Cannabis litigationIn a 1970s TV commercial, the Fram oil filter pitchman observed that it is cheaper to change your filter than to rebuild your engine: “You can pay me a little now. Or you can pay him (expensive engine rebuilder) a lot later!” This auto maintenance rule also applies to your cannabis business in the area of intellectual property (IP) litigation. Today’s post is on avoiding expensive IP  litigation later by doing preventative maintenance on your IP now.

The first step to protect your IP is to know that you have it. You may not realize it, but almost every cannabis business has one or more of these kinds of IP assets: trademarks, copyrights, trade secrets, or patents. Even if you’ve never registered your IP, you almost certainly have some combination of the first three IP types, which don’t require registration. But just like your oil filter, you can’t maintain it if you don’t know it is there.

Once you know what you have, the next step is to protect it. Each type of IP is protected differently. Here is an overview that will fit in your glove compartment:

  • Trademarks: Trademarks protect brand names, e.g., “FlyBoy Cannabis,” that signify you as the source of the goods and services you offer. Although trademark rights are established by use of the trademark, not registration, you should still register your trademark with state trademark office(s), and the federal trademark office in some cases. Once you’ve registered your trademark, you should tell the world this is your trademark. Using ® is a good first step, but you should also establish a trademark use policy so that your customers consistently link you with your products. Registering your mark makes it easier to protect your brand in court, and will give notice to infringers that your brand belongs to you.
  • Copyrights: Copyrights protect the expression of a creative idea in a tangible form, not the idea itself. Your copyright applies as soon as your creation goes from your mind into a tangible form, such as writing an article on your computer or creating a CAD drawing of your design. You should take steps, including using the ©, to identify your work as yours. You should also register with the U.S. Copyright office (don’t bother sending your content to yourself in certified mail). As with trademarks, copyright registration gives you increased protection over your rights. Being able to threaten a lawsuit can be a powerful incentive to convince an infringer to stop instead of litigate.
  • Trade secrets: Trade secrets are commercial information, including technical and business information, which give you a competitive edge because they are not publicly known. For example, your confidential process for extraction could be a trade secret, so long as it cannot easily be “reverse engineered.”  The most important step to protect trade secrets is to keep them secret. However, you will likely need to share trade secrets with your own employees, and also with others outside your organization with whom you do business. Thus, nondisclosure agreements are one important feature of a trade secret policy. Depending on your business, you may need to take other steps as well. By the way, you can’t “register” a trade secret.
  • Patents: Although plants are generally patentable, the U.S. Patent Office traditionally refused to patent DEA Schedule I cannabis plants, though this appears to be changing. But many other inventions that can be used with cannabis could be patentable, such as vaporizers, smoking devices, and test equipment. An inventor has no patent rights until he or she files a patent application with the federal patent office (there are no state patents), and these rights won’t be enforceable, if at all, until the patent is granted, usually several years later.

Consider this article a free oil filter for your cannabis business.

 

Cannabis litigationOne of the unfortunate byproducts of cannabis legalization is cannabis litigation. With each passing month of legalization in the states in which our cannabis lawyers operate (California, Oregon and Washington) we see an increase in disputes. The most common cannabis litigation matters are disputes about medical and recreational grows, disputes between former business partners now going their separate ways, disputes between employee and employer, and cases involving cannabis intellectual property. This is the first in a series of posts I will be writing on cannabis litigation.

Today’s topic is criminal law, which to at least some extent, can permeate civil litigation involving any cannabis business. Criminal law is important in civil cannabis cases because conduct that is perfectly legal under state law may well be illegal under federal law. The risk of federal criminal liability means that a cannabis litigator in a civil case should at least consider whether to rely on the 5th Amendment privilege against self-incrimination, which can be asserted in in civil proceedings or in connection with oral testimony, pleadings, or requests to produce documents.

How do evaluate whether to take five, i.e., assert the 5th Amendment? Here is an overview of the three main legal issues to help you analyze whether associating criminal counsel is appropriate in your civil law matter.

1. Prior statements in a civil cannabis case could be admissions of criminal activity in another case: A large part of every civil case is explaining the facts which support your claims, and which contradict your opponent’s. A civil litigant will make statements about facts in her pleadings, in discovery before trial, or in testimony at trial. You should assume that almost anything a litigant or her lawyer says about facts in a civil case will be admissible in a later criminal proceeding, even if the statement is not made under oath. An example might be the opening allegation in a complaint against a business partner in a grow: “Pursuant to an agreement, plaintiff and defendant worked together to cultivate cannabis crops, which they intended to be sold, and did sell, pursuant to this state’s recreational cannabis laws.” Right there you are probably admitting that you violated federal criminal drug laws.

