How trade secrets provide protection for cannabis companies

Trade secrets may include recipes and production methods

The cannabis industry is growing faster than federal and state laws can keep up. While the gap between regulation and reality persists, entrepreneurs are investing time and capital developing valuable business information. However, the disparity between federal law and the law in those states that have legalized cannabis can leave some wondering if intellectual property rights even apply.

The recipe for Coca-Cola is probably the world’s most famous trade secret.

Intellectual property and cannabis

Intellectual property is an umbrella term for a bundle of rights that include patents, copyrights, trademarks and trade secrets.

Federal intellectual property protection for cannabis-related products is hotly debated and generally fact-dependent. For example, a federal court in California found that the illegality of a California corporation’s cannabis products under federal law rendered that corporation unable to challenge a Nevada company’s federal trademark.

In contrast, state courts are more likely to offer some protections. A Washington state court agreed that a California-based marijuana business sufficiently “alleged lawful use of its mark in the ordinary course of trade in Washington and, therefore, had trademark protection for its mark pursuant to Washington’s trademark statute.”

But unlike patents, copyrights and trademarks, where enforceability is established or strengthened by public disclosure and use, trade secrets, by their very nature, require secrecy. That said, the existence of a trade secret need not and should not be secret. In fact, some of the most valuable trade secrets are among the most popular, such as the formula for Coca-Cola or a search-engine’s algorithm.

What is a Trade Secret?

“Trade secret” is a broad term with fuzzy edges. As with most laws, trade secret statutes and their interpretation vary from state to state. However, most jurisdictions have adopted some version of the Uniform Trade Secrets Act. Keep in mind, the statute in your particular state may not have identical language.

Generally, almost any type of information may be protected as a trade secret given the correct set of circumstances. The threshold qualification is that the information derives actual or potential value from not being generally known. For example, while the identity of a single customer or vendor is easily ascertainable by any competitor, a confidential list which includes multiple customers’ or vendors’ points of contact, billing rates and business tendencies, and which required significant time and money to develop, would generally qualify as a trade secret. Cannabis-related trade secrets may include horticulture practices to produce flowers; processes used to extract THC, CBD and other cannabinoids; and the formulas for unique edibles, tinctures and oils. At least one state court has explicitly confirmed that “the growing, cultivation, nutrition, additive, extraction and harvest processes and practices” may qualify for trade secret protection.

The owner of the information must take reasonable steps to maintain its secrecy. “Reasonable steps” is an ambiguous term that allows courts (or a jury) to determine what is reasonable on a case-by-case basis. The most common steps include: requiring employees, contractors and customers to sign nondisclosure agreements before the information is disclosed; labeling information as confidential; limiting physical and electronic access to the information; and educating those with access to trade secrets about specific information.

What is Protected?

The owner of trade secret information retains the right to prevent its dissemination for as long as the information remains secret. Once the secret is out, it may be lost forever.

Trade secrets may be enforced through a civil action for trade secret misappropriation. Misappropriation is best described through a series of examples.

– Employees may be liable for misappropriation if they take password-protected information for which they usually do not have access.

– Employees may be liable for misappropriation if they use or disclose a trade secret in violation of a signed nondisclosure agreement.

– A business may be liable for misappropriation if it knew the former employee of a competitor brought trade secrets to the business in violation of a signed nondisclosure agreement with the former employer.

The following examples illustrate what is not trade secret misappropriation:

– A contractor under no contractual obligation of secrecy founds a competing business, using information it has a legal right to use;

– A customer reverse engineers a product; or

– A competitor independently produces the same information.

If the court finds misappropriation has occurred, it may order the party wrongly possessing the trade secret to stop using or return the trade secret, to compensate the owner for actual financial losses or to hand over any profits unjustly earned with the trade secret.

Some states have enacted legislation that anticipates enforcement actions in the cannabis area. Washington law, for example, expressly provides that a licensed marijuana business may enter into an agreement for any “trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to any marijuana business.”

The Bottom Line

Today, trade secrets are likely the most enforceable intellectual property a cannabis business can own. As with all business decisions, the owner of potential trade secrets must weigh the value of the asset against the cost of maintaining it. While the owner must be diligent in its efforts to maintain secrecy, the necessary steps are often not overly burdensome.

At a bare minimum, cannabis companies should clearly identify their trade secret information, limit access to the information and require those with access to sign nondisclosure agreements with indefinite duration as to any trade secrets. Although nothing is guaranteed, such a regimen may save you a world of headaches down the road.

 

Christopher Rosario is an associate with trial law firm McManis Faulkner in San Jose, California. He represents clients in a various litigation topics. He may be reached at crosario@mcmanislaw.com.

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