cannabis marijuana intellectual property
It can be tough to decipher who owns your cannabis business IP, if you don’t write it down.

An important question for any cannabis business is: who owns the company’s intellectual property (IP)? The easy way to answer this question is to work it out before any dispute. The much, much harder way is to litigate. As noted in a famous oil filter commercial, “You can pay me a little now. Or you can pay him a lot later!”

The two most common situations where IP ownership disputes arise in a marijuana business are between the owners of a company, and between the company and its employees. Here are some tips on how to handle each situation.

IP ownership in an entity: IP is a capital asset of a cannabis company, and like all other capital assets, e.g., grow equipment, real property, office furniture, software, etc., should be owned by the cannabis company itself, as provided in the entity operating agreement. Issues can occur, however, when the entity wants to use IP that is already owned by a member/owner of the entity.

In particular, many operating agreements provide that a member contributes her IP as initial capital. There is nothing wrong with this, in theory. Intellectual property, like real property or other assets, can be contributed as capital provided that the operating agreement properly values and accounts for the asset. But problems can occur when the operating agreement does not legally transfer title in the IP to the entity. In such a situation, the “contribution” may be more like a license, which can be revoked. If the contributed IP is the primary brand name of the company, this could give the contributing shareholder undue leverage if she wants to withdraw from the entity after the company has built equity in the brand name. A significant number of operating agreements do not properly transfer title to the trademarks, copyrights, or patents that are being contributed. Without the appropriate transfer, this is a time bomb waiting to explode, in a courtroom near you.

IP ownership of employee creations: The conventional wisdom is that everything that is created by a company’s workers automatically belongs to the company as “work for hire.” While there is a federal copyright statute that refers to works for hire, the rules are much narrower than conventional wisdom suggests. This often causes conflicts between employers and employees about patents and copyrights, which in turn lead to litigation.

There is an easy way to avoid the work-for-hire minefield, called an employee IP agreement (“EIA”). An EIA is a written agreement that defines which creations are the employee’s, and which are the employer’s. For example, where a new employee has already created IP before her employment, the EIA could provide that the employee retains title to all disclosed preexisting IP, but is required to assign any future IP created in the scope of her work to the employer. EIAs also often address creations done outside of the workplace or outside of the scope of employment, and may provide for invention bonuses or other incentives. The key is that the EIA allows the parties to define their ownership of worker creations, without having to rely on the limited default rules that exist in federal and some state law.

***

IP ownership agreements: don’t leave the dispensary without one! For parts 1 – 3 of this series, check out the following:

Cannabis Litigation Webinar
Join us next Thursday! Should be fun.

Next Thursday, January 11, Harris Bricken will present a FREE lunch hour webinar on marijuana litigation. Please click here to sign up.

Harris Bricken’s marijuana litigators in Washington, Oregon, and California have been handling cannabis disputes for years. These cases involve individuals, partnerships, corporations, and LLCs. Subject matter may cover business disputes, investment and financing, intellectual property, employment, landlord-tenant issues, and administrative actions. As the cannabis industry expands, litigation in these areas, as well as in new areas such as product liability and patents, will increase.

Cannabis cases are different than any other type of business litigation, and nearly every case has a federal law component. State legalization has also led to an enormous statutory and regulatory apparatus that cannabis businesses — and their lawyers — must navigate every day. To meet the needs of the cannabis industry, Harris Bricken has experienced and dedicated civil litigators in its Seattle, Portland, San Francisco, and Los Angeles offices, including Vince Sliwoski, Hilary Bricken, John Mansfield, and Will Patterson. These lawyers will speak on various topics, including:

  1. The state of cannabis litigation and emerging trends
  2. How cannabis disputes are different than disputes in other industries
  3. Disputes involving partnerships and other business entities
  4. Intellectual property disputes
  5. Product liability disputes
  6. Federal law issues
  7. Employment disputes
  8. Remedies in cannabis lawsuits
  9. Ways to avoid cannabis litigation

If you are in or around the marijuana industry, understanding business disputes and how to avoid them is critical. And if you are unfortunate enough to find yourself in a dispute, you need advisors experienced in handling these issues. We hope you will join us next week for a lively panel discussion on this important topic. Go here to sign up, and bring your questions.

