*This story was originally published in the October 2017 issue of Marijuana Venture, on sale now at a store near you.
The good news for the marijuana industry is that the U.S. Patent and Trademark Office (USPTO) has begun issuing patents for inventions with patentable subject-matter, and further, that many companies are starting to file patent applications to stake their claims to plant strains, breeding methods, extraction techniques, growing technologies, proprietary software and novel products.
Unlike federal trademarks, which, under the Lanham Act, cannot be issued for federally illegal activities, there are no analogous laws that prevent patents from being issued to the marijuana industry. As more companies become aware of the opportunity and importance of obtaining patent protection for their inventions, those companies are creating valuable assets and gaining strategic competitive advantages within their markets while accruing, in virtue of their patents, enhanced business valuations.
What is a patent?
By Lindsay Moore, Ph.D.
According to the United States Patent and Trademark Office, a patent is an intellectual property right that is granted by the U.S. government to an inventor. In exchange for the public disclosure of the invention to stimulate innovation, patent owners are granted a legal monopoly on the invention for 20 years.
During that term, the owner has a right to exclude or stop all others from making, using or offering for sale the protected invention without the permission of the patent holder.
Patents protect inventions that are novel, nonobvious and useful. There are three types of patents:
– Plant patents are for any inventor who invents or discovers and asexually reproduces a distinct or new variety of a plant.
– Utility patents are available for machines, articles of manufacture, methods, processes, compositions of matter and in some cases, software and business methods.
– Design patents are for new, non-functional ornamental designs or distinct articles of manufacture.
Patents can be extremely valuable for both strategic and monetary reasons. Strategically, the monopoly awarded by the government to the patent holder delivers a powerful competitive advantage in any marketplace. Monetarily, the value of patents as intellectual property and assets of a company is unsurpassed. For example, the patents held by the companies that make up the S&P Index are valued conservatively at more than $6.4 trillion (30%) as of Feb. 28, 2017 — approximately 30% of the index’s $21.4 trillion market capitalization.
Part I: Patentability and Strategic Opportunity
According to the 2016 Envision IP study on medical marijuana patents, there were 266 patents in-force and 255 patents pending at of the end of 2016. Prior to 2000 and the increased legalization of medical marijuana, only a few cannabis-related patents were issued to academic institutions, research laboratories and the U.S. government. However, since 2009, patent filings have increased rapidly, and with the spreading decriminalization of recreational marijuana starting in 2012, patent filings have now more than tripled.
Those who stake their claims early may obtain key intellectual property rights that will initially provide a broad marketplace advantage, while also helping create the basic topography of the industry going forward, particularly regarding industry standards, the foundations for medical claims, compositions of matter, extraction technology, therapeutic use, delivery vehicles and other diverse products.
Early, industry-founding patents are commonly the more highly monetized patents. They are either used to exclude competitors from the marketplace or licensed to create ongoing royalties. Early-stage patents are suggestive of the nexuses of invention that exist at the start of a new industry, and the scope for innovation going forward. Patent filings and issuances within recent years range from hydroponic growing methods to trimming devices, drug screening equipment, transdermal delivery vehicles and the use of cannabinoids in the treatment of a number of diseases. The trend suggests that we are at the very beginning of a patent “gold rush” that will continue for years to come.
The innovation index of the marijuana industry, where everything has to be “reinvented and discovered,” suggests that the industry will become patent-intensive, and that patents, with brands, will become the major business assets of the most successful cannabis businesses. Patents are not inexpensive, often costing $25,000 to $35,000 over three years of prosecution.
However, they offer a large return on investment by providing legal monopoly protection for decades, greater sales volume in virtue of consumer demand for better products, greatly increased margins because of premium pricing and favorable attention from sources of capital. For these reasons, it is likely that many businesses will seek patent protection for their technologies.
Fundamentally, patents are valuable business assets that are inexpensive to create. It is especially strategic to patent during the early stages of an industry, when the cost of patents buys more than it will after the patent landscape has been carved up and closely populated. Amortized over the life of a 20-year monopoly, $35,000 for a well-written patent actually turns out to be a small investment — $1,750 per year.
