A Brief Insight into Expanding Your Cannabis Business
Speaking to Arnold Shokouhi we explore some of the issues and considerations companies investing or wanting to expand in the cannabis industry need to address. In this insightful interview, we discuss IP issues, the regulatory landscape, as well as the risk management and licensing.
The regulatory landscape of the Cannabis industry remains to be in flux; how should businesses deal with this, to ensure they remain on top of changing regulations?
Like with any new emerging market, oversight and regulatory compliance are essential. The majority of the states now have some form of legalised cannabis. Although the federal government still does not recognise the cannabis industry as a legal industry, they are taking a passive stance on enforcing those laws. The best advice would be to follow the strict laws that are put in place by the specific states that you are doing business in. And if you are in multiple states, comply with the stricter of the state guidelines.
What makes this industry particularly challenging and unique?
There is no blueprint for it, despite perhaps the end of prohibition. You have an industry that has been deemed taboo at best and illegal at worst. Now, as we have learned more about the industry and the good it can do both from a health and financial aspect, businesses are scrambling to catch up with demand. In some instances, the cart was put before the horse. And by that, I mean that the government is trying to regulate an industry after the fact.
The key to being successful is to have a strict compliance policy in place and adhere to the different regulations.
Every state has different regulations; can this impact a business’ growth? What’s the best way to handle this?
Currently, there are different requirements in states for alcohol, tobacco, and many other products. Therefore, it is not uncommon to have to follow different regulations when doing business in different states. The key to being successful is to have a strict compliance policy in place and adhere to the different regulations.
What protection is ideal for cannabis businesses?
Cannabis businesses that are determining which forms of IP protection are ideal should view themselves like any other business selling a good and utilise all of the different protection tools available to them under IP to the fullest extent possible. These tools include trademark protection for brand names, patent protection for inventions related to the cannabis business, trade secrets for protecting certain aspects of the business that are not generally known or readily ascertainable by others, and copyrights for protecting creative works.
As businesses expand both within their state and nationwide, securing federal trademark registration protection is highly advisable. This will preserve national expansion rights and the presumption of trademark ownership and validity. While cannabis businesses cannot register trademarks with the U.S. Patent and Trademark Office (USPTO) for cannabis products and services that involve cultivating, manufacturing or dispensing cannabis products, they may secure federal trademark registration protection for their brand names for certain products and services. In states that have legalised cannabis, state trademark registrations and common law trademark rights may also be available.
Patent protection also adds value. Patents are property, and therefore a capital asset, and can exclude competitors from using a patented invention in the market. Businesses may secure patent protection for inventions, including new strains of the cannabis plant itself, as well as new methods or devices.
Patents do not require an applicant to show that the product is lawfully used in interstate commerce and are therefore an inviting avenue of protection for cannabis businesses.
Trade secrets can also offer valuable protection and an economic advantage over competitors and could be the most easily accessible protection offered to cannabis businesses. Businesses should be aware, however, that to remain eligible they must be stringent in taking the necessary steps to legally protect their trade secrets.
Finally, copyrights may be secured for certain creative works, including any artwork, written materials, photographs and software utilised by the cannabis business.
Businesses may secure patent protection for inventions, including new strains of the cannabis plant itself, as well as new methods or devices.
For federal trademark registration, it’s important to distinguish between cannabis products and services, including certain hemp-based products that are currently illegal under federal law, and cannabis-related activities that are legal. The USPTO requires that the use of trademarks must be lawful under federal law for federal trademark registration eligibility. However, businesses may secure federal trademark registration protection for their brand names for certain cannabis-related products and services that are currently legal under federal law.
The concept of a zone of natural expansion in trademark law could also be used to extend a trademark’s prior rights into a new geographical area or into a new product line. It applies when a company is using their trademark in one area and a newly expanded area is a natural extension of the prior use. Given the USPTO’s current stance on the illegality of certain products and services, the best strategy is to secure federal trademark registration protection for marks and legal activities. Those trademark registrations and rights may preserve future expansion under the same registered mark for related goods and/or services that are unlawful as of the trademark application filing date but could become lawful after the legalisation of cannabis at the federal level.
What other hurdles are presented in this area?
Cannabis businesses should be wary of infringement of IP of other companies in other industries. They should have foresight and perform their due diligence on all aspects of their business where another business’ IP rights may reside. In one recent example, the Girl Scouts sued a California-based cannabis edibles company for promoting its cannabis-infused cookies as similar to several of the Girl Scouts’ cookie brands.
Risk Management and Licensing:
Without the ability to have nationwide rights through federal trademark law, issuing a “nationwide” licence is extraordinarily difficult. How can businesses work around this?
Unfortunately, until the federal government legalises cannabis and creates universal governing laws, issuing nationwide licences will remain difficult. Cannabis businesses should work with a local law firm which works closely with law firms in other states and issue licences on a state-by-state basis. Working with local firms and issuing licences state-by-state allows the cannabis business to avoid any potential pitfalls that may arise due to the difference in legislature between the different states.
What consequences are there when violating regulations?
Violating such regulations in a highly regulated industry like cannabis includes, but is not limited to, the revocation of your licence to operate, fines, and criminal charges.
Further, more and more insurance companies are beginning to write policies that will help protect cannabis businesses and their owners.
Loans and insurance can be hard to obtain when involved in the cannabis industry – are there particular methods/ companies to approach here?
This is one of the more difficult hurdles in the cannabis industry. Most banks that are insured by the FDIC will not work with businesses in the cannabis industry because the federal government does not recognise them as a legitimate business. Additionally, many large insurers are wary of providing insurance policies to businesses in the industry. However, we have found that state-chartered banks have been helpful with assisting cannabis companies. Further, more and more insurance companies are beginning to write policies that will help protect cannabis businesses and their owners.
Standardisation of compliance rules is inevitable for the cannabis industry; when do you think this will occur and what should companies look out for?
I personally believe that we will see the federal government step in over the next 4-6 years to pass legislation regarding the legalisation of cannabis. If this does not happen, I foresee some states using the Commerce Clause to argue that the states with legalised cannabis have an unfair advantage over states that do not. This will force the Supreme Court to rule on the issue.
About Arnold Shokouhi
Arnold Shokouhi is the Managing Partner of McCathern, PLLC, a full-service law firm based in Dallas with additional offices in Frisco, Houston, and L.A. His practice focuses on complex civil litigation, with a particular focus on business disputes, real estate, director and officer liability, health care litigation, and cannabis law.
3710 Rawlins Street, Suite 1600
Dallas, Texas 75219