What if a company patented any liquid form of high-potency cannabis? And, what would happen if that company used the patent to shut down the operations of anyone making these liquid forms? Those are the questions raised by a lawsuit filed in Colorado federal court on July 30, 2018, and the answers could have existential consequences for many cannabis businesses.

In July, United Cannabis Corporation (“UCANN”) sued Pure Hemp Collective, alleging infringement of U.S. Patent No. 9,730,911, “the ’911 patent.” The UCANN case has major implications for U.S. cannabis businesses, and it is critical for the industry to understand exactly what UCANN is claiming, and the strength of its claims. This will require understanding a bit about U.S. patent law, and, importantly, the limitations inherent in the U.S. patent system.

A patent provides its owner with statutory protection over patented “inventions,” including “any new and useful process, machine, manufacture, or composition of matter….” 35 U.S.C. § 101. The scope of protection is defined by the “claims” in the patent, which are succinct descriptions of what is covered by the patent, similar to the “metes and bounds” description on a real property deed. Each claim operates like a “mini patent” in the context of the patent as a whole. Patent infringement occurs when someone, without permission, practices the “invention” described in any of the claims of a patent.

UCANN claims that Pure Hemp is infringing the claims of the ‘911 patent, which is directed to compositions of matter, and it alleges specifically as follows:

UCANN purchased Pure Hemp’s Vina Bell 5000mg product and ran chemical composition tests on it to determine whether the cannabinoid formulations within the product are covered by the ’911 Patent.  The analysis revealed that the product contains a cannabinoid formulation that directly infringes one or more claims of the ’911 Patent, including exemplary claim 10: “A liquid cannabinoid formulation, wherein at least 95% of the total cannabinoids is cannabidiol (CBD).”  Specifically, the Vina Bell 5000mg product contains a cannabinoid formulation wherein at least 95% of the total cannabinoids is CBD.  Pure Hemp sells other cannabis products with similar cannabinoid compositions that infringe other claims of the ’911 patent.

Complaint, ¶ 22.  UCANN references Claim 10 of the ‘911 patent, which reads in its entirety as follows:

A liquid cannabinoid formulation, wherein at least 95% of the total cannabinoids is cannabidiol (CBD).

On its face, Claim 10 would appear to cover any liquid formulation containing CBD so long as at least 95% of the cannabinoids in that formulation consist of CBD. This is a very broad claim, apparently encompassing a significant number of CBD products currently on the market. Of the thirty-six claims in the ‘911 patent, claims 1, 5, 16, 20 and 25 are similarly broad, and would appear to cover, in turn, high-potency formulations containing: THCa; THC; THCa and CBDa; THC and CBD; and CBD, CBN, and THC. Assuming the ‘911 patent is valid, any cannabis company selling such formulations could risk a similar lawsuit.

It is not possible, however, to infringe an invalid patent. Under 35 U.S.C. § 101, an invention must be “new” to be valid and to qualify for patent protection.  This “novelty” requirement is analyzed by the U.S. Patent & Trademark Office (PTO) during the application process for the patent. Although, the PTO is not the final word in our U.S. patent system. The federal courts are empowered to review the validity of patents made the subject of federal lawsuits.

In reviewing the validity of a patent, the federal courts will be guided by the principle that “that which infringes, if later, anticipates, if earlier.” This means that the reviewing court will look at the patent claim(s), determine their scope, and then look at both the accused infringer, and also the “prior art” that predates the patent. If the invention is described in the prior art, it is not “new,” and therefore fails the novelty requirement under § 101. It will be ruled invalid, and cannot be enforced.

Here, UCANN has asserted that Pure Hemp infringes because “[Pure Hemp’s] product contains a cannabinoid formulation wherein at least 95% of the total cannabinoids is CBD.” Taking UCANN’s assertion at face value, any prior art that establishes the existence of “a [liquid] cannabinoid formulation wherein at least 95% of the total cannabinoids is CBD” will invalidate Claim 10 of the ‘911 patent.