2)         Does testifying to potentially incriminating facts in the civil case waive the privilege? Courts have held that  waiver of the 5th Amendment privilege in a civil case will not waive the privilege in later criminal proceedings. But the practical effect of this principle is limited. Though a defendant who has waived her privilege in a prior civil case could testify in a later criminal case, any prior incriminating statements she made in the civil case can be used against her, even without her testimony.

3)         Risks of asserting the privilege in the civil case: In a criminal case, the fact finder may not infer that a defendant is guilty because she asserted the 5th Amendment. In civil cases, however, a jury may draw negative inferences against a party who declines to testify by relying on the 5th Amendment. So, a lawyer in the civil case might argue to the judge or to the jury: “Plaintiff claimed privilege when asked whether she grew cannabis. Doesn’t this suggest she did grow cannabis?”

Knowing and evaluating the legal issues is only the first step in deciding whether to assert the 5th Amendment. The more difficult next step is forecasting whether a prosecutor—now or in the future—will choose to bring criminal charges for conduct legal under state law.

In part 2 of my series on cannabis litigation I will discuss how early registration of trademarks and copyrights and protection of your trade secrets can help you both avoid litigaiton and prevail should it nonetheless be unavoidable.

California cannabis commercial leaseA contract isn’t worth much without your being able to enforce it, and the same goes for commercial leases. We’ve written about unique problems in cannabis contracts due to the state-vs-federal illegality problem (see here, here, here) and of how courts have navigated that inconsistency in the context of contract enforcement. But when it comes to commercial cannabis leases in California, landlords and cannabis companies alike want to know how likely it is a court will enforce their lease. The short answer: it’s much likelier now than five years ago.

The main challenge with California commercial cannabis leases, as with all cannabis contracts, goes back to the problem of federal illegality. Because cannabis is still federally prohibited under the Federal Controlled Substances Act, it is federally illegal to cultivate, manufacture, or sell cannabis for any purpose. This means cannabis contracts trigger the doctrine of illegality in contract law, which holds that contracts without a lawful object are void and unenforceable as against public policy. Though enforcement of contracts is generally governed by state law, state law includes federal law under the U.S. Constitution’s Supremacy Clause.

Courts have struggled with how to reconcile the different laws, but a consistent theme emerges in California court decisions: commercial cannabis lease agreements will generally be enforced so long as the dispute before the court is purely contractual and so long as the landlord and tenant are in an arms-length transaction for payment of rent. One infamous example of this is the Harborside case, where a U.S. District Court declined to void a commercial lease for a cannabis dispensary on grounds of illegality, where the dispensary was in compliance with California law.

Another more recent example is Mann v. Gullickson, a November 2016 Northern District of California decision involving a dispute between a creditor plaintiff who sold shares in two cannabis businesses to the defendant in exchange for a promissory note. When the creditor sued for nonpayment under the promissory note, the defendant argued federal illegality rendered the contract (the promissory note) unenforceable. Though the court acknowledged it could void a contract if it required a party to violate the CSA by, for example, requiring it to cultivate or sell cannabis, for several reasons, the court declined to do so in this case.

First, the fact that the court could order payment on the note without requiring any cannabis-related actions meant that enforcing the contract would not necessarily further an illegal purpose. Second, even if an illegal purpose were to be furthered, the court found it would be inequitable for the defendant to be unjustly enriched by not having to pay on the promissory note. Third, the court noted that many states, including California, had recently changed their laws to encourage state-legal cannabis business activities, thereby undercutting the defendant’s public policy argument. Fourth, and most interestingly, the court called out the observed effect of changing state laws on federal enforcement: “The federal government’s concern over the CSA’s medical marijuana prohibition has waned in recent years, and the underlying policy purporting to support this prohibition has been undermined.” The court also noted that under the McIntosh case, the Rohrabacher-Farr amendment prohibits CSA enforcement against medical marijuana in the Ninth Circuit (the federal appellate circuit that encompasses California).

