Cannabis Closure

The Washington State Legislature recently passed Senate Bill 5131, which updates Washington’s cannabis laws and includes a provision that explicitly addresses IP licensing agreements. The bill has already been signed by Gov. Jay Inslee, and the implications of these new regulations will be wide-sweeping with existing and pending intellectual property licensing deals.

“The big question that remains unanswered is whether the state’s acknowledgement of the permissibility of “licensing agreement[s]” is also an acknowledgement of the permissibility of standard trademark licensing practices, including royalties.”

Section 16 of the bill reads as follows:

• A licensed cannabis business may enter into a licensing agreement, or consulting contract, with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation, for:
• Any goods or services that are registered as a trademark under federal law or under chapter 19.77 RCW;
• Any unregistered trademark, trade name or trade dress; or
• Any trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to a cannabis business,
• All agreements or contracts entered into by a licensed cannabis business, as authorized under this section, must be disclosed to the state liquor and cannabis board [(WSLCB)].

On its face, this provision does little to change things for those with existing licensing deals, except that those deals will now need to be disclosed to the licensee’s WSLCB enforcement officer. But the provision does validate the position that these types of licensing agreements were permissible under the rules all along, which provides some level of security to the parties as to the legitimacy of the contracts.

The big question that remains unanswered is whether the state’s acknowledgement of the permissibility of “licensing agreement[s]” is also an acknowledgement of the permissibility of standard trademark licensing practices, including royalties. Currently, it is impermissible under WSLCB rules for a licensor to receive a royalty based on sales or profits from a cannabis licensee, where that licensor has not been vetted by the WSLCB as a true party of interest.

Undisclosed true party of interest relationships are grounds for license cancellation by the WSLCB, so it’s important to structure these deals so they do not implicate Washington’s true party of interest rules when dealing with an out-of-state licensor, or a licensor that simply would not meet the state’s requirements.

Even if state cannabis law reform in Washington makes the state law compliance piece of any trademark licensing deal more straightforward, these deals are still by no means as cut and dry as your typically IP licensing deal. Ownership of IP in the cannabis industry remains a tricky issue, in large part because the United States Patent and Trademark Office (USPTO) will not issue federal trademark registrations for cannabis-related marks.

Cannabis companies are routinely faced with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it purports to own. As a refresher, if you are looking to get a license for another company’s IP, here are the most basic questions you should be able to answer about that other 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 intent-to-use?
• What representations and warranties is the licensor making (or, often more importantly, not making) regarding the marks?

This is not an exhaustive list, and it only scratches the surface of the issues you and your cannabis IP counsel must consider before you enter into any IP licensing deal. Parties are often quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist.

Though cannabis IP licensing deals remain complicated, it’s encouraging to see the Washington State Legislature acknowledge and condone their existence. It remains to be seen whether the passage of SB-5131 will result in any changes to the current difficulties surrounding a royalties-based payment structure.