Until then, here is a healthy list of articles regarding cannabis litigation:

Cannabis Litigation Webinar
Please join us for our cannabis litigation webinar

On January 11, 2018, Harris Bricken will present a FREE lunch hour webinar on cannabis litigation. Please click here to sign up.

Harris Bricken’s cannabis litigators have been handling cannabis disputes for years. These cases involve business entities including partnerships, corporations, and LLCs; intellectual property; employment; investment and financing; landlord-tenant issues; and administrative actions. As the cannabis industry expands, litigation in these areas, as well as in new areas such as product liability and patents, will increase.

Cannabis cases are different than any other type of business litigation, and nearly every case has a federal law component. State legalization has also led to an enormous statutory and regulatory apparatus that cannabis businesses — and their lawyers — must navigate every day. To meet the needs of the cannabis industry, Harris Bricken has experienced and dedicated civil litigators in its Seattle, Portland, San Francisco, and Los Angeles offices, including Vince Sliwoski, Hilary Bricken, John Mansfield, and Will Patterson. These lawyers will speak on various topics, including:

  1. The state of cannabis litigation and emerging trends
  2. How cannabis disputes are different than disputes in other industries
  3. Disputes involving partnerships and other business entities
  4. Intellectual property disputes
  5. Product liability disputes
  6. Federal law issues
  7. Employment disputes
  8. Remedies in cannabis lawsuits
  9. Ways to avoid cannabis litigation

If you are in the cannabis industry, understanding business disputes and how to avoid them is critical. And if you are unfortunate enough to find yourself in a dispute, you need advisors experienced in handling these issues. We hope you will join us next month for a lively panel discussion on this important topic. Go here to sign up.

In the meantime, here is a healthy list of articles regarding cannabis litigation:

cannabis litigation
Cannabis litigation is its own thing

Two previous posts (here and here) discussed the McCart v. Beddow case, in which an attorney who was fed up with cannabis grows next to her rural home filed RICO (Racketeer Influenced and Corrupt Organizations Act) claims against dozens of defendants who allegedly participated in a criminal enterprise that damaged her by diminishing her property value, among other things. The defendants aptly described the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

The McCart case appears to be wending its way towards settlement.  Although motions to dismiss the complaint were filed, the plaintiff never responded to them and the court never addressed the merits. We probably won’t get to see the terms on which the parties settled, as settlements are usually kept confidential.

Meanwhile, the same attorney has filed a similar lawsuit on behalf of property owners in the Lebanon/Albany Oregon area, against various grow defendants. Ainsworth v. Owenby, Case 6:17-cv-1935, D. Or. It will be interesting/important to see how the RICO/nuisance claims hold up this time around.

In the meantime, this case nicely highlights how cannabis litigation can be so different from other litigation; who brings a RICO claim against their neighbors? Which is a perfect segue to tell you how I and three of our other Oregon, Washington and California cannabis litigation lawyers will be putting on a FREE webinar on January 11. Go here for full information and to sign up.

Marijuana business valuations
Finally!

In April of 2016, we covered the basics of marijuana business valuation. At that time, we were aware of just one accounting firm — or, more accurately, one accountant at one accounting firm — who claimed to have any interest in marijuana business appraisals. This was likely due to a couple of factors: 1) CPA firms were slower than attorneys to offer services to cannabis businesses, due mostly to complications with CPA ethics rules (there were no CPA firms in Oregon or Washington with cannabis clients when we started in  this  industry seven years ago), and 2) business valuation is a uniquely specialized and accredited field, even among accountants.

But things are changing fast. Recently, we were excited to see Cogence Group PC, one of Oregon’s best financial forensics and valuation firms, publish a no-paywall series of excellent articles on cannabis business valuation. The first article, “How to Perform a Business Valuation of a Marijuana Business,” gives a high-level overview of the three approaches appraisers commonly take: the asset approach, the market approach, and the income approach. Each of those approaches, in turn, comes with a dedicated article of its own. Those links are here, here and here.

