Increased Flexibility Washington State now allows royalties in IP licensing deals

Structuring intellectual property (IP) licensing deals in a way that makes economic sense has been a struggle for I-502 licensees since the inception of cannabis legalization in Washington State. The state’s rigorous ownership, or “true party of interest,” disclosure and vetting requirements meant that any party taking a portion of the profits from a licensed cannabis business, including royalties, must qualify and be disclosed to the Washington State Liquor and Cannabis Board (LCB) as a true party of interest.

Because of the residency requirements that accompany true party of interest qualification, out-of-state cannabis brand owners have been severely restricted in how they license their brands to Washington producers and processors. Licensing agreements needed to be structured to avoid a payment scheme that included any share of the profits or revenues of the licensee, which often meant that licensors were selling packaging to licensees and/or taking flat fee payments. These restrictions made it nearly impossible to create a payment structure that would give a licensor the true benefit of the success of their brand in Washington State.

But in May, Gov. Jay Inslee signed House Bill 1794, which explicitly allows cannabis licensees to enter into IP licensing deals with third parties that include a royalty without triggering true party of interest disclosure requirements, so long as that royalty does not exceed 10 percent of the licensee’s gross sales of the licensed/branded products. The bill also allows for the payment of lump sums or flat rates, and it allows for standard quality control by a licensor without triggering that same true party of interest disclosure based on control of a licensee. As has been the case for some time now, all licensing agreements must still be disclosed to the LCB.

This law went into effect on July 28 and will likely lead to the renegotiation of many existing licensing agreements to include more economically reasonable terms. Parties to such licensing agreements will still need to ensure that their agreements don’t contain other provisions that will trigger true party of interest disclosure, but will have substantially more flexibility when it comes to payment and the types of quality control provisions one would typically find in a trademark licensing agreement.

“Because of the residency requirements that accompany true party of interest qualification, out-of-state cannabis brand owners have been severely restricted in how they license their brands to Washington producers and processors.”

 

Because I expect to see a proliferation of such licensing agreements in Washington State (as well as renegotiation of existing agreements), now is a good time to consider some of the basic considerations for all IP licensing deals. In addition to the true party of interest issues raised by IP licensing payment structures discussed above, the parties will need to determine whether single or ongoing lump sum payments also make sense, as well as the frequency of payments and what kind of accounting must be provided to the licensor.

And even though HB-1794 will allow licensors to exercise quality control over a licensee without triggering true party of interest disclosure, licensors will still have to walk a fine line between a level of control that allows them to protect their IP assets and a level of control that would be impermissible under state law. There is no bright line rule here, and these provisions must be carefully crafted.

Some other issues to consider when putting together these agreements include indemnification, morality clauses, which party is responsible for marketing and to what extent, creative control over marketing, term and termination, exclusivity, performance targets, etc. Although this legislation will make life easier for trademark licensing parties in Washington State, it is by no means a free pass to craft these agreements in any way possible, and retention of an IP attorney with a solid grasp on state regulations will be key.

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