The lesson to be drawn from these cases for California commercial cannabis leases is that cannabis leases should be written to keep the landlord-tenant relationship as an arms-length transaction. This means no profit-sharing arrangements, no payments in cannabis product, and no equity shares changing hands; just payment of rent. Ultimately, the best way to avoid enforcement problems for your California commercial cannabis lease may be to include a well-drafted arbitration clause that specifies choice of California state law, among other things, as that can to a large extent side-step the issue of court enforcement, at least until you need to get your arbitration award enforced by a court.

To help you better understand what is going on with California cannabis and what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on Tuesday August 8, 2017, from 12 pm to 1 pm PT. Hilary Bricken from our Los Angeles office will moderate two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a discussion on the major changes between the MCRSA and MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. They will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us.

Our Oregon lawyers have been fielding many questions regarding a recent civil RICO complaint filed in the federal court in Portland, Oregon styled as McCart v. Beddow et al. This case was filed on the heels of the Safe Streets decision out of Colorado that we discussed recently, and was clearly heavily influenced by that decision. You will recall that in Safe Streets, the Tenth Circuit allowed a private civil RICO action by a neighbor of a cannabis grow operation to survive a motion to dismiss.

As a reminder, RICO is a federal statute that provides for a civil cause of action for acts performed as part of an ongoing criminal organization (in addition to criminal penalties). It has become fashionable for meddlesome neighbors to bring these lawsuits against cannabis operators and their business affiliates. Because RICO complaints sound in federal law and implicate supply chain defendants, these cases differ from your ordinary nuisance-and-tresspass actions, which pursue only the marijuana grower itself, and also have been recently brought against Oregon marijuana growers.

Though McCart shares many similarities to the facts in Safe Streets, it is the differences that make things interesting. These differences let us tease out a couple of lessons for other cannabis companies seeking to avoid a similar lawsuit.

Oregon Cannabis First the similarities: Plaintiffs in both suits are bringing RICO claims against neighboring cannabis grow operations and alleging direct injuries to plaintiffs’ properties in the form of noxious odors that allegedly reduce property values. They also allege the mere presence of a “criminal enterprise” next door decreases property values.

But McCart is not Safe Streets. Taking the McCart complaint on its face, the direct operators of the neighboring grow operation are alleged to have gone out of their way to intentionally provoke the Plaintiffs at every turn. This isn’t just a case about noxious odors and neighboring criminal enterprises (although it is that); rather, the Plaintiffs are asserting this case is the culmination of a bitter dispute between neighbors in which cannabis is more of an extra than a star.

Specifically, the McCart Plaintiffs allege that:

  • The defendant cannabis growers menaced Plaintiffs and “made obscene gestures” and “screamed obscenities” at Plaintiffs;
  • The grow operation increased traffic on a shared driveway by an excessive amount;
  • The Defendants caused direct injuries to the property by leaving tire tracks on Plaintiffs’ property;
  • The Defendants revved their car engines when they saw Plaintiffs outside;
  • The Defendants “discharge firearms for extended periods”;
  • The Defendants frequently “blast the air horn of their dump truck”;
  • The Defendants damaged the shared driveway and at times blocked it; and
  • The Defendants littered on Plaintiffs’ property.

Whether these allegations are true will be Plaintiffs’ burden to prove. However, two immediate lessons come to mind:

Lesson 1: To paraphrase Wil Wheaton: don’t be a jerk. Be a good neighbor. If the McCart allegations are true, the behavior of these growers reflects poorly on the entire industry. If you want to be treated like a serious business, act like one. Recognize the precarious legal situation afforded by inane prohibition policies, and strive to be ideal neighbors.

Lesson 2: Control the odors. The Safe Street court found that the cannabis smell released by the Colorado grow op was enough to assert a claim for RICO damages. You should do everything you can to minimize odors on your businesses.

But what about the other McCart defendants?

Like in Safe Streets, the McCart plaintiffs seem to have sued everyone even tangentially related to their hated neighbors, including cannabis dispensaries that just happened to stock the neighbors’ products. These “Dispensary Defendants” are probably in much better shape than the growers.

A civil RICO claim under 18 U.S.C. Section 1962(c) (at issue in both Safe Streets and McCart) requires a plaintiff prove:

  • The existence of an enterprise affecting interstate or foreign commerce;
  • The specific defendant was employed by or associated with the enterprise;
  • The specific defendant conducted or participated in the conduct of the enterprise’s affairs;
  • The specific defendant’s participation was through a pattern of racketeering activity; and
  • Plaintiff’s business or property was injured by reason of defendant’s conducting or participating in the conduct of the enterprise’s affairs.