In our 2016 blog post, we briefly described each of the three valuation approaches as follows:

  • The asset approach looks at the business as a sum of assets and liabilities used to determine its value. This approach asks, “what would the cost be to create another business that would produce similar economic output?”
  • The market approach looks at similar businesses, and asks “what are other, similar businesses worth?”
  • The income approach considers the expectations of someone participating in the business. This approach asks, “what economic benefit will an investor of time or money receive?

The Cogence series expands on these descriptions with valuable insights and considerations for cannabis industry entrepreneurs and investors, who may take interest in this topic for any number of reasons, including: a pot business is making an allocation of intangible assets; the business is creating an employee stock ownership plan; the business is the subject of an ownership dispute, etc. Throughout the life cycle of a pot venture, as with any business, questions of value are common.

As cannabis business lawyers and litigators, we often work closely with CPAs, alongside our in-house tax attorney. Over the past year or two, we have been encouraged to see an influx of high-level professionals and blue-chip vendors beginning to serve the cannabis industry. These service providers include not just accountants and business appraisers, but also qualified lawyers, realtors, and others. The Cogence valuation series is a good example of the expanding pool of legitimate resources available to the cannabis industry. And it doesn’t hurt that it’s free.

Upcoming Cannabis Events
Upcoming Cannabis Events

Over the next month or so, Harris Bricken will be putting on three lunch-time webinars relevant to starting and operating a cannabis business. All three will be from 12 to 1:15 pm Pacific Time.

The first of our webinars will be with Botec Analysis, a leading drug and crime policy research and consulting firm. This webinar, “Rights, Opportunities, and Responsibilities of California Municipalities Regulating Cannabis,” will be on Thursday, December 14. BOTEC’s Brad Rowe and Harris Bricken’s Hilary Bricken will discuss the legal and policy and regulatory issues California’s local governments need to know about MAUCRSA. To learn more about this webinar and to register for it, please go here.

Our second webinar, “What You Need to Know Now to Get Your California Cannabis License on January 1,” will be on Monday, December 18. Featuring two of Harris Bricken’s Los Angeles-based attorneys, Hilary Bricken and Julie Hamill, and two of our San Francisco-based attorneys, Alison Malsbury and Habib Bentaleb, this webinar will give listeners an overview of the recently issued emergency MAUCRSA rules governing medicinal and adult use cannabis licensing and operations in California. It will cover the licensing process for each license type, operational standards for all license types (including renewable energy requirements for cultivators), the 6-month “transitional” period for product and operations, major changes between the MCRSA and MAUCRSA rules, and key unknowns posed by the rules. You can register for this free webinar here.

On January 11, four of our cannabis lawyers from California, Oregon, and Washington will discuss both how to avoid cannabis disputes and how to prevail should you be involved in such a dispute. Will Patterson, John Mansfield, Hilary Bricken, and Vince Sliwoski will lead this webinar and they will cover the following topics:

  • The present state of cannabis litigation
  • Emerging trends in cannabis litigation
  • Disputes involving cannabis partnerships and other business entities
  • Intellectual property disputes involving cannabis
  • Cannabis product liability disputes
  • Federal law issues inherent in every cannabis case
  • Nuisance cases against cannabis businesses
  • Arbitrating and mediating your cannabis disputes
  • How disputes involving cannabis businesses differ from other disputes

To register for this free webinar, please go here.

All webinars will accept audience questions before, during, and after the presentation. For logistical questions or to send questions to presenters in advance of the webinars, please email firm@harrisbricken.com.

We look forward to having these discussions with you.

 

 

 

Cannabis litigation
How to end your cannabis litigation early

Last week we discussed frustrations that arise from the slow and methodical pace of cannabis litigation and the possibility of shortcutting the process through provisional remedies. Though provisional remedies do not directly bring a case to its conclusion, they can often force a quick settlement. This week I will discuss a litigant’s options to bring a quick end to a case via a motion to dismiss or a motion for summary judgment.

These two sorts of motions share many similarities, but this difference is key: motions to dismiss contend that a party’s allegations in its pleadings (complaint or counterclaims) are deficient. A motion for summary judgment requests the court apply the law to the facts a and determine the case is not even worth sending to a jury.

