With California’s regulated cannabis industry having just arrived, many Washington brand owners are either looking to enter the California market themselves, or they are exploring means for spreading their brands into one of the largest cannabis markets in the country. Regardless of whether you are seeking to become a cross-state licensor or licensee, there are a number of legal issues you should familiarize yourself with before entering into a brand licensing deal.
“A small amount of high-level IP due diligence can save a lot of money and potentially keep your company out of litigation down the road.”
Cannabis licensing deals are complicated and fraught with issues that aren’t as common in more conventional industries. While many companies expect the biggest hurdle in completing a licensing deal to be state cannabis law compliance (and this certainly is an issue), more often than not, fundamental intellectual property (IP) issues are the problem. With any licensing deal, the first step should be determining who owns what in terms of IP. This is especially true when it comes to the cannabis industry, where information, strain names and industry terminology have been shared freely since long before state-level legalization.
IP ownership in the cannabis industry is 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; this is due to the requirement that in order to register a federal trademark you must make, or have a bona fide intent to make, lawful use of the mark in commerce on the goods and/or services that you specify. Cannabis companies often encounter licensing deals where basic due diligence quickly reveals that the licensor simply does not own what it claims to own. A small amount of high-level IP due diligence can save a lot of money and potentially keep your company out of litigation down the road.
If your company is 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 (or these are the questions you should be able to answer if you are the licensor looking to license your own IP to another company):
- 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?” Is that intent bona fide?
- What representations and warranties is the licensor making (or, more importantly, not making) regarding the marks?
- If the licensor doesn’t own any federal trademark registrations, is it licensing someone else’s marks?
- Does the licensor have a master licensing agreement that grants them authority to sub-license? Do the terms of the proposed sub-licensing agreement mirror the terms of 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?
While this list is extensive, it only scratches the surface of the issues you and your IP counsel must consider before you enter into any IP licensing deal as either a licensor or a licensee. Cannabis companies are often too quick to skip straight to negotiating commercial terms for a deal, without ever assessing whether the rights they are licensing actually exist. Just like with any other type of property—like a house or a car—a licensor of IP must actually own the rights to that property to be able to confer all or some portion of those rights to another party. Due diligence in these deals is key and will quickly reveal whether an IP licensing agreement will be feasible or not.