Legally creating brand awareness in an illegal market
Federal law complicates trademark protections
By Lauren Rudick
One of the hottest ancillary businesses in the cannabis industry is branding. Cannabis businesses that are enjoying early market success in their home states are seeking multi-state and national expansion opportunities. New businesses that specialize in elevating brand awareness have found a profitable niche supporting these enterprises.
In September 2015, the United States Patent and Trademark Office (USPTO) issued the first federal trademark registration to a company that sells cannabis products, Cannabis Basics.
Brand recognition presents a unique set of business challenges for cannabis professionals. Brand strength typically derives from “use” of a trademark. But with cannabis, the only state-legal industry operating in violation of federal law, “use” remains illegal and products containing THC cannot qualify for trademark registration. Mistakes in brand development could subject businesses (and their attorneys) to criminal and regulatory sanctions. Given the industry’s novelty, we cannot predict the resolution of disputes between confusingly similar cannabis brands. The tools upon which typical businesses rely to prevent customer confusion are simply unavailable in the cannabis industry. Because the federal government still regards cannabis as a Schedule I drug, alternate methods of trademark protection should be pursued.
First, choose your brand name wisely. Steer away from terms that are generic to the industry, including strains and slang terms (such as indica, ganja or Mary Jane) and terms that are merely descriptive of your product (like organic herb), and select a brand name that is distinctive. The more distinctive your trademark, the more protectable it is. Given the many variables that influence the sale of cannabis products (growing technique, extraction method, breeding, sustainable practices, use of “organic” growth supplements, celebrity affiliation, etc.), the possibilities to set your brand apart are limitless.
Next, secure state registration of your trademark. While a state-registered trademark may not be enforceable nationally, the efforts you employ to protect your brand on a state level could resolve intra-state competition disputes, and eventually serve as precedent for national protection.
Always utilize a well-written cannabis-specific license agreement. Traditional license agreements provide royalty payments to the trademark owner. But royalty payments constitute profit sharing, and those entities collecting cannabis profits must report to the same state licensing agencies responsible for assuring compliance with residency requirements. This is not an issue in states like New York and Maryland that do not have residency requirements. But to be safe, consider charging a “consulting fee” in lieu of royalty payments, to assure products developed under your brand are of a consistent quality. A uniform license agreement will also protect against policing complications that would inevitably arise under a bifurcated licensing scheme.
If available, seek federal registration for those branded products that do not contain THC, including CBD products, clothing, non-infused treats, vaporizers and other accessories. Using carefully-written company organizational documents, such as operating agreements and bylaws, insulate those aspects of your company involving the cultivation, distribution and retail of products containing THC from those that do not. The reason to separate branded products with THC from those that do not is that sale of cannabis remains illegal under federal law; therefore, obtaining trademark registration for products that are legal under federal law serves multiple purposes.
The mere existence of the federal registry discourages creation of confusingly similar trademarks. Once registered, trademark owners may utilize the ® symbol, as opposed to the TM symbol, signifying an investment and commitment to brand development and protection.
Registration further provides national protection, and precludes competitors from asserting “good faith” adoption of your trademark in defense to alleged infringement. Registration also constitutes presumptive evidence of validity and exclusiveness — which may become “incontestable” after five years — providing trademark owners with an effective means of avoiding expensive, protracted litigation.
Cannabis businesses do not have unfettered access to the USPTO. Until recently, applicants touching the cannabis plant have been routinely rejected (even Cannabis Basics’ registration only covers CBD products).
Examiners at the USPTO are prohibited from approving trademarks for registrations that are deemed immoral or scandalous, or not “used in commerce” across state lines.
Given recent state legalization efforts, advances in medicine and legalization initiatives in Canada and Mexico, it is increasingly absurd to malign cannabis products as “immoral” or “scandalous.” But the requirement that a trademark be “used in commerce” is fatal to any application involving a THC-based product.
Applications for registration typically require owner declarations about use of a product or service in interstate commerce. Such “use declarations” must be sworn under penalties of perjury. It is inadvisable to declare that you are using a THC product in commerce; such a declaration could easily be used against you in a federal proceeding. It is also inadvisable to lie about use on a sworn declaration, as such would be illegal, subjecting you and your attorney to criminal charges and disciplinary proceedings. Accordingly, brands of products containing THC will need to wait until cannabis is delisted as a Schedule I drug before seeking trademark registration.
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, is a white-shoe boutique firm with a track record for success, handling sophisticated legal matters including business and corporate law.