Motions to Dismiss. You can move to dismiss a claim against you for a variety of reasons including that: 1) the court lacks jurisdiction (legal authority to resolve the present dispute), 2) there is already another action between these parties attempting to resolve the present dispute, 3) the claim was brought outside the statute of limitations, or 4) the claimant failed to state facts sufficient to constitute a claim. Jurisdictional questions focus on whether the claim should have been brought in another state or county, or whether the parties complied with any binding dispute resolution clauses in any relevant contracts, such as mandatory arbitration provisions. A party can also move to dismiss on jurisdictional grounds if service was improper.

On a motion to dismiss for failure to state a claim, the question for the court is not whether the actual facts ultimately support a claim, but whether the pleadings as written support a claim. The party that files the motion to dismiss is asking the court to throw out the case as a whole (or at least certain claims) based solely on the face of the complaint or counterclaims. Essentially, by filing a motion to dismiss you are telling the court, “Even if everything my opponent claims is true, I still win so there is no point in our even continuing with this case.”

On a motion to dismiss the court must assume everything your opponent writes in its claims is true and apply your opponent’s ideal set of facts to the law and decide whether any valid claim exists. Any litigant should be mindful that a successful motion to dismiss for failure to state ultimate facts will not necessarily end the case. The court has broad discretion to allow the non-moving party to amend its pleadings to fix any deficiencies.

Motions for Summary Judgment. Though motions to dismiss are limited to the four corners of the pleadings, a motion for summary judgment digs into the underlying facts that exist outside the complaint and other pleadings. Motions to dismiss are usually filed pre-discovery, but since motions for summary judgment examine the underlying facts, they are typically brought after the parties have incurred significant expenses in discovery disputes and depositions. The party seeking summary judgment essentially asks the court to look at the evidence produced through the discovery process and rule that no reasonable jury (or other fact finder) could rule in the opponent’s favor. Both sides will submit sworn statements, called affidavits or declarations, laying out their side of the case, and will also submit documents obtained from discovery and deposition transcripts.

The court will review all of this evidence in the light most favorable to the non-movant. In other words, the court will draw all reasonable inferences in the non-movant’s favor. If the evidence, when viewed as favorably as possible to the non-movant, reveals the fact finder (usually the jury) would essentially have no choice but to rule in the movant’s favor, the trial is unnecessary and the court will enter a summary judgment in the movant’s favor on one or more of claims and defenses at issue. Even if some claims survive summary judgment, the summary judgment process can help narrow the scope of the dispute at trial and thereby save time and costs.

No cannabis business wants to be in litigation; at best it is an expensive distraction and at worst it can destroy a business. Motions to dismiss and motions for summary judgment can be good tools for trying to end the litigation early. In my next post, I will talk about alternative dispute resolution (“ADR”) and why it so often makes sense for cannabis businesses

Last week we expanded our litigation series to focus more broadly on the different kinds of litigation in which your canna-business is likely to become embroiled. For ease of reference, here is the series so far:

Cannabis litigation
Cannabis Litigation: The waiting is the hardest part.

Today we will talk about one of the most vexing aspects of litigation: timing. According to Above the Law, the longest legal case in US history lasted 57 years! Fortunately, your typical state court case will usually be set for trial within one or two years of filing (with exceptions for expedited cases), though some federal cases can take much longer. For example, federal patent litigation cases can take about three years before trial.

Clients almost always have a justifiable sense of urgency when it comes to litigation. It feels like the other side is trampling on their rights, and each passing day brings more legal fees and more damage to the business. Litigation can often make clients feel helpless in the face of a legal system designed to slowly and methodically ferret out the truth.

This sense of urgency is particularly acute when the opposing party’s conduct is actively and irreparably harming your business interests. In these cases when patience is not a viable option, your lawyer will likely discuss the possibility of seeking provisional remedies, specifically temporary restraining orders (“TRO”) and preliminary injunctions.

A party seeking provisional remedies is asking the court to halt certain conduct prior to a full determination on the merits. Since it comes before you win your case, this is an extraordinary remedy, and the burden on the movant is high. Additionally, the purpose of provisional remedies is typically to preserve the status quo, for example, to prevent a landlord from wrongfully evicting a tenant.

