We’ve written extensively about the potential pitfalls of intellectual property (“IP”) licensing deals, which are prolific within the cannabis industry. (For a few select articles, try here, here and here). Recently, news broke of another licensing-related lawsuit, this time involving Tommy Chong. According to the lawsuit, Chong and his son allegedly conspired to steal profits from Evergreen Licensing LLC. The complaint seeks damages for breach of contract, fraud and unjust enrichment.
The complaint alleges that after three years and $1 million spent on the project, Chong and his son conspired to “take it all away, even hacking into Evergreen’s Gmail account in order to misappropriate social media sites that plaintiffs created for the project.” The plaintiffs further allege that they were cut “entirely out of the picture, the project and the revenue and profits the project was going to generate and is generating.” It all sounds pretty unfair.
Unfortunately, these types of allegations come as no surprise given some of the proposed deals that have come across our desks. IP licensing is often seen as a quick and easy way to enter the marijuana industry, without having to clear the hurdles of state and local licensing and regulatory compliance. But unfortunately, this simply is not the case. These deals are complicated and fraught with unique cannabis-related issues beyond those posed by state and local regulations.
In addition to regulatory compliance, those contemplating a cannabis-related IP licensing deal need to understand the fundamentals of intellectual property, and this often begins with determining who actually owns what. In the cannabis industry in particular, information, strain names, and industry terminology have been shared freely since long before state-level legalization, and this compounds the difficulty faced by cannabis business owners in protecting their IP.
Ownership of IP in the cannabis industry is fraught with issues, as we’ve discussed before, in large part because the USPTO will not issue federal trademark registrations for cannabis-related marks. Far too often, cannabis companies come to us with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it claims to own.
If you’re looking to license IP from another company, here are the most basic questions you should be able to answer about that 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 an “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?
- 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 list is only the beginning of the questions that will need to be asked and answered, but failing to address these issues at the outset of a deal is a recipe for litigation, as we see in the case of Tommy Chong. As a business owner considering entering one of these deals, don’t be distracted by big names or big promises: If the IP doesn’t exist and if ownership cannot be demonstrated, there is no real value to be had. Although IP licensing in the cannabis industry is complex, there are creative and valuable solutions to be had, but those require a solid understanding of both IP law and state and local cannabis laws to execute.