Budding In: The Law’s Intrusion on Branding inthe Cannabis Industry

Posted by Allison Margolin on June 22, 2020

Budding In: Branding in the Cannabis Industry


By Allison B. Margolin, Raza Lawrence, and Xochilt Gama
Margolin & Lawrence
 
©2020. Published in Landslide, Vol. 12, No. 5, May/June 2020, by the American Bar Association.Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
 
As of January 2020, a total of 11 states have legalized recreational marijuana, and 33 states have legalized medical marijuana. With the increasing number of states legalizing medical and recreational marijuana, state lawmakers and all pertinent licensing authorities have found themselves scrambling to enact and enforce regulations for the different aspects of this continually evolving industry. Among one of the most important elements of the cannabis industry, and any business for that matter, is branding.
 
As the cannabis industry continues to emerge and grow, there is more competition, and it is essential to stand out among other cannabis businesses. One way cannabis businesses are standing out is by creating and protecting unique brands. The cannabis industry, however, is heavily regulated, and those regulations apply to branding. The speed at which cannabis regulations are changing requires those in the industry, including attorneys, to remain vigilant and up to speed.
 
USPTO’s Stance on Trademark Registration of Cannabis-Related Goods
 
Despite the legality of marijuana in many states throughout the U.S., marijuana remains illegal at the federal level, with harsh criminal penalties and the specter of asset forfeiture for any money or property connected to commercial cannabis. Under the supremacy clause to the U.S. Constitution, federal law controls to the extent it conflicts with state law, but for some time now, the federal government has generally not interfered with commercial cannabis businesses to the extent they operate pursuant to state licenses.
 
The Controlled Substances Act (CSA) is the federal statute that regulates controlled substances and places controlled substances on five different schedules according to the following factors: (1)potential for abuse, (2) accepted medical use in treatment, and (3) accepted safety for use. The CSA classifies cannabis as a Schedule I substance, the most restrictive schedule. As a Schedule I substance, the federal government considers marijuana to have a high potential for abuse, no currently accepted medical use in treatment, and a lack of accepted safety for use of the drug under medical supervision. Due to the classification as a Schedule I substance, the federal government prohibits the manufacture, distribution, dispensation, and possession of marijuana.
 
The United States Patent and Trademark Office (USPTO) “refuses to register marks for goods and/or services that show a clear violation of federal law, regardless of the legality of the activities under state law.” Although the USPTO will not trademark cannabis-related goods or services, cannabis businesses have a few options to protect their unique brand.
 
Trademark of Legal Goods and Services Related to Cannabis
 
Currently, one option available to cannabis businesses is to trademark legal goods and services with the same brand and logos as cannabis products. This is an option for cannabis businesses that want the trademark to eventually expand to cannabis itself when marijuana is legalized at the federal level. For example, an applicant can apply to trademark tobacco products, e-cigarettes, ashtrays, or lighters that include the mark the applicant wishes to eventually extend to cannabis-related goods or services. The applicant will go through the same trademark application requirements for registering any other mark. Federal law protection, however, will not extend to cannabis goods, unless the business applies for a cannabis-related mark if and when this is allowed.
 
The applicant will need to ensure that the mark is currently being used in commerce on or in connection with the related goods or services as listed on the application. The applicant will also need to ensure there is no mention of cannabis on the application, and no images of cannabis plants or anything related to cannabis in the application. Otherwise, the examining attorney may reject the application for the mark.
 
State Trademarks for Cannabis-Related Goods and Services
 
Notwithstanding the USPTO’s refusal to trademark cannabis goods and services, those cannabis businesses in states that have legalized cannabis have the option to apply for state-based trademarks. Although state-based trademarks do not provide protections outside of that state, they do provide cannabis businesses with some protection in the state in which the registration is issued.
 
For example, California has allowed cannabis businesses to register their cannabis-related mark in the state since January 1, 2018. Like registering a federal trademark, in order for a cannabis business to register a trademark in California, the mark must be lawfully in use in commerce. For cannabis businesses, this means that the cannabis goods or services associated with the mark are authorized under California law. Accordingly, those cannabis businesses looking to register cannabis marks must have all the required local and state licenses to legally operate a cannabis business. Further, the cannabis business needs to comply with all the labeling and packaging requirements under the Bureau of Cannabis Control’s regulations.
 