The law varies by jurisdiction, and for purposes of this post, we will focus on Oregon state law. Under Oregon Rule of Civil Procedure 79 (ORCP 79), a party can obtain provisional remedies in a civil action when it appears the movant is entitled to relief demanded in a complaint and the requested relief involves halting the commission of an act that will cause injury to the movant during the course of the litigation. The movant can ask for a preliminary injunction, or, pursue a TRO if the danger is immediate.

Preliminary Injunctions

A preliminary injunction prohibits the non-movant from taking specific actions that will harm the movant, and the scope of the Court’s authority to craft an appropriate remedy is remarkably broad. A preliminary injunction can even bind non-parties, specifically a party’s “officers, agents, servants, employees, and attorneys and … those persons in active concert or participation with any of them that receive actual notice of the order by personal service or otherwise.”

When considering a preliminary injunction you should be aware of the cost. A hearing on a preliminary injunction is a mini-trial, with both sides presenting witnesses and evidence, and all of the attorney fees and costs that entails. Additionally, even if you prevail you will need to post a bond in an amount set by the Court, based on the Court’s estimate of the potential damages that the injunction will cause to the other party. If you ultimately lose at trial, then the other party will get the full amount of the bond.

Temporary Restraining Orders

In Oregon, you must give the other party at least five days notice of the preliminary injunction hearing, so that the parties can prepare their evidence. If you absolutely cannot wait five days, then you can file a motion for TRO and order to show cause why a preliminary injunction should not enter. Given the emergency nature of this type of pleading, it is typically submitted ex parte: the movant will personally appear at the court and hand deliver the pleading and supporting documents to the clerks and will likely speak directly to a judge on the same day. The Court will typically decide whether to issue the TRO based on the affidavits and evidence submitted by the movant on the same day. The non-movant may appear but likely won’t have much of an opportunity to submit contradictory evidence.

The TRO can only last about ten days, so if the TRO is granted, then the Court will quickly set an evidentiary hearing to determine if the TRO should be converted to a preliminary injunction, as described above. As with the preliminary injunction, you will need to enter a bond with the court before the TRO will go into effect.

Seeking provisional remedies is an extraordinary and expensive step, but may prove vital towards protecting your cannabis businesses. We have seen it be particularly effective in stopping wayward business managers from stealing company assets and other misconduct. The preliminary injunction procedure can prove to be dispositive, as the result will often drive the parties to settle in one or the other party’s favor.

Next week we will continue this series by discussing another method of quickly resolving litigation disputes: dispositive motions.

Cannabis patent litigation
Noted cannabis patent expert

In previous posts, we’ve discussed how cannabis is patentable, and what these patents might mean for a cannabis business. Today, we peer into the not-so-distant future to imagine what a lawsuit to enforce a cannabis patent might look like. My research has discovered no such lawsuits filed to date.

Keep in mind that all patent infringement cases must be heard in one of the 94 federal courts, with very few exceptions. No non-federal trial or appellate judge has jurisdiction to decide any issue relating to patent infringement.  There are at least four major parts of a potential cannabis patent litigation in which the federal illegality of cannabis raises concerns: pleadings, discovery, proof/evidence, and remedies.

Pleadings: In the initial phase of a lawsuit, each party must detail its allegations in pleadings. A pot patent plaintiff will allege she owns a patent for a cannabis plant and that the defendant has infringed the patent by growing, selling, offering to sell, or importing the patented plant in the United States. Because a patent is merely a right to keep someone else from practicing the patent, the plaintiff needn’t plead anything about her own business, although there are good strategic reasons for her to do so. The defendant must then either admit or deny each and every allegation made by the plaintiff; there is no “no comment” option. In most cases, this means the defendant must plead, in substance: “I grow marijuana.” Pleadings are almost always publicly available, including to federal law enforcement. Though under past practice the Department of Justice has not prioritized cannabis enforcement in states where cannabis has been legalized, each set of pleadings will remain as a public record admission of criminal activity and therefore available to any DOJ attorney who wants to pursue such cases.

