This post originally appeared as an article in Cannabis Business Executive on December 5, 2019.
A cannabis product business is no simple venture. Cannabusinesses have to innovate to remain competitive just like any other company, but in an industry plagued by complex and changing federal and state regulations of marijuana (aka cannabis). At the heart of every innovation lies potentially protectible intellectual property (IP) rights and that is no different in the cannabis industry. In our two-part article, we provide cannabis entrepreneurs with an overview of the IP protections available to them for their innovations. In Part I, we discuss trade secret protection. In Part II, we will cover patent protection. In both parts, we will address choosing between trade secret and patent protection.
Defining a “Trade Secret”
A trade secret is commonly defined as information – e.g., a formula, program, device, method, technique, or process -- that derives economic value by not being generally known to the public (or those in the industry who can take advantage of the information) and is the subject of reasonable efforts to keep it secret. [1] Potential trade secrets do not include information that is readily available to or ascertainable by members of the public or those in the particular industry. For example, the composition of an flavored CBD extract may not be subject to trade secret protection if competitors can easily discover the composition by reverse engineering (i.e., analyzing) the extract.
There are many potential trade secrets in the cannabis business -- growing methods, distribution plans, drying and curing processes, extraction techniques, fertilizer recipes, customer and supplier lists, cloning techniques, and tissue culture techniques. Indeed, some types of innovations (e.g., soil recipes) may be ineligible for patent protection and better protected as trade secrets. But, they cannot be enforced as trade secrets unless the business has taken – before any misappropriation -- reasonable steps to protect their secrecy.
Developing an Effective Trade Secret Plan
Before information can be protected as a trade secret, it must be identified as a practical matter. Cannabusinesses should consider examining their operations to determine what information they want to withhold from competitive use (i.e., information that gives them their competitive advantage). Maintaining and organizing an internal inventory of putative trade secrets should assist a company in developing and communicating a trade secret plan to employees and should make it easier to identify potential gaps in reasonable efforts to maintain the secrecy of that information (e.g., a non-disclosure agreement [NDA] or other reasonable protections are not in place).
As part of their internal trade secret plan, cannabis businesses should consider:
- Requiring employee education (e.g., as to the information they need to protect for the company, how they should protect the information, and why it is important to protect the company’s proprietary information).
- Including proactive and reactive measures to protect trade secrets, such as limiting access to trade secrets on a “need to know” basis, implementing appropriate physical and electronic security measures for premises and labs, and establishing an action plan (which includes counsel’s input) in the event of perceived or suspicion of misappropriation.
Internal trade secret plans should be reviewed and updated periodically. Management and enforcement of trade secret plans may serve as persuasive evidence that “reasonable measures” were taken to protect the confidential nature of the putative trade secret, should the issue be the subject of litigation in the future.
Non-Disclosure Agreements (NDAs)
While employees are ordinarily critical to a company’s protection efforts, they also pose one of the biggest misappropriation threats. Indeed, trade secret disputes often involve a former employee using her former employer’s trade secret information for a new employer that is the former employer’s competitor. To decrease the risk of such misappropriation, cannabusinesses should consider requiring NDAs for all employees who are given access to confidential information. Cannabusinesses can also consider using non-compete agreements (i.e., that limit an employee’s ability to work in the same industry for a certain period after the employment terminates). However, many jurisdictions in the United States consider such agreements unlawful or unenforceable except in narrow circumstances. Accordingly, a cannabis business should consult legal counsel about whether such agreements are available to it to protect its trade secret information.
Employees are not the only ones who should be required to executed NDAs. Potential investors often demand detailed information about the business’ proprietary technology and processes. Oftentimes, potential investors will be invited to an on-site visit for a tour of a lab or processing plant, potentially exposing them to trade secrets. Similarly, businesses often share trade secret formulas, recipes, or processes to third-party business partners or licensees in the course of their operations. Thus, cannabis businesses should require licensees, business partners, and investors to execute NDAs and consult counsel for advice about appropriate and beneficial provisions.