The California secretary of state, which is the entity responsible for registering trademarks in the state, also requires that cannabis businesses choose one or more classification codes adopted by the USPTO when registering their trademark. In deciding which classification code to use, the applicant needs to “choose the code(s) which best categorize the good(s) or service(s) associated with their Trademark as if these goods or services did not involve cannabis.” Therefore, an applicant trying to register a trademark for cannabis plants can choose “Classification Code 31,”which is the designated code for “Natural Agricultural Products.” An applicant can also use“Classification Code 34,” which is the designated code for “Smokers Articles” for cannabis products intended for smoking.
 
USPTO’s Newer Stance on CBD
 
Since the enactment of the Agriculture Improvement Act of 2018, commonly known as the 2018Farm Bill, cannabidiol (CBD) has continued to gain traction among many people due to its purported health benefits. From food and beverage products to personal care products, CBD products are on almost every shelf at your nearby grocery store. One of the most notable portions of the 2018 Farm Bill involved the exclusion of hemp from the CSA. Hemp is a strain of the cannabis plant that has a much lower tetrahydrocannabinol (THC) concentration, which is the primary psychoactive chemical in marijuana.
 
Although cannabis businesses still face many hurdles when it comes to branding cannabis-based products at the federal level, those businesses interested in hemp can now actually trademark CBD products or hemp-based products and services. According to the 2018 Farm Bill, in order for hemp to be legal under the bill, it must contain no more than 0.3 percent concentration of delta-9THC. Thus, the USPTO will accept applications to register goods that are derived from hemp as defined in the 2018 Farm Bill.
 
However, the USPTO will refuse registration for any applications for CBD products or hemp-based products and services submitted before December 20, 2018, when the 2018 Farm Bill was signed into law. Any applicant who submitted prior to December 20, 2018, will be given the opportunity to amend the date of the application to conform with the enactment of the 2018 Farm Bill. Applicants must state that the change is being made to establish a valid filing basis under 37 C.F.R.§ 2.34, and amend the identification of goods to specify that the CBD or hemp-based products contains less than 0.3 percent THC.
 
For those applications submitted after December 20, 2018, the USPTO will examine the trademark application to ensure that “the identified services involve cannabis that is ‘hemp’ (i.e., contains less than 0.3% THC).” Applicants will need to submit a statement confirming their activities meet the requirements of the 2018 Farm Bill with respect to the production of hemp. For example, businesses wanting to register a trademark for services involving the cultivation or production of hemp must have the appropriate local and state licenses and permits to produce hemp, and the examining attorney will check for such licenses and permits.
 
In addition to the above requirements, the USPTO also warns applicants about compliance with the Federal Food, Drug, and Cosmetic Act (FDCA). The USPTO makes it clear that the 2018 FarmBill explicitly preserved the U.S. Food and Drug Administration’s (FDA’s) authority to regulate products containing cannabis or cannabis-derived compounds under the FDCA. This includes the use of cannabis or cannabis-derived compounds in foods and dietary supplements without approval by the FDA. Therefore, the USPTO will refuse registration of “marks for foods, beverages, dietary supplements, or pet treats containing CBD . . . even if derived from hemp, as such goods may not be introduced lawfully into interstate commerce.”
 
Nevertheless, on January 13, 2020, a new bill (H.R. 5587) was introduced in Congress that would allow the FDA to regulate hemp-derived CBD, thereby lawfully allowing it to be marketed as a dietary supplement. In the Golden State of California, CBD is also making progress. GovernorGavin Newsom is expected to sign into law California Assembly Bill 228, which would “state that a food, beverage, or cosmetic is not adulterated by the inclusion of industrial hemp or cannabinoids, extracts, or derivatives from industrial hemp, and would prohibit restrictions on the sale of food, beverages, or cosmetics that include industrial hemp or cannabinoids, extracts, or derivatives from industrial hemp.”
 
Other Options Available to Cannabis Businesses
 
In addition to the obstacles cannabis businesses face due to the illegality of cannabis at the federal level, cannabis businesses also face obstacles at the state level when it comes to complying with the wide range of regulations involving branding.
 
One emerging practice in the cannabis industry involves the concept of white labeling. White labeling is a practice where a business places its own brand on products made by a third party.The end result is that the product ultimately appears to be that of the business which placed its label on the product and not of the manufacturer. White labeling in the cannabis industry is even more complicated. A retail business must not only have the appropriate local and state licenses to sell cannabis products, but also obtain its product from a licensed manufacturer.
 