Qualifying prior art will include any patent or printed publication, or corroborated evidence of the existence of such a formulation, prior to the “critical date” of the ‘911 patent. The earliest effective filing date of the ’911 patent is October 21, 2014. The critical date under the U.S. patent system will be one year prior, i.e., October 21, 2013.

So to be clear, Claim 10 of the ‘911 patent will be invalidated by a showing essentially that on any date prior to October 21, 2013, there existed a liquid cannabinoid formulation wherein at least 95% of the total cannabinoids was CBD.*

For one with familiarity with the history of the cannabis, and cannabinoid biopharmaceutical industries, this would appear to be easy to show. GW Pharma’s Epidiolex, for example, is a 99% pure liquid formulation of CBD and has been in development for well over ten years. In addition, high-potency liquid CBD formulations have been sold in the U.S. for a very long time. This leads to the question: how did the PTO miss this in allowing the ‘911 patent to issue with these very broad claims? One answer: there is a lack of published prior art of the sort upon which a patent examiner typically relies. The federal illegality of cannabis in the U.S. has contributed to this shortage of published art.  One group that is trying to remedy this shortage by establishing a library of cannabis prior art is the Open Cannabis Project. Their stated goal is “keeping cannabis in the public domain.”

Maintaining an open and accessible marketplace for cannabis products depends on tracking this kind of patent activity. Lane Powell closely monitors this activity for its clients, and stands ready to assist.

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* To my colleagues in the patent field: you will recognize that I have simplified some of the patent issues including the process by which prior art is evaluated.

On June 7, 2018, a supermajority of the Washington Legislature blessed financial institutions and accountants providing services for the licensed marijuana industry.[1]

The new law is comfort legislation for a special class in Washington. It is also a protest against impressions about the threat of federal prosecution. But what comfort is the legislation for persons falling outside the protected group? Does it provide any comfort or is it the proverbial cold comfort? The answer may be economics and politics (limited funds to target violent crime, federal/state relations and votes) should reduce the threat of prosecution, regardless of the new legislation.

Discussion

The new state law had broad support; supermajorities passed the law, 81 percent in the senate and 85 percent in the house.[2]

Public safety and other policies. The law targets the public safety problem caused when licensed businesses move cash in 80-pound duffel bags and thieves drill through roofs to steal the stored cash. Overlapping policies support the law:

  • The adage (less cash, less crime);
  • The elimination of the black market;
  • The promotion of transparency and traceability of funds; and
  • The promotion of access to banking and regulated financial services.

Public testimony and lawmakers’ statements.[3] Who supports the Comfort legislation? The support was wide spread.  The Northwest Credit Union Association supported the law. Three credit unions serve the industry and provide almost $1 billion in safe banking. The testimony emphasized the public policies listed above along with the stringent compliance requirements and due diligence for each transaction, and the risk of prosecution for money laundering. Additional policies were the promotion of small marijuana businesses, health research, the protection of employees of the licensed marijuana businesses to have bank accounts and credit cards rather than cash, especially the young, entry-level workers who may be unfamiliar with the financial services world.

Washington Association of Sheriffs and Police Chiefs supported the law as amended. Their support rested on the “incredible public safety issue” stemming from the amount of cash from the industry that was not safeguarded in a financial institution.

The staff summary of the public testimony was:

Washington needs to shut down the black market for marijuana and get cash out of the marijuana market. Having financial services that are traceable would improve the regulation of the industry. Previously, there was federal guidance for financial institutions interacting with the regulated marijuana industry. However, recent guidance by the federal government has caused uncertainty regarding providing financial services to the marijuana industry.[4]

The sound bites from the hearings included:

  • Important first step.
  • Step in the right direction.
  • Can’t wait for the feds to act.
  • Position for time when action is taken by Congress.
  • Eliminate some of the uncertainty resulting from the Sessions memo.