In Reves v. Ernst & Young, the US Supreme Court held that the language of 1962(c) requires the defendant have “participated in the operation or management of the enterprise itself.” (page 183). There are a few out of jurisdiction cases that have held that mere business relationships and supplier-purchaser relationships are insufficient to establish RICO liability, even with knowledge of the illegal activity. If you are curious, take a look at In re Mastercard Intl. Inc., (page 487) and Arenson v. Whitehall Convalescent & Nursing Home, Inc. It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.

Though there is a dispensary defendant in Safe Streets, the Tenth Circuit appears to have found the conduct requirement was met because the Safe Streets defendants admitted they all “‘agreed to grow marijuana for sale’ at the facility adjacent to the [plaintiffs’] property.” The Safe Streets dispensary defendant was directly involved in operating the specific grow operation at issue. This is not the same thing as an innocent dispensary accepting product from a third-party farm.

We will be watching this case and reporting back if anything of importance breaks, but in the meantime, it never hurts to be a good neighbor, and to take steps to minimize odors.

California cannabis leaseWe’ve written previously on arbitration and why it so often makes sense for cannabis business contracts, primarily because of enforceability issues stemming from cannabis being illegal under federal law. But in the realm of commercial real estate leasing, cannabis uses can present other unique challenges that require thoughtful solutions to disputes, and, more importantly, thoughtful planning to prepare for potential disputes down the road.

Below are some of the issues our California cannabis lawyers typically consider when anticipating how to draft dispute resolution clauses for commercial cannabis leases.

  1. Enforceability of the lease and the arbitration award. Federal illegality of cannabis impacts all cannabis business transactions. Though the Federal Department of Justice has issued cannabis enforcement guidelines in the Cole Memo (and every cannabis-touching lease agreement should include language mandating compliance with these guidelines), this does not guarantee against federal civil asset forfeiture or other federal enforcement actions. Another consequence of federal illegality is that cannabis companies must consider what recourse they will have in enforcing their contracts and account for federal district courts being unwilling to enforce any such contract. For this reason alone, it will nearly almost always be better for you to have your disputes resolved in a California state court that will be far more likely to apply and enforce California state cannabis laws. California state courts can also apply federal law, but because there is often a risk of your case being removed to federal court you should always consider putting an arbitration clause in your cannabis commercial leases, specifying the arbitral body, limiting how the lease and the arbitration award can be enforced (confining it to state courts, perhaps) and limiting potential appeals.
  2. Choice of law. We’ve written about how California commercial cannabis landlords (and tenants) should consider beefing up their lease’s indemnity provisions, allowing for early termination in the event of enforcement actions, disallowing federal illegality as a grounds for invalidating the lease, and generally requiring strict compliance with California state law for the specific proposed cannabis use. For similar reasons, arbitration clauses can include a mandate that the arbitral body apply state law and the California Arbitration Act, and not, for example, the Federal Arbitration Act, which allows an award to be vacated where the arbitrator “manifestly disregards the law.” It is not difficult to imagine a scenario where a federal court vacates an arbitral award for an arbitrators having failed to apply the Controlled Substances Act or void the cannabis lease ab initio. California arbitration clauses should, at minimum, specifically outline 1) the method for choosing the arbitrator, 2)  the laws the arbitrator must apply in resolving the dispute, and 3) the standard of review any reviewing court must apply. For many California real estate transactions, the arbitration clause should also include specific statutory notice language.
  3. Carve-outs for Unlawful Detainer, Nonpayment, and other Early Termination Causes. Though arbitration can be a highly useful tool, landlords will also want to maintain their ability to seek remedies for nonpayment of rent and unlawful detainer (eviction) without having to go through the arbitration process. Similarly, if a tenant faces a state or federal enforcement action, the landlord (and even the tenant for that matter) will likely want to maintain its ability to terminate the lease quickly and without arbitration. The parties to a California commercial cannabis lease should always consider carving out exceptions to arbitration to keep options open and to encourage timely performance of the lease.
  4. Arbitrator’s industry expertise. California arbitrators tend to be retired California state court judges and the changes of this sort of arbitrator having deep knowledge about the cannabis industry or cannabis laws are not good. But spelling out the arbitrator selection process in your commercial lease agreement (or even naming the specific arbitrator or arbitrators) can allow you to make certain your arbitrator has sufficient cannabis industry knowledge to understand any eventual dispute.
  5. Consider making mediation the first step. Arbitrations can be expensive and their outcomes uncertain. So instead of drafting a commercial lease agreement that requires you to jump right into that process whenever a dispute arises, consider making private mediation a mandatory first step before a demand for arbitration can be made.

