Like the tech industry, the cannabis market is quickly being shaped by its volatile intellectual property (IP) rights landscape. Both new markets are plagued by dysfunctional regulations and a tendency for big companies to bully smaller ones through IP litigation. America’s most prominent cannabis companies are already fighting the battles for market share by securing, protecting and enforcing IP.
“The cannabis IP landscape may not be as dense as the tech industries, but there are still very fragile start-up companies and small farms that are easy [for a bigger firm] to crush with a patent lawsuit,” explains Dale Hunt, a well-respected cannabis IP attorney and founder of Plant & Planet Law Firm.
Hunt says companies will sometimes buy up patents from failed companies, or purchase patents that are for sale because they aren’t being used, with the sole intention of bringing suits against infringers.
Of the cases being litigated currently, UCANN v. Pure Hemp Collective is particularly concerning for small cannabis businesses across the country. UCANN holds a patent for a method of cannabis oil extraction that may eliminate many products from the market made by producers who are unlikely to have the funds to litigate and prove prior art.
“In the event that UCANN is successful in its lawsuit, the company could then target other cannabis businesses that are using the same concentrate formulation. If UCANN loses, then other businesses may go ahead and pursue such formulations more competitively,” Cannabis Business Times reported earlier this year
Patent trolls are not the only players in the IP land grab. Non-cannabis businesses have already started filing lawsuits against cannabis companies for unlawfully profiting from patented production methods, state-registered trademarks, or other forms of protected IP. The real threat with these lawsuits is that the plaintiff normally has a federally legal patent, trademark, or copyright in a legitimate market with years of proven and documented prior art, and the cannabis business doesn’t.
“Patent litigation is terribly expensive, technical, and often requires experts if the case goes to trial; it’s nothing to be trifled with,” Hunt says.
Earlier this year, Mondelez Canada Inc. became the latest Fortune 500 company to file an infringement lawsuit against a small cannabis business. Mondelez, the company that produces the famous Sour Patch Kids candy, filed suit against the unknown makers of “Stoney Patch” cannabis-infused gummies in a California federal court.
Unless the defendants in this case purchased a specialized insurance policy that includes defense costs, it is unlikely that they can afford to fight Mondelez’s claims. Coverage for smaller cannabis businesses is essential because the defense costs associated with defending an IP claim are burdensome at best and bankrupting at worst.
Also this year, the United Parcel Service (UPS) filed suit against an assortment of cannabis delivery companies for trademark infringement. The defendants, United Pot Smokers, UPS420, and THCPlant, are all accused of trademark dilution, trademark infringement, unfair business practices, false designation of origin and deceptive advertising.
Despite the growing availability of insurance policies aimed at providing defense coverage for cannabis-related businesses, there is still an overwhelming lack of coverage in the industry. Rather than stand by and wait to be served with their own infringement lawsuit, smaller businesses can begin seeking out cannabis insurance brokers for coverage options that will help finance their defense costs.
Harborside dispensary is one of the only cannabis businesses known to have successfully fended off an infringement claim from a Fortune 500 company. The Hershey Co. sent Harborside a cease and desist letter that included a demand of $20,000 in liquidated damages and a confidentiality clause. Harborside ultimately decided to fight Hershey’s claim and soon after, Hershey’s was forced into a settlement that provided zero legal liability to Harborside.
“Harborside refused confidentiality, and I told Hershey’s that we were prepared to proceed with the litigation,” explained Henry Wykowski, Harborside’s longtime attorney. “And guess what happened? They caved the next day.”
Harborside’s success helps prove the importance of working with both specialized counsel and an experienced commercial cannabis insurance broker to make sure you are properly protected during the cannabis IP land grab.
Kirk Miller is an executive producer at Nine Point Strategies.