Marijuana Business LicensingThe marijuana industry has an eclectic mix of businesses seeking to cash in on the growing market. It includes manufacturers and sellers of a variety of cannabis infused edible products and beverages, cannabis paraphernalia, including vaporizers and e-cigarettes, and an increasing number of companies providing  support services like consulting, testing, warehousing, financing, banking and insurance.

 

Like providers of conventional goods and services, cannabis businesses can adopt various business models. One business model of significant interest to a number of cannabis entrepreneurs is the “licensing” model. In such cases, a business may seek to license its trademarks, know-how, or other proprietary rights to another business in exchange for monetary compensation. The licensing model appeals to many cannabis businesses because it can allow the owner of a trademark, trade secret or other proprietary know-how or information to expand by licensing its brand or proprietary know-how to another company. This model works particularly well in the marijuana industry where local residency is often required to operate and where local knowledge is often nearly as important. Licensing allows the licensor to monetize its brand or know-how outside their home state. However, the current state-by-state patchwork of marijuana laws means that these licensing agreements are usually very complicated and must be tailored to the laws of the relevant states.

The owner of a trademark for conventional goods or services may file a U.S. trademark application for a particular trademark on a use, or intent-to-use basis. When the trademark is registered, the trademark owner will have presumptive nationwide rights to the trademark for the goods and/or services identified in its federal trademark registration. The trademark owner may then license the trademark to a licensee anywhere in the U.S., who will then produce or sell the goods or services under the licensed trademark. However, owners of cannabis trademarks, including trademarks for cannabis paraphernalia and cannabis support services (e.g., processing, testing, warehousing, and financing services), are currently prohibited from obtaining a U.S. trademark registration for any controlled substance or related services. Therefore, until federal trademark law changes, providers of cannabis and related products and services cannot acquire federally recognized trademark rights in a cannabis trademark. This of course means that they cannot license such trademarks either.

Though it is currently not possible to obtain federally recognized trademark rights for a cannabis trademark, it is sometimes possible to obtain a U.S. trademark registration for certain non-controlled goods or services, including certain goods and services relating to cannabis, but in a way deemed not to violate federal law. In addition to being licensable subject matter, such rights may be leveraged to prevent others from using the same or similar trademarks for cannabis-related goods.

It is also possible to obtain state trademark rights for cannabis goods and services in those states where medical and/or recreational use of cannabis is permitted. Common law trademark rights arise when a trademark is used on goods or services in lawful state commerce. Common law trademark rights are typically limited to the geographical area in which the trademark is actually used, so once a company uses a trademark in lawful state commerce in a particular state, it should apply to obtain a state trademark registration for the trademark in that state. In most states, a state trademark registration confers statewide protection for the trademark. Because the trademark laws of each state vary, you should be sure to retain a lawyer licensed in the particular state or states in which you are seeking your trademark.

A marijuana company unable to obtain either a U.S. or state trademark rights because of state restrictions on its right to legally sell cannabis goods or services usually has other options for achieving its licensing goals. For example, if a company owns a trade secret, technology, know-how or other proprietary information used to manufacture a particular cannabis product or provide a service to a cannabis business, it can consider licensing this trade secret, technology or know-how via a license agreement, consulting agreement or similar agreement that also addresses the issue of trademark ownership as between the licensor and licensee. Such agreements may, for example, also provide for the licensor to supply the licensee with certain non-controlled goods associated with the licensee. In doing these sorts of agreements, it is again important for you to use an attorney who knows the laws of all states involved in the transaction as some states with legal marijuana restrict the amount and type of payments to out-of-state companies, and some states prohibit any involvement by businesses not licensed to trade in cannabis goods or services in the state. The implications of federal law prohibitions regarding trading in controlled substances and related services need also be considered in any cannabis-related transaction.

Bottom Line:  Licensing agreements, consulting agreements and management agreements can be a great way for a marijuana business in one state to monetize its know-how or IP in another state, but doing these sort of deals the wrong way can lead to your license being revoked, your IP being lost, your not getting paid, or even your being hauled into federal court. If you think we are trying to scare you here, we are, as we have seen too many of these deals go badly wrong when done by people who had no idea of what they were doing. However, when done well, these deals work well.