Though every commercial lease dispute is unique (even more so for cannabis commercial leases), there are common themes and one is that private dispute resolution tends to work best for disputes between cannabis businesses.

Washington State cannabis lawsAs Washington’s cannabis industry continues to develop, marijuana businesses continue to face new challenges. And with an ever growing number of consumers buying and using marijuana the risk of lawsuits against those who produce or sell cannabis keeps growing as well. Under what is called product liability law, manufacturers, distributors, suppliers, retailers, and others who make products available to the public can relatively easily be held liable for any injuries those products cause. Cannabis business owners must be mindful of product liability lawsuits arising from the cannabis products they make or sell.

In Washington State, product liability law is codified in the Washington Product Liability Act (WPLA), which broadly applies to virtually any injury claim resulting from a product covered under this act. The WPLA distinguishes between product manufacturers and non-manufacturer sellers. Washington’s marijuana market is divided between businesses who grow and process cannabis and businesses that sell the product to consumers. Manufacturers, for WPLA purposes, are the licensed producers that grow cannabis and turn that cannabis into edibles, extracts, concentrates, and other marijuana products. Non-manufacturer sellers are retailers that sell marijuana to consumers. A business can hold a license to produce and process marijuana but it cannot also have any ownership interest in a retail business. In turn, a retailer may have not an ownership interest in a cannabis producer or processor.

A product manufacturer is subject to liability under the WPLA if it was negligent or failed to provide proper warnings or instructions or if the product was not designed as reasonably safe. A plaintiff can show negligence by proving the manufacturer owed a duty to the plaintiff, the defendant breached that duty, and the breach caused the plaintiff damages. A plaintiff can prove a manufacturer failed to provide an adequate warning by showing that a product’s warning or instructions were not likely to notify the consumer of the potential harm and the manufacturer could have provided instructions or warnings that would have been adequate. A plaintiff can show that a product was defectively constructed by establishing that “when the product left the control of the manufacturer, the product deviated in some material way from the design specifications or performance standards of the manufacturer, or deviated in some material way from otherwise identical units of the same product line.” Finally, a plaintiff can prove that a product lacked adequate warning and was designed defectively if the product “was unsafe to an extent beyond that which would be contemplated by the ordinary consumer.”

Washington’s robust marijuana regulations may provide producers and processors with some safeguards against claims brought under the WPLA.  Producers and processors may present evidence of compliance with Washington’s extensive cannabis laws and regulations as a defense to a product liability lawsuit. However, compliance with these state law cannabis standards does not automatically bar products liability claims as it is still possible the state required warnings or acceptable standards for growing and processing are inadequate.

Under the WPLA, non-manufacturer sellers can be liable in some scenarios, but simply selling a product that eventually leads to injury does not by itself establish liability. This means that retailers have a lower risk of being subject to product liability than a manufacturer because they do not manufacture the products they sell. However, a retailer may be liable to an injured consumer if the consumer’s harm was caused by the seller’s own negligence by the breach of a warranty made by the seller, or by a seller’s intentional misrepresentation of facts about the product it is selling. A seller may also be liable if there is no financially solvent manufacturer. Because many producers and processors do not have the funds or the insurance to pay off on large (or even not so large) product liability lawsuits, even cannabis retailers in Washington State need to be wary of product liability lawsuits.

Marijuana businesses operators can reduce their product liability risks by doing the following:

  1. Set up your cannabis business so as to protect yourself from personal liability. See Cannabis Businesses And Corporate Separateness and Cannabis Business and Corporate Separateness, Part II
  2. Vet the businesses with which you conduct business and, in particular, seek to ensure they are complying with applicable regulations and industry standards. See Buying a Cannabis Business: The Top Five Due Diligence Items or Buyer Beware.
  3. Draft your contracts so that vendors must indemnify you for any damages arising from their defective product.
  4. Use appropriate packaging and warning labels on the products you sell. See Cannabis Products and Dosing: Educate, Educate, Educate and Label, Label, Label and Pot Puppies? Let’s Talk Labeling and Packaging. NOW.
  5. Get good insurance for your business. The LCB requires cannabis licensees carry and maintain commercial general liability insurance, but you should also consider adding additional insurance to cover potential product liability lawsuits.

