Contracts should be revisited in light of regulatory shifts
As state regulators take measures to protect residents against vape-related illnesses, governmental authorities are increasingly calling upon cannabis operators to disclose the “secret sauce” in their products intended for vaporization. Such transparency will serve to inform consumers, while enabling authorities to track the ingredients and additives included in vape products and respond appropriately to public health concerns.
In Massachusetts, for example, the Cannabis Control Commission now requires concentrate manufacturers to disclose on their products’ list of ingredients every additive used, including thickening agents, diluents and specific terpenes.
A similar measure is in effect in Canada, where vape product manufacturers, pursuant to the Tobacco and Vaping Products Act (2018), are required to disclose all ingredients in any vape e-liquid. A bill with similar effect is pending consideration in New York, while in Ohio and Pennsylvania, some medical marijuana manufacturers volunteered to publicly disclose all vape ingredients, in an effort to build patient confidence and as a matter of self-regulation.
When faced with a subpoena or other formal request for information, operators have no choice but to comply, even if the information constitutes a trade secret or has otherwise been deemed confidential. However, it may be possible to limit the scope of disclosure to those who “need to know” while providing consumers and regulators with the information they need.
The notion of compelled disclosure must be considered when determining the appropriateness and scope of any agreement regarding confidentiality. Most confidentiality obligations take the form of non-disclosure agreements (NDA).
Compelled disclosures may appear in a variety of circumstances independent from vape-related regulatory requirements, including product mix disclosures in cannabis license applications; research partnership agreements in hemp programs or other state and federally regulated research programs; and as a tool in furtherance of lawsuits, including, in particular, actions involving product liability and intellectual property infringement.
Confidentiality agreements, in all forms, should contain a series of carve-outs (exceptions to confidentiality), which typically allow the recipient to disclose the information without breaching the agreement, if the information becomes general public knowledge from authorized sources (other than the discloser). Confidentiality agreements should also specifically address what happens in the event that the recipient is served with a subpoena or other legal document compelling the disclosure of confidential information. It is appropriate to allow the recipient to disclose the confidential information, but contractually require the recipient to: (a) notify the discloser as soon as reasonably practical following receipt of a subpoena or other demand; (b) provide the discloser with a copy of the subpoena or other demand, so that the discloser can evaluate its rights; (c) use commercially reasonable efforts to provide the discloser with sufficient time to seek protective relief, limiting or precluding disclosure; (d) refrain from challenging or objecting to any such discloser’s protective efforts; (e) disclose only the minimum amount necessary to satisfy the subpoena or other demand; and (f) use commercially reasonable efforts to ensure ongoing confidential treatment to any information ultimately disclosed.
That said, imposing these obligations upon the recipient of confidential information means little without meaningful enforcement. When served with a subpoena or other legal document, recipients of confidential information may only have a few weeks to respond before risking contempt or other penalty. With the clock ticking, recipients may feel torn between complying with the subpoena or other legal document, or breaching the NDA.
Smart disclosers should anticipate this time pressure and should include in their confidentiality agreements a provision creating an easy pathway for “equitable relief” — distinct from monetary damages — which may consist of an emergency order preventing or limiting disclosure (such as a restraining order or injunction). Litigators will generally advise that “equitable relief” may be difficult to obtain in court and subject litigants to heightened pleading requirements, monetary bonds and other procedural hurdles, making such an action more costly than traditional litigation. But it is possible to avoid these hurdles by requiring recipients of confidential information to acknowledge the discloser’s advance entitlement to such relief and to waive any bond requirement.
Previously executed confidentiality agreements devoid of these precautions should be revisited in light of the current regulatory environment. If precautions are taken, it may be possible to maintain trade secrets and other confidential business information, while still satisfying governmental calls for transparency, which are rooted in public health.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.