Headspace v. Podworks: Good News (With Warnings) for Marijuana Trademark Licensors

In January 2017, Headspace International, LLC, a California-based cannabis company, sued Podworks Corp., a Washington-state-based cannabis company, for trademark infringement. Headspace sells a product called “The Clear” and claimed Podworks’ “Top Shelf Clear” product infringed on its trademark. Podworks defended itself by claiming that Headspace did not have valid trademark rights in Washington and that the only use of Headspace’s trademark in the state had been by its in-state licensee, X-Tracted. The trial court in Headspace International LLC v. Podworks Corp., dismissed Headspace’s claim, finding that it had not established trademark rights in Washington. Headspace appealed and on October 29, 2018, the Washington Court of Appeals reversed the trial court’s decision and sided with Headspace.

What Does This Mean for Cannabis Businesses? First, the Good News

  • Lawful use of a trademark in Washington only by a licensee and not by the mark’s owner can support the owner’s state trademark rights, even for cannabis products.
  • A trademark licensor can lawfully exert sufficient quality control to maintain valid trademark rights without violating Washington’s Controlled Substances Act (the “CSA”).
  • A trademark licensor is not necessarily a “true party of interest” under the Washington Administrative Code (WAC).

Digging a Little Deeper

The court cited federal precedent in holding that:

. . . indirect use of a protected mark by a licensee inures to the benefit of the owner of the mark when the owner has sufficient control over the quality of the goods or services provided to customers under the licensed mark” and also that such “use” must be “lawful placement of a mark in the ordinary course of trade.”

The court then had to decide if an out-of-state trademark owner can exert “sufficient control” over the quality of its Washington licensee’s marijuana products without making that licensee’s use of the trademark unlawful under the CSA.

What is necessary to have “sufficient control” over quality? Three factors are assessed, any one of which may support a finding of sufficient control:

  • Contract language authorizing control over the licensee by the licensor,
  • Whether the licensor exercised actual control over the licensee, or
  • Whether the product quality over time was sufficient for the licensor to rely on the licensee to ensure quality control.

Under the CSA (as codified at RCW 69.50.331(1)(b)), licenses to legally produce, process or sell marijuana products may only be issued to in-state entities. Further, license holders may not permit any other entity to use the license (RCW 69.50.325), which the court says bars participation “in the production, processing, or sale” of marijuana products. How can an out-of-state trademark licensor exercise quality control without violating these requirements of the CSA?

Podworks claimed that in order to exercise sufficient quality control over its trademark, Headspace had to unlawfully participate in its licensee’s production or processing of the branded products. If true, this would create a “damned if you do, damned if you don’t” dilemma for Headspace — either it had no enforceable trademark rights because it didn’t exert sufficient control over X-Tracted, or it did exert sufficient control but still had no trademark rights because then X-Tracted’s use of the mark was unlawful. Nevertheless, the court held that sufficient quality control could be exerted “through contractual means” or by relying on the licensee’s own quality control measures, neither of which would violate the CSA, as neither would constitute participation in the production, processing or sale of the branded products.

Podworks then argued that the May 17, 2017 addition to the CSA (RCW 69.50.395), which requires marijuana businesses to disclose all licensing agreements to the WSLCB, should be applied retroactively and thus Headspace’s license to X-Tracted was unlawful, as X-Tracted did not disclose it to the WSLCB when it was entered into in 2014. The court held that X-Tracted’s failure to disclose the Headspace license in 2014 did not make it unlawful, but did note that the WSLCB must now require X-Tracted to disclose the license.

Along With the Good News, Consider These Warnings[1]

  • All current licenses must be disclosed to the Washington State Liquor and Cannabis Board (WSLCB), even those entered into before the disclosure obligation was created in 2017.
  • If a trademark licensor is paid a royalty based on a percentage of its licensee’s profits, said licensor will qualify as a “true party of interest” under the WAC and so must:
    • Be named on the licensee’s marijuana business license,
    • Disclose to the WSLCB the source of funds it invests in the licensee’s business, and
    • Have those funds pre-approved by the WSLCB.

This decision makes clear that licensing agreements will continue to be an effective way for Washington cannabis businesses and out-of-state IP owners to work together to their mutual benefit, but also highlights the significant dangers that can arise from poorly drafted or inappropriately implemented licenses. Creative approaches are required to appropriately compensate licensors without turning them into true parties of interest.  Lane Powell has structured such deals for both licensors and licensees in Washington and other states.

[1] (See WAC 314-55-035, which requires that marijuana licenses “must be issued in the name(s) of the true party(ies) of interest” and then goes on in subsection (1) to define “true parties of interest” as any party that “…has the right to receive, a percentage of the gross or net profit from the licensed business”, and in subsection (5) requires that after licensure true parties of interest “…must continue to disclose the source of funds for all moneys invested in the licensed business. The WSLCB must approve these funds prior to investing them into the business.”)

We are proud to support Seattle University’s 6th Annual Northwest Marijuana Law Conference taking place on Friday, November 16. Josh Ashby and Sativa Rasmussen are the program’s Co-Chairs and will lead the conversation, bringing together experts from the law and the industry to provide critical focus and frameworks.

Ben Pirie will present on “Updates on Marijuana Law in Washington, Litigation, Dispute and Financial Issues” at 9:45 a.m.

Justin Hobson will present on “The Impact of Oregon, Canada and California on the Legalization of Marijuana Across the United States” at 11 a.m.

Other topics include:

  • Cannabis and the Constitution
  • The Impact of the 2017 Changes in Tax Law
  • Greening the “Green”: Sustainability in Cannabis Cultivation, Processing and Distribution
  • Growing Investments by Banks and Big Money in the Cannabis Industry
  • Ongoing Issues of Employment Law in the Cannabis Industry
  • Cannabis IP: Federal and State Protection of Trademarks and Other Intellectual Property

Date: November 16, 2018

Time: 8:30 a.m. to 5:15 p.m.

Cost: $225 General Registration | $195 Seattle U Law Alumni | $150 Non-Attorney

Credits:  Approved for 7.0 CLE Credits

(Live webcast and in-person options available.)

For more information and to register, visit the event website.

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