Testimony alluded to one bank stopping services to the industry after the Sessions memo.

But why did the lawmakers feel the need to adopt special legislation when the number of financial institutions nationally reporting that they served state licensed marijuana businesses rose from 340 to 400 by September 2017?[5]

Continue Reading 2018 Washington State <em>Comfort Legislation</em> for the Financial Industry and Accountants Dealing With Licensed Marijuana Businesses

In the recent issue of GQ magazine, an article entitled, “The Great Pot Monopoly Mystery,” sought to unravel some of the mystery behind the “shadowy” BioTech Institute LLC. The article made a particular point that should be of immediate concern to those in the Cannabis industry — BioTech’s burgeoning patent portfolio.

BioTech has taken the unprecedented step of acquiring utility patent protection for the Cannabis plant itself. BioTech is attempting to exert control over access and use of the various Cannabis strains that are covered by its patents. Such control over one of the most vital elements of the budding Cannabis industry will impact all parties involved, from growers through all aspects of the supply chain and ultimately to consumers.

While the fear and impact of the BioTech patents are understandable, they are also misplaced for two main reasons. First, no entity can patent ideas or plants that are well-known in the public domain. Because the Cannabis industry is emerging from the shadows of a formerly illegal market, little to no formal documentation of the progression of Cannabis plant strains and Cannabis-related innovation exists, which is known as “prior art” in the patent world. This prior art is traditionally reviewed by patent examiners during review of applicants’ patent applications and is often cited against applications to reject them if the idea an applicant tries to claim has already been publicly known. Without that prior art library, the patent examiners are left with no choice but to allow the patents to issue. Applied specifically to the BioTech Institute portfolio, Cannabis industry leaders may be able to find documentation of well-known strains of Cannabis with coordinated, collaborative effort and build a bank of prior art related to Cannabis plant strains from unique sources not typically used. Such an effort will require cooperation among like-minded industry leaders moving towards a common goal of prohibiting commercial exploitation of well-known ideas. The prior art research will need to be balanced with concerted efforts to also foster protection of new innovation, the driving force of capitalism.

Additionally, many other industries experience — and weather — similar marketplace challenges to those presented by BioTech’s patent portfolio. The modern bioscience industry, for example, is rife with companies using patents to carve out market niches for themselves at the exclusion of others. Similar parallels are found in the tech industry too; the value of an industry drives participants to create zones of exclusion to further their business interests. As the Cannabis industry continues to grow in the U.S. and abroad in both value and legitimacy, it will attract serious and well-funded players (like BioTech) — with big appetites for risk — all vying for the immense reward at stake. Each of them is looking to capitalize on the existing market conditions and to monetize their investments.

Cannabis and Cannabis-related businesses can take steps now to protect themselves and prepare for the industry changes that are coming. It is not an “if” the Cannabis industry will face the same patent-related market pressures that the bioscience and tech industries face, it is merely a matter of “when.” The business risks posed by BioTech Institute and other players like them will affect each Cannabis business in unique and individual ways. Each sector and individual business in the Cannabis industry needs to evaluate its intellectual property position to face these coming challenges. Businesses need to begin developing and executing balanced strategic initiatives now to weather these challenges and to be proactive — rather than reactive — to the threats. Steps such as entering strategic partnerships, engaging in tactical contract negotiations, developing targeted innovation protection plans, cross-licensing intellectual property from key technology owners, pooling resources for common threats and lobbying for favorable legislation, establishing regulatory standards, and the like, will help businesses meet these new challenges and chart a pathway to longevity and prosperity in the industry. Each Cannabis company’s position in the market is unique, which drives a need for a custom strategic plan — there is no generic answer. The Lane Powell team of highly-experienced practitioners in intellectual property and corporate matters has deep industry knowledge and is uniquely positioned to partner with clients to create tailored business strategies to help clients thrive and achieve longevity in an intense and fast-evolving Cannabis industry.

* Sun Tso quote from The Art of War