Trade Secrets in Cannabis

Understanding ways to protect intellectual property is becoming increasingly important as the industry grows

With rapid advances in technology, reverse engineering and production scale, cannabis companies are under increasing pressure to protect their intellectual property. Understanding why and how to keep trade secrets is ever more important in this increasingly competitive marketplace.

The definition of a “trade secret” can vary somewhat from jurisdiction to jurisdiction. Generally speaking, however, U.S. courts consider a trade secret to be protectable when it is not generally known in the industry or trade, provides an economic advantage and has been the subject of reasonably appropriate steps to protect its secrecy.

As a hypothetical example, take a cannabis extractor who has developed technology to produce edibles that are effective in less than 20 minutes. This hypothetical extractor is unaware of anyone else who has claimed similar results or has published the specific method this extractor uses to achieve them; she has not shared the details of her process and does not allow anyone in the extraction lab while practicing it; and in an industry where edibles can take up to two hours to reach efficacy, she is aware that her formula has value both for medical and recreational users. Seeking patent protection for her method would require her to disclose its details in the patent application for her competitors to see, and could take years of waiting and tens or hundreds of thousands of dollars to issue as an enforceable patent — if it ever did — and her rights would expire 20 years after submitting the application. Instead, she might decide to maintain her invention as a trade secret.

Until relatively recently, companies could only enforce trade secrets under various state laws. In 2016, President Obama signed the Defend Trade Secrets Act (DTSA), which provided a federal cause of action for trade secret theft, referred to as misappropriation. However, because the DTSA requires a connection to interstate commerce — which, in the case of cannabis businesses, is currently largely illegal — most trade secret proprietors will likely be better off in state court until federal prohibition ends.

Ensuring the security of trade secrets is difficult, especially for new cannabis businesses. In most industries, trade secret cases commonly play out in the context of employee departures, including poaching. Typically, an employee or a group of employees leaves one company for a competitor, or to start their own company, and either launches or promises a suspiciously similar product. Legal tools to protect secrecy include non-disclosure agreements and work-for-hire and non-compete clauses, at least where those clauses are legal. (California-based companies should be particularly cautious, given the state’s longstanding antipathy to non-compete clauses and recent statutory prohibitions on bypassing its restrictions by choice of law or forum clauses.) Because litigating trade secret disputes can be difficult and costly, however, cannabis companies should evaluate the potential for theft and the value of the secret information to decide what level of protections to employ. Prioritizing the time and resources up front to develop safeguards to protect from the theft of a trade secret can produce a long-term savings.

Regardless of the venue in which cannabis companies might eventually seek to enforce their trade secrets, they should take proactive measures to strengthen protection: Keep trade secret information out of the hands of employees who do not need to know it; implement protocols for handling your trade secret information, such as keeping it under lock and key or under password protection when it is not in use; use confidentiality agreements with employees, partners, vendors and other third parties who have access to your trade secret information; have qualified counsel review policies and agreements to ensure they contain appropriate language to maximize your rights under state trade secret laws and the DTSA; when possible, draft non-disclosure provisions with specific trade secrets in mind, not simply a generic reference to “all confidential information.”

And if you ever face the unfortunate circumstance when you believe that your trade secrets were compromised, turn to counsel with expertise in both intellectual property protection and the cannabis industry.

 

Anne van Leynseele is a cannabis regulatory and deal attorney, often working across sovereign borders. She advises multi-state and multi-national cannabis clients on governance, compliance, licensing, acquisition, asset management, and import/export matters. Anne can be reached at avanleynseele@zuberlawler.com.

Joshua Masur has practiced intellectual property litigation and general business litigation for technology companies for two decades. He focuses on issues involving computers, media, and cannabis. Josh can be reached at jmasur@zuberlawler.com.

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