The Bureau of Cannabis Control (BCC), which is the lead agency responsible for licensing retailers, distributors, testing laboratories, micro businesses, and temporary cannabis events, has specifically enacted regulations targeted at this white labeling practice. The BCC’s regulations provide that “[l]icensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.” This is intended to prevent unlicensed businesses from engaging in commercial cannabis activities by selling their products through licensed cannabis businesses, and directing the standards and practices of those licensed businesses. The BCC has provided guidance on this section, stating that unlicensed brand owners are allowed to license their brand to licensed entities as long as one of the brand owners is added to the license application as an “owner” or “manager” and undergoes a background check, thereby ensuring that the people in control of the products are under the jurisdiction of the licensing agency.
 
Licensing agreements are another way cannabis businesses are attempting to stand out among other businesses. Generally, companies with established or well-recognized brands will enter into licensing agreements with other not-so-well-established manufacturers of products. The established brand will profit from the success of the brand itself, and the licensee will profit from using its product with a successful and remarkable brand. It’s a win-win situation. For example, the cannabis industry has attracted the attention of many celebrities. Snoop Dogg and Mike Tyson both have equity interest in cannabis businesses. Celebrities, due to their widespread reputation and audience, can attract more customers, and more customers means the possibility of more profits.
 
While this is entirely permitted for many other products and services that do not involve cannabis, for those in the cannabis industry, current established brands are not permitted to enter the industry unless they are licensed themselves, or they enter into a licensing agreement with a licensed business where one of the brand owners becomes an owner or manager of the cannabis license. The same regulations apply to distributors in relation to non cannabis goods. Pursuant to the BCC’s regulations, a “licensed distributor shall distribute only cannabis goods, cannabis accessories, and licensees’ branded merchandise or promotional materials.” Currently, if a licensed distributor, licensed retailer, or licensed micro business wishes to sell branded merchandise, it must first obtain written approval from the BCC. To obtain approval, the licensed business must submit a written request along with a photograph of the branded merchandise to the BCC. These stringent regulations and disclosure requirements involving cannabis have likely prevented celebrities and other high-profile potential investors from getting involved in the cannabis industry.
 
Management Agreements in the Cannabis Industry
 
Given the multiple hurdles that cannabis businesses face, including white labeling restrictions and disclosure laws, management agreements can provide a lifeline. A cannabis business can enter into an agreement with a management firm that has significant expertise in branding and marketing services to provide advisory services to the licensed commercial cannabis business.The management company is entitled to receive a fee that is commensurate with the value of services the management company provides to the cannabis business. A management company may receive compensation, including profit sharing, in accordance with the management agreement.
 
Under the BCC’s regulations, in order for an applicant to obtain a state cannabis license, the applicant must provide a full disclosure of all entities and individuals with a financial interest in the cannabis business. An entity or individual with a financial interest includes anyone who will receive a portion of the profits, anyone who made an investment in the commercial cannabis business, anyone who loaned money to the cannabis business, or anyone with any equity interest in the cannabis business no matter how small. For every investment, the applicant must provide the amount of the investment, the date the investment was made, the terms of the investment, and the investor’s contact information. Additionally, applicants must also notify the BCC if there are any ownership changes while the cannabis business is operating. Pursuant to the cannabis regulations, a management company will be considered an owner, subject to a background check.
 
Conclusion
 
It is indisputable that cannabis businesses still face many obstacles simply for being in an industry that is still federally illegal, even though it has been legalized in the majority of states in the U.S. In addition to the stringent regulations involving cannabis licensing, cannabis businesses also encounter several challenges with regard to branding a unique brand. As for any business, protecting a unique brand is extremely important for cannabis businesses that want to expand and financially succeed. Although cannabis businesses in states that have legalized recreational marijuana have the option to obtain a state-based trademark, this only allows these businesses to protect their brand within that state. In sum, while cannabis businesses have a few options to protect their unique brand, cannabis businesses will not be able to operate like any other fully legal business until marijuana is legalized at the federal level.
 
In contrast, CBD is making progress at both the state and federal level. Businesses in the hemp industry, as long as they have the appropriate local and state licenses to produce hemp, may register a trademark for goods and services involving hemp or CBD. Because hemp and CBD businesses are now federally legal, they enjoy more protections than regular cannabis businesses, although they remain heavily regulated.
 

For more information about this post, contact Margolin & Lawrence.

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.