Identifying Confidential Information to Regulators
A cannabis business may be required to disclose potential trade secrets to regulators. For example, California cannabis businesses are required to submit information about their operating procedures and protocols in their applications for annual licenses. Commentators have expressed concerns that the requirement to disclose operating procedures, which could be requested by competitors pursuant to the California Public Records Act, unnecessarily risks the loss of trade secrets. In response, the Bureau of Cannabis Control has stated that nothing in the regulations prohibits prospective licensees from identifying information as proprietary or confidential so that the Bureau can make an informed decision in response to a Public Records Act request. Indeed, the regulations explicitly acknowledge that manufacturers submitting operation procedures and protocols to the Department of Public Health may claim trade secret protection by clearly marking such information as “confidential.”[2] Thus, cannabis businesses would be wise to clearly mark all proprietary information as “confidential” before submitting it to regulators and to follow applicable procedures established by regulators to protect the confidentiality of information submitted.
State Protection for a Federal Crime
Although some states have legalized (in whole or part) the sale and distribution of cannabis, such activities remain illegal under the federal Controlled Substances Act[3] (as well as under many state laws). Thus, to the extent a cannabis business is skittish about drawing attention to itself, it may consider opting for trade secret protection over patent protection if presented with that option. Trade secret protection does not involve registering the trade secret with the federal government, while patent protection involves applying to the United States Patent and Trademark Office (USPTO) for a patent.[4]
Nevertheless, a trade secret holder may face obstacles in obtaining relief for trade secret misappropriation in jurisdictions where the sale and distribution of cannabis is illegal (e.g., seeking relief under the Defend Trade Secrets Act, which creates a federal cause of action for trade secret misappropriation related to products or services used in “interstate commerce”).[5]
By pursuing such relief, a plaintiff may have to admit a violation of the Controlled Substances Act or comparable state law. On the other hand, many cannabis businesses conduct themselves openly. Thus, if the government authorities were interested in prosecuting the company for a violation of the Controlled Substances Act (or comparable law), they could do so even before the company filed a misappropriation lawsuit concerning their business.
To the extent the sale and distribution of cannabis is illegal in the jurisdiction, the court may or may not refuse to enforce trade secret rights. This is a relatively open issue, which has yet to be decided in many jurisdictions. For example, even though the sale and distribution of cannabis is illegal under federal law, at least one court has held that client lists in the cannabis industry are protectible despite their relation to an “illegal enterprise.”[6]
Keeping the Secret
Like other industries, there are many potentially valuable trade secrets in the cannabis industry. Cannabusinesses should be diligent in identifying and protecting the trade secrets they own, including by seriously considering whether to give anyone (employees, owners, third parties) access to their putative trade secret information unless an appropriate NDA is in place. This is a real concern since to monetize their trade secrets, businesses routinely need to share the proprietary information with employees, licensees, investors, or regulators. Although regulators may be unwilling to sign NDAs, they frequently offer procedures by which a party submitting proprietary information to them can designate the information as not to be made public
In Part II, we will explore patent protection in the cannabis industry.
[1] See, e.g., Cal. Civil Code § 3426.1(d); 18 U.S.C. § 1839(3).
[2] Title 17 of the California Code of Regulations, at § 40131.
[3] See 21 U.S.C § 812 (listing “marihuana” as a “Schedule I” drug).
[4] However, even if a cannabis business opts for trade secret protection, it may not be able to avoid federal regulators depending on the circumstances. See, e.g., https://www.fda.gov/news-events/public-health-focus/fda-regulation-cannabis-and-cannabis-derived-products-including-cannabidiol-cbd.
[5] 18 U.S. Code § 1836.
[6] Silva Enters. v. Ott, 2018 U.S. Dist. LEXIS 223854 *13 (C.D. Cal. 2018).