Transforming opinions about cannabis, Amazon's patent move and a startup godsend are on tap.
Cannabis is an industry that’s growing like gangbusters with demand for products that range from skin care treatments to anxiety-reducing dog treats. While the industry was projected to reach $35 billion this year, there are several obstacles entrepreneurs in the space are trying to overcome. Among them is intellectual property protection.
Cannabis is legal in a variety of forms in 33 states, yet its consumption and production remain illegal under federal law. Trademarks—the brand names and logos for products and services—are approved by the United States Patent and Trademark Office (USPTO), presenting a conflict between what’s legal in a state and what’s illegal at the federal level.
Enter attorneys who are trying to help clients protect intellectual property to foster innovation and investment.Stay up to date with the region’s business scene. Subscribe to Columbus CEO’s weekly newsletter.
Greg Krabacher, a partner at Bricker & Eckler, says there have been positive developments that are easing barriers for trademark protection in the cannabis industry.
Recent U.S. Supreme Court litigation unrelated to the cannabis industry, but related to the First Amendment, has reduced the odds of trademarks not being approved on the basis of “immoral, deceptive or scandalous matter.” And the Agriculture Improvement Act of 2018 legalized products derived from hemp where the concentration of the psychoactive compound THC is less than 0.3 percent by dry weight.
Krabacher says several obstacles remain under the current USPTO guidelines for the examination of trademarks in the cannabis business.
“It’s important to remember what the Farm Bill did and did not do,” he says. “A lot of companies rushed to the federal trademark office after the Farm Bill, believing that it completely legalized their products and services. The reality is that the federal law is still catching up with the state law, and it may take more time before cannabis businesses have the same rights to protect their brands that other industries do.”
He noted two issues. First, if a product is derived from marijuana, as opposed to hemp, or has more than 0.3 percent THC, it continues to violate the federal Controlled Substances Act, and applicants will be rejected for federal trademark protection.
Second, the Farm Bill expressly preserved the authority of the Food and Drug Administration to regulate products containing cannabis or cannabis-derived compounds. In the absence of FDA approval of such products, the trademark office’s position has been to continue to reject marks for foods, beverages, dietary supplements or pet treats containing CBD as unlawful under the Federal Food, Drug and Cosmetic Act.
Cannabis businesses can protect their trademarks by registering them at the state level. Krabacher says this is an option many are pursuing. To avoid pitfalls, he recommends paying close attention to particular state laws and any special registration procedures for products or services related to the cannabis industry.
According to IPWatchdog, unlike trademarks, a patent doesn’t require an applicant to show that the product is lawfully used in interstate commerce. As a result, it reports that the USPTO is issuing an increasing number of cannabis-related patents.
Alex Brown, partner at Dickinson Wright, believes the conflicts that now exist between federal and state law will be resolved over time, which will open up the industry to major players who, so far, have sat on the sidelines. Most banks, for example, are federally regulated and have been skittish about cannabis.
“For the entrepreneurial folks, this is a great opportunity to get a foothold and build a business,” Brown says. “Once the cannabis industry is no longer illegal (on the federal level), you’ll see big players like pharmaceutical companies snapping up cannabis businesses. That will create a lot of wealthy exits.”
Amazon takes IP in-house
Tyler Dunham, founder of Dunham IP Law, has seen an uptick in clients who need representation now that Amazon.com has taken its utility patent infringement process in-house. The ecommerce giant uses third-party patent attorneys to review complaints and make initial determinations of infringement. Amazon then can remove abusers from the platform without going to court.
The change, which Amazon made last year, is beneficial to smaller businesses that rely on the platform to sell their wares. Federal patent litigation could cost into the six figures and take years to resolve. This new process may cost $10,000 or less and can be settled in a few months, Dunham says. Children’s toys, exercise equipment, tools and home improvement products are the most commonly disputed.
“Utility patents have very specific language and numbered sentences that claim the invention,” Dunham says. “Interpreting that language is difficult and takes a lot of time to work through in court. Amazon has streamlined this—they want only one claim from the patent to be included, so you have to be very careful about which claim you pick. Still, my hat is off to Amazon for making this faster and easier because so much commerce is being moved to their platform.”
Kate Ball, who focuses her practice on startups and growth-stage businesses at Gillespie Law Group, is intrigued by a new “Discovery Assist” program created by venture capital company First Round, which has offices in San Francisco, New York and Philadelphia. By deploying artificial intelligence, the firm is helping pre- and early product founders hone their startup ideas through introductions to the companies that would be their likely customers. By tapping into First Round’s deep network of startup builders and Fortune 1000 operators, the firm is helping the startups skip months of asking for favors, opt-ins, failed introductions and “sorry for the delay” replies.
“I think this is the biggest barrier to entry for entrepreneurs, especially under-represented entrepreneurs who lack access to capital, but also lack access to casual conversations with early customers,” Ball says. “The program received a ton of attention in just the first 24 hours.”
Connections to potential customers to vet and help improve products is one of the most important steps of a startup’s journey ahead of establishing its IP, Ball says, and should happen even before capital is raised. They can help validate the idea, identify problems before lots of money is spent and suggest changes in course.
“It’s hard to find potential customers to sit down and give feedback,” Ball says. “This allows a startup to connect with the customers who feel the pain point most acutely and then have them be willing to go on the journey with you. It would be really interesting to explore whether similar programs could exist in the Midwest.”
Laura Newpoff is a freelance writer.