Tag Archives: trademark

Licensing High Technology; Cannabis and Corporations

In a recent and excellent blog post, Jeff Madrak, a colleague of mine, addressed the current growth of “Big Marijuana.” The trick is lots of water and sunlight, but mostly it is careful adherence to the law. Cannabis’s legal status is a figurative hydra; ask a question about protecting children and you find yourself having to answer what harms current prohibition has and the long term effects of that regime; ask about taxing cannabis, and then you’re raising questions about specific tax types and similar industry approaches; and so on. Similarly, for every clever business strategy and solution, for every big picture analysis raised by that post, I found myself wondering about the policies served – if such solutions are “good” in more than a business sense, if society should punish or reward these “ganjapreneurs.”

Tackling that hydra is a task that is literally Herculean. This is cold comfort for business people, because business thrives best when the legal framework is well developed: such a framework reduces uncertainty, which reduces risk, and lower risk means greater long term return on investment. I want to address what I found to be a surprising result and a happy coincidence of law: namely the interaction of licensing intellectual property and the legal fiction of the corporate form.

An industry built on cannabis cannot operate on an interstate market without violating federal law and policy. Note the Cole Memo priority of “[p]reventing the diversion of marijuana from states where it is legal under state law in some form to other states” is facially violated even if marijuana is legal in those other states. Interstate commerce is the prerogative of the federal government, so Big Marijuana is restricted to operating on a state by state basis. However, the intangible nature of intellectual property and the economic convenience of the corporate form can provide an avenue between states that is already being explored by some.

The corporate form. It already sounds like a flimsy pretense, a phrase someone might casually drop as a parenthetical at a cocktail party and be met by a collective eye rolling of all within earshot. These days, the idea of the corporate identity is not only much more prevalent in the social dialogue but it is also more akin to an incantation. It is some sort of legal witchcraft, seeming to afford businesses protections traditionally reserved for actual people. I certainly have a degree of initial discomfort with corporate personhood.

Which isn’t to say there are not benefits to allocating personhood to a corporation. Probably the best justification for identifying a corporation as a legal individual is the allocation of liability. For one thing, investors are protected from personal liability, which promotes risk taking and innovation. Additionally, anyone harmed by the activities of a corporation can name this identity as a defendant in a court of law. In fact, a “person” can sue another “person” so long as they have standing. Standing is basically when one person has an injury that another person caused and the courts can give a remedy to, like Apple v. Samsung.

Legal personhood could also be applied to resolving unusual problems, such as an endangered animal being granted personhood via statute, allowing others to sue “someone” on behalf of that animal if that “someone” poses a threat to them or their habitat. While it has been indicated as possible for congress to grant such standing (an extraordinary step, indeed), courts have rejected standing for cetaceans, and declined to address the standing of sea turtles and birds. Not to digress too far into the realm of the Lorax, what is pertinent here is that our legal system defines “person” in a precise and artificial way to enforce certain rights and responsibilities.

Corporate persons generally have residency where they are incorporated. This is another convenience because courts are able to discern what laws apply to that corporation, and corporations are able to determine which state gets their taxes. Cannabis’ current legal hodgepodge makes this particular simplification incredibly useful. A business can very specifically choose a single state and act within those borders in both a literal and transparently legal sense. This distinction not only allows businesses to choose their laws, it also allows businesses to limit the federal illegality of their endeavors.

The California Artisan Cannabis initiative provides that “[a] person who is not a California resident, or not incorporated in California, shall not be qualified for a [cannabis] license.” (emphasis added). So the legal form, in this specific case, allows the legal cannabis market to thrive while limiting the breaking of federal laws, and promotes state self-governance. Finally, it keeps all of the profits and commerce contained within state limits, thus minimizing the effect of state legalization on neighboring states.

This raises the issue of licensing agreements between corporations in different states. Do such agreements subvert the policies and priorities of the individual states and the federal government, or do they, like the corporate form, actually work to preserve what few clear lines exist in the current legal schema? It is most likely that licensing agreements do neither of those things, but they do allow businesses to continue to flourish and to set up strategically for any potential federal-level changes in the legality of cannabis.

Intellectual property comes in various flavors, but is generally understood to refer to the protection of a particular expression of an idea. Intellectual property law is also often under the jurisdiction of the federal government, which, given the apparent contradictions between federal and state law, can lead to some interesting legal dilemmas. Licensing, however, affords private parties simple and interesting solutions to these problems.

Intellectual property is intangible. When you license someone to use it, you transfer legal rights, not an actual object. Normally a sale between a business in one state and a business in another state would be interstate commerce. Does a license to use a particular expression of an idea qualify as a transfer between state lines? Generally, no.