At this early stage in the industry, it may be hard for many to appreciate the monopolistic power of a patent. It is a startling realization to suddenly find that another company owns, for example, the most desirable strains of cannabis or the optimal extraction process. And while some patent owners may license selected rights to others for a royalty, they also may exclude other players from the marketplace.
From the beginning, Apple used its patents to keep others out of the cell phone market. The company’s modus operandi was to never license its intellectual property and to aggressively enforce its rights against those who infringed, taking them to court and often winning large awards for damages and the return of ill-gotten profits. Even after Google invented its Android cell phone operating system and made it available as a “free” technology to other players, the company still couldn’t compete effectively against Apple because it didn’t have the sophistication of the iPhone design and operating system. Thus, it took Samsung years to become a formidable competitor.
Generally, it is cheaper to invent and fund patent portfolios than it is to license rights to become competitive or to defend against infringement in court. Licensees are always in a weaker position because they often have to pay substantial royalties off their gross revenues and accept reduced margins.
Part II: Key Competitive Advantages
At the beginning of every new industry, there is already enough know-how in the market space to allow the industry to emerge and start growing. Whatever knowledge is already out there is in the public domain. It isn’t owned by anyone and is free to all. Public domain know-how includes everything that has already been disclosed or used freely in commerce for at least one year and that is not protected or claimed by any party. However, new inventions on top of that prior knowledge can be filed for protection and patenting. For example, in the early days of the marijuana industry, anyone could come along with seeds and begin to grow cannabis plants without another party claiming they owned that respective “genus, species and variety of a plant.”
Irrespective of what is in the public domain, there is always a great need in the early stages of an industry to solve the initial problems of commercialization and industrialization. Under the rule of “reinvention and discovery,” there will be opportunity for innovation in every aspect and dimension of the industry. If we look at the natural adjacent industries, we can see the natural next steps and the obvious patentable opportunities, especially those that are easy to overlook or sequence improperly. From the perspective of obtaining patent protection, the marijuana industry will primarily focus on the following areas:
- Plant Patents: The plants themselves; plant breeding, cultivation and horticulture.
- Utility Patents: Farming to include plants, harvesting and handling; manufacturing of consumer products and the development of industry services; cannabis science and chemistry to include genomics, extraction, standardization, biological tests, and the design and improvement of plants; product development.
- Design Patents: Non-functional aspects of uniquely designed and ornamental objects of manufacture and product design and shapes, and paraphernalia.
As in other agricultural industries, the fundamental base of the cannabis industry will largely come to be protected by plant patents and patents regarding the breeding and care of cannabis. Marijuana plant patents have already been filed at the USPTO and at least one has issued: Patent No. US 2014/0287068 A1, titled “Breeding, Production, Processing and Use of Specialty Cannabis.” It was filed in 2013 and issued in 2015 and it is, according to Vice News, “the first-ever patent for a plant containing significant amounts of THC.”
It is likely that there will be a large number of plant patents that will be filed during the coming years and the owner of each such patent will be able to exclude competitors from growing and commercializing that specific plant strain.
In time, disputes over who owns what intellectual property rights are likely to occur, and whoever owns the best strains and has title to their taxonomy and the genomic details in virtue to a plant patent, will likely enjoy tremendous competitive advantage over those who merely plant seeds. In some cases, popular strains will be developed by specialized agricultural laboratories and companies, and then be sold and licensed to many growers in the industry. Breeding and cultivation will also become a professional focus and an essential aspect of marketplace success because they will be creating patentable subject matter.
The primary focus of patent filing will be to obtain the exclusive rights to the most valuable plant strains, to optimize breeding and cultivation and to continue to innovate new plants.
Most agricultural products require specialized farming and harvesting equipment.
The techniques and methods for cultivating the most potent and high-yielding plants will be a simultaneous focus for the industry. Because the industry is based on a plant, the growing, cultivating and harvesting of marijuana in all its forms will require specialized and newly invented methods, protocols, equipment and processes. Very little of it exists at this present time.