TIPSA couple of years ago, I wrote on this blog that we are never not litigating cannabis disputes. As a direct result, we have written dozens of articles on the subject. This year and next, as the adult use market expands into key states like California, the sheer number of cannabis businesses coming online will result in a further expansion of contested matters. We wish that were not the case, but we have been staffing up our Oregon, Washington and California office with litigators, partly in response to growing demand for cannabis dispute resolution services.

Some cannabis business disputes are short and sweet; others protracted and difficult. Common sense would dictate, and we have always found, that the more efficient and disciplined a litigant is, the better the result, from both a cost and results perspective. The most efficient litigants are those who work closely with counsel to take responsibility for their case, set a goal at the outset, and keep that goal in mind throughout the process.

Here are five tips for working with an attorney to resolve a cannabis business dispute.

Hire the right attorneyAs much as we hate to say it, it is easy to hire poorly in the context of cannabis disputes, for a couple of reasons. First, many lawyers who work in this industry come from a criminal law background and rode the wave into legalization. Much like a business attorney would struggle in drug court, attorneys who lack business law experience are ill equipped to handle corporate cannabis beefs. Second, many good business litigators are still unwilling to service the industry, given the status of federal law. And third, many business litigation firms that do wish to work with the industry are new to cannabis law and its steep learning curve. Most cannabis disputes have significant underpinnings of state and local administrative law and policy. These rules run into the several hundreds of pages, are constantly evolving, and generally are supplemented by unwritten agency policies. Even the brightest non-industry lawyers incur significant time and client expense just getting up to speed.

Be Organized. The most critical client-side component to any litigation is organization. When you hire a lawyer, assemble any and all relevant materials in one place (contracts, emails, voicemails, texts, etc.), and transmit these materials in aggregate to the attorney. Supplement them, if you can, by a chronology and/or written summary of your case. This will save the attorney significant time and energy in assembling the facts of your dispute, and will result in less back-and-forth from the attorney attempting to elicit information he or she may need for your case.

Put all of your cards on the table. Don’t shield any information from your attorney that you find embarrassing, or that you think is less compelling than other facts, or that you feel may damage your case. You should feel incentivized to pass along anything relevant, or even possibly relevant, for four primary reasons: (1) everything you pass along will be protected by the attorney-client privilege; (2) anything damaging will almost certainly come out at depositions or elsewhere in the discovery process, anyway, and is best dealt with beforehand; (3) when an attorney lines up the facts of your case with the legal elements of potential claims, minor facts, which you may not find compelling, tend to come out of the woodwork and play a significant role; and (4) trust us, we have seen worse.

Step back. Throughout the arc of any litigation, there will be a volley of correspondence, filings and other developments between the parties – shots across the bow. When a development occurs, you may feel a very strong urge to immediately pick up the phone and offer an extended hot take on the latest item. Most of the time, these conversations are less productive than if both litigant and attorney allow the new information to percolate in advance of a structured conversation. The one exception here is any development that truly requires immediate action, and those developments are rarer than many people think. We realize that stepping back is easier said than done, but taking a measured approach throughout the arc of a contest preserves energy and controls costs. Think of litigation as a marathon, not a sprint.

Be Realistic. As attorneys, we like to think we excel at getting efficient, advantageous results for our clients. And we generally do, within the realm of the possible. For example, we may be able to recover your costs or attorney fees in litigation, but only if you have a contractual or statutory basis for doing so. Similarly, we may be able to resolve a dispute with a strong letter or a well-written complaint, but only if the other side is acting rationally. Understanding the strengths and weaknesses of your position will lead to a realistic appreciation of the gamut of possible outcomes. At that point, you and your lawyer can maximize every tool at your disposal to pursue, and attain, the best possible result.

 

Cannabis attorneysThe owners of a vineyard in Yamhill County, Oregon, filed a lawsuit in April to block a neighboring property owner from using his land to grow and process cannabis. The plaintiffs alleged that the odor and runoff from the cannabis farm will negatively affect their grapes and claim to have already lost one buyer. Another neighbor, who has plans to turn its property into a vineyard as well, has joined the lawsuit.

