An Entrepreneur’s Guide to Navigating California’s Complex Cannabis Industry

“Despite being illegal under federal law, the USPTO has been issuing utility patents directed to cannabis-related inventions for decades.”

"Indoor Cannabis Plants" by Plantlady223. Licensed under CC BY-SA 4.0.As of now, ten states have legalized recreational cannabis. Twenty-one other states allow medicinal use of cannabis, many of which are expected to legalize recreational cannabis in the near future. Investors have sunk an estimated $10 billion into cannabis-related businesses in 2018, an amount that is expected to reach $16 billion this year. The fast spreading legalization of cannabis presents a unique opportunity for entrepreneurs, businesses and investors to get in on the “ground floor” of this growing market.

California, as the largest single market for legalized Cannabis in North America, has attracted outsized attention from potential investors, who also see the state’s legalization as a trend setter for other states. However, would be investors in the California cannabis market often find themselves in a maze of complicated and changing licensing rules and regulations, banking challenges and uncertainties, choice of the appropriate business structure, and protection of potential intellectual property (IP).

At a high level, entrepreneurs seeking to invest in the cannabis businesses have two broad choices for making their investment: businesses that “touch the plant,” and those that don’t. The former category includes cultivation, dispensaries, transportation, retail outlets, testing and manufacture of cannabis infused products. Included in the latter category are businesses that deal with the cannabis industry in a peripheral manner, such as security, media and counseling services.

Developing Cannabis Legislation

Keeping up with the cascade of cannabis legislation and regulation at the federal, state and local levels affecting cannabis businesses can be daunting. Recent developments at the federal level include the 2018 Farm Bill, signed by the President last December, which legalized production of hemp with less than 0.3% THC. More recently, congress is working on passing the SAFE Banking Act, which would protect banks from criminal liability for providing financial services to legitimate cannabis businesses. The banking legislation is likely to have a significant impact on the legal cannabis market and its ability to raise and process funds.

Setting Up a Business

A threshold issue for entrepreneurs is choosing a proper business structure for their startups. There are several choices for structuring of a cannabis startup business. In addition to the four conventional choices, namely, sole proprietorship, partnership, corporation and limited liability company, California cannabis businesses can form as Cannabis Cooperative Associations (CCAs), which allows small producers to join and coordinate production and marketing with three or more people, the majority of whom are residents of the state of California; or a microbusiness, which allows a business to engage in three out of the four major permit areas (cultivating, manufacturing, distributing, and retailing). Choice of the appropriate business structure is significant, as it will impact management, ownership Interests, transfer of assets, taxation and personal liability.

Obtaining a License

Most businesses dealing with cannabis need a license to operate. California has a dual local/state licensing system. Applicants are required to obtain a city and perhaps county permit before applying for a state license. There are three agencies which, together, issue 26 Licenses. The Bureau of Cannabis Control (BCC) issues licenses to retailers, distributors, test Labs and Microbusinesses. The Department of Food & Agriculture is responsible for licenses issued to cultivators, and the Department of Public Health licenses manufacturers of cannabis products, e.g. edibles.

IP Protection

Because of the exclusivity it provides its owners, IP is a key asset for cannabis focused businesses. However, protection and enforcement of cannabis-related IP faces unique challenges, since, despite its recent and spreading success at the state level, cannabis is still illegal at the federal level, while most IP protection, as well as enforcement, is federal. Nevertheless, cannabis focused businesses can benefit from IP protection.

Utility patents, design patents, and plant patents are available to protect cannabis-related inventions. Despite being illegal under federal law, the U.S. Patent and Trademark Office (USPTO) has been issuing utility patents directed to cannabis-related inventions for decades. Recent examples of issued cannabis utility patents include: U.S. patent 10,028,987, issued on July 24, 2018, titled “Cannabis-infused milk,’” and USPN 10,206,888, issued February 19, 2019, titled “A cannabis based therapeutic product for treatment of chronic pain produced by separating hash resin from plant material of the cannabis plant.”

Plant patents protect new varieties of plants. U.S. patent PP27,475, issued on December 20, 2016, is titled “Cannabis plant named `Ecuadorian Sativa.”  According to its specification, “The new strain has energizing and motivating psychoactive effects.”

Design patents protect ornamental, aesthetic and non-functional aspects of useful products. Design patents can protect cannabis-related products such as smoking paraphernalia and containers. For example, U.S. patent D844,892, issued on April 2, 2019, issued for a “Cannabis container,’ and U.S. patent D798,739, issued on October 3, 2017, is directed to a “Cannabis storing container with individual tear off lids.”

For businesses that are reluctant to disclose their cannabis inventions to the public in exchange for patent protection, trade secret protection is an option. Cannabis businesses can deploy trade secret law to protect sensitive and valuable business information such as unpatented inventions, marketing strategy and information, customer lists, processes and software, recipes, formulas, and developing technology.

As a source identifier, trademark is another highly valuable IP asset to cannabis businesses in establishing and promoting their brand. Despite the unavailability of federal trademark protection and most service marks for cannabis products, cannabis businesses can still obtain significant trademark protection for their products and services by adopting a hybrid protection approach, which includes state registration in cannabis-friendly states combined with using the otherwise federally unprotectable marks on parallel products that do not include cannabis. For example, while a mark identifying a cannabis cookie can’t yet receive federal protection, the mark can obtain federal protection in connection with use of the same cookie without cannabis. That way, when federal trademark protection for cannabis does become available, the registration can be amended. While a state trademark registration is not as strong and robust as federal registration, it nevertheless enhances the value of the business by providing state-wide protection for the mark and provides would be infringers with notice of the mark. As the number of cannabis-friendly states increases, the geographic sphere of state-protected trademarks will increase.

Otherwise unprotectable cannabis logos can also benefit from copyright protection in a number of ways, including graphical depictions and illustrations and writings on the product packaging or the company website, as well as logos. Concerning logos, obtaining copyright registration is a way to get around lack of availability of protection for the logo as a trademark at the federal level.

Optimize the Opportunities

Entrepreneurs seeking to invest in cannabis-related businesses face special opportunities and challenges due to the developing and fast changing business and legal landscape. However, making timely choices, along with knowledge of the complexities, can help optimize the opportunities for success in this field.

Image Source:
“Indoor Cannabis Plants” by Plantlady223.
Licensed under CC BY-SA 4.0. 



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