Without getting too silly, intangible properties, like debt, have no real location and so they are not physically transferred from one place to another. This legal technicality is important because the federal government only has jurisdiction over interstate commerce. In U.S. v. Lopez a federal statute barring guns from public schools was deemed unconstitutional and later had to be rewritten to include only those guns that have “moved in or that otherwise affect[] interstate or foreign commerce.”

Often, licensing will have territorial restrictions. With the current legal classification of cannabis, this is not only desirable and probably legally necessary for business, it also serves the voters’ preferences in determining the legality of cannabis for their state. Common intellectual property licensing practices come with various pros and cons.

What is interesting to this discussion is the availability of arbitration and non-assertion clauses, and the antitrust considerations raised by the latter. Arbitration agreements are a way to provide legally binding resolutions to any disputes that arise. They are wonderful because they avoid the public costs of a court, the individual costs of an attorney, and because they are not part of the court system they can be much more efficient, quick, and accessible to the poor. Of course, the flipside is that there are no fairness guarantees, appealing a decision is difficult, one party often has much more bargaining power and influence in the choice of arbiter (you’re probably bound to one with your credit card, your cell phone, your car, and so on), among other concerns. The primary focus of these concerns relates to labor agreements, or the protection of unsuspecting consumers.

I assume these business licenses are conducted by corporations that are legally savvy and cooperative, so many of those concerns are not present. Which is to say, arbitration agreements would largely function to save taxpayer money by keeping inter-business disputes out of the courts. An additional benefit of keeping disputes out of the courts is that courts would not have to weigh in on the divisive political debate over the legality of cannabis, arguably outside the purview of the court since strategy on how to enforce federal law is up to the executive branch.

Similarly a non-assertion agreement is a contract to not sue over certain property right infringements (often as part of a settlement in an infringement claim). This serves much of the previously mentioned arbitration benefits by keeping such controversies out of court but raises different concerns. Patents, specifically, grant a temporary monopoly on an invention and the dangers of monopolies have long been recognized. A non-assertion agreement can lead to a small group of businesses acting as an oligarchy by contract. Further, such an agreement potentially protects invalid patents from being challenged by competitors – certainly not a win for society since we prefer the full use of ideas in the public domain.

In conclusion, it appears that the legal technicalities of how corporations exist as entities and the intangible nature of intellectual property actually serves to avoid many of the legal problems surrounding cannabis.   While my initial impression was that corporations could use legal maneuvers to essentially be an interstate cannabis operation, the actuality is that these legal hoops need to be jumped through and actually function as further restrictions on interstate commerce for Big Cannabis.

Additionally it would be wrong to condemn a business for working within the existing legal framework. Furthermore, if they were trying to abuse that framework, courts are equipped to see through manipulations of the corporate form. Through these legal fictions, society is served by confining cannabis commerce to those states that wish to allow it without violating federal law and also potentially without placing unreasonable burdens on the judicial system.

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State Registered Cannabis Trademarks: (An) Amoral Dilemma

I called my mother the other day. I figured that, as an adult, it was time we had the talk; I asked her what she thought a trademark was. “It means,” she said, “that nobody else can use the same thing.” Sure, but why would we have laws about that? “Because… oh I don’t know, because somebody cares.” After some discussion, it became clear that my mother had both a normal level of interest in Intellectual Property law and held a common misconception. My mother was under the impression that trademark law is for the benefit of corporations.

Because our government is “for the people,” it follows naturally that trademarks are also for the people. In a previous post I wrote that the government grants exclusive rights if some important public good is served. The exclusive use of a mark is not protected for the sake of business but for the sake of the consumer. This information is invaluable to consumers because it allows us to choose between spending our dollars on local, sustainable, organic, humane farmers and butchers and more affordable alternatives with a glance at a package. Thus, when you go out and purchase some first-rate dance gear the branding lets you know the source. When you’re stuck in the middle of Nowhere, Oklahoma, you can rest assured that your can with the familiar Coca-Cola trademark is still a Coke™ because of trademark law.

A corporation can build goodwill and leverage its reputation to add value to its products. If a consumer knows nothing about watches, it’s possible they may be led to believe a Rolex is a good watch because of Rolex’s reputation. While trademarks may serve a corporation’s financial interest, keep in mind that a bad reputation is equally protected. What we, the people, get out of enforcing marks is clear identification of the source of goods. The quality of that source, or its “branding,” is not part of the deal. There are a number of reasons that the USPTO might deny a trademark, but the “morality clause” is most pertinent to marks related to cannabis.

