-based payment structure.

So stay tuned.

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.

 

 

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.

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.

 

 

Cannabis trademark lawyersWith so much discussion surrounding the difficulties of obtaining trademark protection for cannabis-related marks, it’s easy to forget that the battle isn’t over when a registration issues. Even after you have completed the onerous process of prosecuting your trademark application, there is no automatic guarantee that others won’t attempt to use your mark, or a confusingly similar mark. Enforcing your trademark requires constant monitoring to ensure that others are not infringing your mark.

Although the USPTO will vet your application against marks that have already been federally registered, and will issue your trademark registration, they will not actively monitor or seek out infringers, nor will they prosecute infringers. Monitoring for and prosecuting infringers is your job, as the trademark owner. There is nothing stopping other companies from adopting your name, or a variation on your name, for their own use. They may not be successful in securing a federal trademark application due to likelihood of confusion with your mark, but they can continue using the mark until someone makes them stop.

Vigilance on the part of a trademark owner is key to preventing infringement. Here, we’re including some basic tips for monitoring potential infringers of your mark.

First, regularly search the Internet. This is common sense. Perform Google searches for your trademark, and for your logo if you have one. Google Alerts comes in handy here as well. Set up an automated search and receive email alerts every time new pages containing your mark are indexed.

If you really want to delve into things, search the Trademark Electronic Search System (TESS) on the USPTO website. This search engine allows you to search the USPTO’s database of registered trademarks and pending applications to find marks that may be similar to yours. Pending applications may give you some insight into companies that are using or attempting to use marks that are similar to or the same as your own. For additional information on searching the USPTO’s database, which can get a bit complicated, go here.

Aside from self-monitoring, there are many companies and law firms that provide trademark monitoring services for their clients. These companies conduct regular monitoring searches for your mark.

And of course if you do encounter a company you believe to be infringing your trademark, you should contact a cannabis IP attorney right away. An experienced IP attorney can walk you through your options for dealing with an infringer, including cease and desist letters, settlement negotiations, and litigation.