In this respect, the rise of the marijuana plant as an economic plant with characteristics and specification unlike any other agricultural products, is similar to the situation that occurred with the rise of gluten-free foods in the natural and organic baked foods market. Gluten-free foods had to replace grains like wheat, barley and rye with new grains and plants that had no gluten in them. The resulting concoctions often required grain ingredients that weren’t being farmed on any scale. Further, the dough could not be manufactured with the traditional baking industry equipment because the gluten-free dough was so unlike traditional wheat-based dough. It was a tough, intractable, tacky dough that necessitated the invention of new manufacturing equipment and alternative processes to result in a desirable baked product.
In 2011, Dr. Jonathan Page and his team of scientists first sequenced the cannabis genome and began to put genomic tools in the hands of breeders, so that new and improved varieties could be developed. These tools are essential to sort out the lineage and strains of marijuana and their characteristics. The scientific research about cannabis is just beginning and is largely focused upon differentiating the two main categories of marijuana — sativa and indica — with their varying characteristics and the basic pharmacognosy of the plant.
As the work proceeds, much of it will be injected into the public domain, but there will also be protectable subject-matter pertaining to commercialization and scaling the industry. Invention will be captured by the companies and laboratories that unpack the workings of marijuana chemistry and discover the right extraction method for the right product, calibration regarding the potency, scent, flavor and texture of the products themselves and new ways to consume the products.
The tobacco industry may be the closest comparison to show the promise of marijuana, but marijuana already offers an explosion of product forms and modes of consumption that go well beyond the cigarette industry. Tobacco has only been able to meaningfully differentiate itself with blends, filters, flavors, indicators of strength and brand imagery.
All these tobacco vectors are opportunities to invent and file patents in the marijuana industry. The industry has certainly picked up on the advent of e-cigarettes to vape liquid and has adapted it admirably to its needs, all the while creating many instances of patentable subject matter.
E-cigarettes were born from the brainchild of a Chinese patent that protected a mechanism to vape nicotine. As e-cigarettes were adopted by Western companies, the owner of that Chinese patent began to enforce against the broad use of nicotine vaping devices, forcing many Western companies to come under license and pay astounding royalties. The vaping industry is currently valued at $5.2 billion and growing, about the same size the current legal marijuana industry.
The marijuana industry has shown it has the imagination to generate a large number of design patents, comparable to Coca-Cola’s fluted bottle. Already paraphernalia, vaporizers and other delivery vehicles have resulted in many non-functional product designs, with shapes, color, arrangement and ornamental designs that provide the opportunity for design patents.
Part III: Intellectual Property Know-How
A challenge for many companies in the marijuana industry will be to learn to think in terms of patents, to understand why protected assets are essential to business success and creating wealth and to learn the valuable art of creating “patentable subject matter.”
There is an abundance of opportunity to protect know-how, art and invention with patents, to strategically position enterprises in markets and to monetize companies going forward. The question will be if the industry can directly connect patents with market share, monetary value and wealth. As intangible assets, patents accrue monetary value around their technological base, boosting the balance sheet of the company and driving revenues, profits and market capitalization.
Simply said, the central patent strategy is to pursue significant invention and innovation, articulate broad claims in well-written patents, assert rights against infringement and monetize patents through accruing revenues based upon patented inventions, and to license art to competitors.
It is in the interest of all cannabis businesses to protect and leverage inventions and to enhance the wealth-producing critical mass of the industry.
Lindsay Moore is the CEO of KLM Inc., a strategic planning and branding consultancy in Colorado that also specializes in the management of intellectual property assets for companies. Moore received her Ph.D. from the University of Colorado and is a former adjunct professor of law at George Washington University Law School in Washington, D.C. She co-authored the book “Intellectual Capital in Enterprise Success-Strategy Revisited,” published by John Wiley & Sons in 2008.[contextly_auto_sidebar]