The Lanham Act, the federal level statutory scheme for trademarks, has a “morality clause.”  In the language of section 1052(a), any mark that is “immoral, deceptive, or scandalous matter” can be denied registration. A deceptive mark clearly undermines the goal of keeping the consumer properly informed as to source. This means marks that misrepresent not only the company name but also geographic source, material composition, or sponsorship of some individual, etc. would be considered deceptive and denied registration.

When it comes to scandalous material, an examiner might “know it” simply when they “see it,” in the manner of Justice Stewart’s famous intuitive approach. A morality judgment is treacherous territory, doubly so with the weight of law behind it. It is no surprise that courts have, as the trademark manual of examining procedure puts it, “included immoral matter in the same category as scandalous matter.” Inevitably, scandalousness and immorality judgments will lead to disagreement, and such a subjective standard is not, in my opinion, useful legislative drafting. Retooling the language is probably best, but that is a legislative prerogative, not the purview of lawyers or courts. For a thorough examination of scandalousness and the caprice of the USPTO, I recommend an excellent (and often amusing) journal article by Anne Gilson LaLonde and Jerome Gilson (for those in the know, yes, those Gilsons). Generally, drug-related marks are denied for scandalousness because of the promotion or association with illegal substances under the Controlled Substances Act. There are some cases, like Cocaine Anonymous (note the circled R indicating a registered mark – not “™” which is for unregistered marks) or Marijuana Symposium, where the context specific use is considered within the gamut of federal drug policy. There are ways around USPTO difficulties with trademarking cannabis products, but I think the apparent contradictions in whether a mark is granted or not can be resolved in a different way, without upsetting the status quo.

See, you can also register a trademark at the state level. The Lanham Act, as mentioned, is the federal scheme. Each state has its own version of the Lanham Act that will give statewide trademark protection. Given the patchwork legal status of cannabis in the United States, a state-by-state approach makes a lot of sense. Unfortunately, the statutory language of 47 of those states replicates the morality clause from the Lanham Act verbatim (for a full list check out footnote 3 in the Gilson article). It’s easier to list the outlying states Colorado, Maine, and Wisconsin — than the majority. Of these, Maine comes the closest to a morality clause, denying any mark that “[c]onsists of or comprises language that is obscene, contemptuous, profane or prejudicial… [or i]nappropriately promotes abusive or unlawful activity” (emphasis added). Setting aside Maine’s oddly detailed trademark legislation on potatoes, oils, and sardines, could a mark for a company whose product is cannabis be an “appropriate” promotion of a federally unlawful activity? I think so.

In a state with a morality clause in its trademark statute (like California), is it scandalous to identify a good that is legal in that state but remains illegal under federal law? My answer looks to the late, great, Judge Traynor. In one of his more famous opinions, Reich v. Purcell, Judge Traynor discusses how the “forum must search to find the proper law to apply based upon the interests of the litigants and the involved states.” Judge Traynor was deciding a conflict of laws problem in torts, but his reasoning can be applied here. More succinctly, scandalousness and morality rejections should be based on the weighed interests of the state and federal governments, not a subjective interpretation of those words as applied to a “substantial composite of the general public.”

In a state where cannabis is totally decriminalized, regulated by the state or where the state participates in the market, the public view about offensiveness of a mark is difficult to ascertain.  While some groups will surely find no moral/scandal objection to cannabis marks, other groups may find cannabis use scandalous but consider regulation a better solution than outright prohibition.  Additionally, the minority may still prefer prohibition and retain scandalousness objections to any cannabis related mark. While scandalousness objections to trademark registration perhaps cannot be resolved, there remain amoral public interest considerations.  A given state’s interests and the effects of granting a trademark in that state should be weighed against the interest of the federal government, especially noting that whole supremacy thing. If a state grants cannabis trademarks and, by extension, allows for companies to potentially build goodwill and brand loyalty, will that promote the use of cannabis?  Will branding push companies to cultivate a more positive reputation through higher quality products, or safer products and safer use environments?

Further, while the public’s subjective reasoning cannot be ascertained, the codified policy (in this hypothetical) would be one that does not criminalize cannabis. Examiners and their supervisors could decide trademark eligibility by looking to established interests instead of subjective review of “scandal.” Admittedly, changing from “scandal” to “public interest” analysis sounds like jumping out of the bog and into the mire. I think that however scandalized someone feels (or doesn’t) about the Redskins trademark, he or she can concede that our public interest has long proscribed racism, prioritized eliminating discrimination, and promoted equality. Revoking the Redskins trademark arguably serves those ends. This approach also clears up how the USPTO ultimately granted a trademark to an apparently scandalous mark. An image that may scandalize the public by depicting our nation’s flag as a condom was acceptable because of the goal of characterizing the fight against AIDS as patriotic.