Discovery: In this phase of litigation, each party collects evidence to support its claims or defenses. One form of discovery allows a party to force the other party to admit or deny any fact related to the lawsuit, under oath. Here is an actual request I saw recently: “Admit that the products sold at [defendant’s cannabis shop] containing marijuana and/or cannabinoids are illegal under federal law.” It may be possible to plead the Fifth Amendment privilege against self-incrimination to avoid answering such requests. But if a defendant can “take five” to avoid admitting many of the facts a plaintiff must prove to show infringement of a patent case, how will cannabis patent plaintiffs enforce their patents as a practical matter?

Proof/evidence: In almost every plant patent trial, the plaintiff must hire an expert to provide an opinion that the patent applies to the plant accused of infringement. In a cannabis patent case, this means the plaintiff (or plaintiff’s counsel) must have the expert botanist or horticulturist analyze the accused cannabis product. That means the lawyer, or the client, or the expert, must possess or transport the cannabis product, which constitutes a federal crime.

What will happen if counsel or a witness tries to bring cannabis to the courtroom to use as evidence? Under some circumstances like drug prosecutions, illegal narcotics are introduced into evidence in federal court under highly restrictive conditions. But it is far from clear whether federal judges will routinely allow parties to a civil suit to bring Schedule 1 narcotics into a courtroom, at least without Congressional approval.

Remedies: The most common remedies in a patent suit are damages, e.g., lost profits or a reasonable royalty, and/or an injunction prohibiting further infringement of the patent. But will a federal judge be willing to order the losing defendant to pay over the profits from its illegal activity to the successful cannabis patent plaintiff? Will the judge enter an injunction relating to the sale of an illegal product?


If cannabis patents are so hard to enforce, we may wonder why the Patent Office grants them. The reason is that the PTO, an agency in the Commerce Department, is empowered to grant patents and cannabis is patentable. The Department of Justice, another department, is empowered to enforce criminal laws passed by Congress, including the CSA. The courts, in another branch of government altogether, hear patent cases, as well as criminal prosecutions. Isn’t federalism fun?

Cannabis patent litigation

 

 

 

 

 

The hard truth is that your canna-business is going to get embroiled in litigation sooner or later. Whether it is a dispute among partners, a dispute with a supplier or a commercial landlord-tenant dispute, the regulatory framework around cannabis will change how your business approaches litigation. With that in mind, we intend to expand our current series on cannabis IP litigation (here, here, and here) into litigation of all kinds. Today we will begin with a bit of general information about dispute resolution in these Litigious States of America.

Litigation is not a pleasant experience. It is expensive, time-consuming and incredibly invasive. Even the smallest dispute can cost tens of thousands of dollars to resolve. Once you are in a lawsuit, your opponent will have the legal right to demand you turn over all documents, emails, text messages, recordings, and records tangentially related to the legal and factual issues in dispute (usually defined as “reasonably calculated to lead to the discovery of admissible evidence”). Your lawyer will ask you to dig through your old physical records, computer files, emails, and text messages for anything that could be relevant. This will usually lead to every judge’s least favorite part of litigation: discovery disputes.

Once the lawyers finish sparring over what documents will or will not be turned over, you will experience the unique joy of a deposition. In today’s practice, it is a near certainty you will be required to sit in a room for up to seven hours (and in some states, even longer) while your opponent’s attorney questions you under oath, trying to dig out from you every bit of information you may have and/or to catch you in a lie. You will be asked questions about conversations and documents you haven’t thought about in years, and whatever you say can and will be used against you.

Though most civil disputes end up settling, there is always a chance your case will go all the way to trial. And if you thought your deposition was unpleasant, you will realize that is nothing as compared to the trial. Everyday you will spend hours in a courtroom, only to go back to your lawyer’s office at night to prepare for the next day. And at the end of it all, you will ultimately be subject to the whims of a jury of your peers who can sometimes be more persuaded by emotion than by the facts or the law.

In light of the financial and emotional burden of litigation, it is critical your litigation decisions focus on what is best for your business. Litigants do not benefit by making decisions based on emotion. To help you make those decisions, this series will address some of the common questions and misconceptions our cannabis litigation team sees/hears so often from our own cannabis clients about litigation, and specifically litigation in the cannabis industry.

Check in next week when we discuss one of the biggest areas of potential frustration with litigation: timing.