The case is interesting because it is in response to a novel fact situation that has not been the subject of much real-world study or legal precedent.

The idea that the odor of cannabis plants could materially alter the quality of grapes in an adjacent parcel of land is a significant divergence from more typical odor-related lawsuits that allege a neighbor’s cannabis activities create a nuisance. Those lawsuits have sometimes succeeded, but in this instance the trier of fact will need to determine whether there actually is an impact on the grapes. Though the plaintiffs say they have already lost a buyer, it is unclear whether that was because the buyer speculated there could be an impact on the grapes or whether there was in fact such an impact. The case has not gotten far enough along for discovery to reveal exactly what kind of evidence the plaintiffs actually have.

As for the cannabis farm owner, he states that he can grow cannabis on his property without seeking permission because it is zoned for that kind of agricultural use and because he is following all rules and regulations. He also asserts that he uses cannabis processing techniques to minimize the smell from his property.

Depending on the results of this case, the issue of adjacent cannabis farms and wine vineyards may be an issue for the Oregon state legislature. Both the cannabis and wine industries are important components of Oregon’s economy and there is significant overlap between locations.

The lawsuit was filed in Yamhill County earlier this week so there is a long way to go for it to reach resolution. If it goes to trial, the court’s reasoning when it comes to the interaction between the two crops and the relationship with their owners’ property and economic rights could be instructive for similar conflicts in the future. We will keep an eye on this case and update you as the lawsuit progresses.

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.

tenth-amendmentYesterday, we wrote about the various ways that enforcement of federal cannabis laws could ensue, if the current administration were bullheaded enough to attempt such a thing. The day before, we wrote about the Washington State Attorney General’s promise to fight any potential enforcement action. Today, we offer a brief primer on what rights the states may have to uphold their medical and recreational marijuana programs in the face of federal enforcement action. The answers may surprise you.

As a baseline matter, it is imperative to note that Article VI, Clause 2 of the U.S. Constitution declares that federal law is “the supreme law of the land,” preempting conflicting state laws. This means—and courts have confirmed—that if the federal government wants to enforce its draconian marijuana laws by targeting specific actors, it can, and states cannot stand in the way. However, if the federal government wants to force states to shut down their marijuana programs, or to use state resources to enforce federal law, it probably cannot.

The constitutional question that will determine the outcome of any lawsuit to invalidate state cannabis laws, whether for medical or recreational marijuana programs, is whether those state laws impermissibly conflict with the federal Controlled Substances Act (CSA). Another way of asking this would be: “Does the federal CSA ‘preempt’ state cannabis programs?” Given the plain language of the CSA, we think the answer is “no.”

Section 903 of the CSA includes express anti-preemption language:

No provision of this subchapter shall be construed as indicating an intent on the part of Congress to occupy the field in which that provision operates, including criminal penalties, to the exclusion of any State law on the same subject matter which would otherwise be within the authority of the State, unless there is a positive conflict between that provision of this subchapter and the State law so that the two cannot consistently stand together. (Our bold emphasis.)

What would a “positive conflict” with state law be? It may sound funny, but a positive conflict might consist of a state law requiring a citizen or state official to possess or distribute marijuana. Such a law would almost certainly violate the CSA. But, state marijuana programs that only permit individuals to traffic in federally controlled substances—because states do not proscribe them—make no such requirement. Think about it: anyone in Oregon, Washington, California, or any other state with a cannabis program, is free to ignore these state programs and follow federal law.

This begs the question as to whether the federal government could require states to shut down their programs, and assist in enforcing its horrible laws. Again, we think the answer is “no.” The Tenth Amendment to the Constitution serves as a constitutional check to the Supremacy Clause. The Tenth Amendment provides that the federal government cannot “commandeer” states by forcing them to enact laws in the federal interest, or to enforce federal laws whatsoever. In the context of cannabis, this means that neither Congress nor any federal actor can require states to enact or maintain laws prohibiting the cultivation, distribution or intra-state sale of pot.

The upshot here is that the Tenth Amendment, coupled with the express, anti-preemption language of the federal CSA, grants the states authority to run cannabis programs. This paradigm gives the states a strong argument in any potential lawsuit by the feds seeking to shutter those programs. Thus, the extremely tall and unpopular task of chasing state-approved pot merchants, would be left to the resource-poor federal government. And if the federal government really wants to go there, well, we’re in for another kind of fight.