Luckily, the interests of the federal government have been clearly set forth in the somewhat notorious Cole memo. The eight priorities listed in that memo can easily be satisfied while serving state interests. A state can serve its own decriminalization regime without subverting these priorities, which explains how a mark can be “scandalous” on a federal level but not in a particular state. Further, the federal government has an interest in allowing states to establish their own unique priorities and policies. This “laboratory of democracy” that respects the individualized needs of specific regions is part of why we have a federal system in the first place. The real question then becomes whether granting trademarks serves a given state’s interest.

Among many details I have glossed over, there is a third option for trademarking: simple use of a mark in commerce grants common law protections without any registration at all, state or federal. This protection is limited to the geographic region of use and depends on common law, which varies by state. California is geographically large and if the consumer is to develop some sense of cannabis products, simple common law protection is assumed not to suffice because a northern California company could use the same mark as a company elsewhere in the state and potentially confuse consumers in between, especially if the market expands rapidly, as it has in Colorado.

If a company cannot build goodwill with its brand it can only really market objectively measurable characteristics like potency and price, not quality. Research indicates that price increases discourage kids from using cannabis more than adults. Granting trademarks would allow corporations to more fully leverage their brand, which would increase pricing of their products – and might decrease potential youth possession and use (which would assuredly remain illegal, just as it is for tobacco or alcohol). There are, of course, risks associated with allowing marks that may be targeted at or appealing to children. An interest analysis supports denial of those types of marks as well, since protecting children is an established interest of both the states and the federal government.

California’s interest might best be served with a model like that of wine, where users of cannabis can pay top dollar for some renowned brand rather than merely finding the cheapest and strongest “high” on the market. Trademark granting should not be based on ambiguous ideas like moral and scandal but on the purposes behind trademarks, which rest on the interests of the individual consumers and states involved.

Cannabis and Intellectual Property: To © or not to ©, and Other Pressing Questions

My contributions will primarily be analysis of different aspects of intellectual property in a market that has decriminalized cannabis while it remains federally illegal.  Can, and more importantly, should a state furnish intellectual property protections when they are unavailable from the federal government?  California’s possible shift from medical cannabis to recreational cannabis raises many questions about commercial and social costs and benefits to affording these protections.  While attorneys and businesses are largely approaching this topic from the perspective of private players,  my goal is to outline not just the various legal challenges and possible solutions to the concerns of cannabis-oriented businesses but, instead, to point out how a state can balance those private interests with public policy, safety, and health concerns.

I am a law student who studied science for my undergraduate degree. I am focusing on intellectual property law with an emphasis on patent prosecution. I am an associate on the Santa Clara High Tech Law Journal, and I have developed a strong interest in the intellectual property challenges presented to emerging markets and businesses.  Because of the politicized nature of these topics I am writing under a pseudonym, Lucilius, who was a friend and correspondent of one of my favorite writers.

Building Big Marijuana

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Sometime in late 2015, a private equity firm by the name of Privateer Holdings will debut a brand called “Marley Natural” to the legal marijuana industry. Bearing the infamous “Marley” surname, Marley Natural will feature a variety of cannabis products and hopes to quickly become the “Marlboro of marijuana” in an industry that is slowly but surely coming out of the shadows. If you wanted to build a big marijuana company like Marley Natural, how would you do it? My multi-part series will inspect the rise of big marijuana and discuss legal strategy and business ethics on topics including marketing and advertising, intellectual property, investments, taxes, and rising ancillary businesses in the big marijuana market sphere. Along the way I will examine case studies of real marijuana companies that are currently on a quest to dominate the marijuana market as it expands quickly across legal boundaries and into the unknown.

My name is Jeff Madrak. I was born and raised on the East Coast. I came to California to surround myself with sunshine and forward-thinking people. I’m currently a law student where I’m focusing on intellectual property and business law. At my core, I pride myself on being an entrepreneur and I’ve launched and been a part of several start-up companies throughout the last five years. I’ve written business plans for marijuana-related companies and designed strategies to navigate the hostile legal landscape that the grey marijuana market provides. In my spare time I run a company that advocates personal vaporizers for use as a tool to quit smoking and as an alternative to cigarettes. I’m fascinated with the law and how it creates new business opportunities for those who are brave enough to test its limits.