Cannabis and Intellectual Property: Starting Up in an Illegal Industry

It’s the question cannabis entrepreneurs have been asking every year since 2014: How do I startup and operate my business in a newly-emerging industry that’s technically still illegal under federal law?

Cannabis law experts, patent attorneys, business owners and capital investors gathered at Denver Startup Week to address this and the main obstacles facing the cannabis industry, as well as some main tips for protecting cannabis businesses and ideas.

“In a lot of ways, intellectual property is the cannabis area is very much like any other areas,” Patent Attorney Randy McCarthy says. “A couple of differences are it’s a controlled substance, and I usually don’t have clients come and pay me cash.”

The Hurdles

Perhaps the biggest issue facing cannabis companies in America is the issue of banking.

Attorney John Hickey says that the problem isn’t native to Colorado, and that legal states across the nation are currently having trouble banking their profits.

“For hemp, that’s starting to sort of break loose,” Hickey says. “Though for a lot of local banks, it’s still an issue.

Taxation is also a problem facing cannabis, especially when it comes to dispensaries.

“For example, if you’ve got employees, you’d be able to take those salaries and wages as a deduction in your business,” Hickey says. “With dispensaries, that’s not an option, so your effective tax rates are pretty high.”

The panel went on to discuss how most people run up against intellectual property challenges just trying to trademark and copyright their brand.

“In today, with so many differentiated and distributed companies all using ‘cannabis’ and ‘green’ and other keywords that everybody uses to affiliate with cannabis, it’s getting harder and harder to even find unique and viable names that represent your business,” says Cannabis Venture Capital owner Kyle William.

McCarthy pointed out how federally trademarking cannabis-related products is an area that still presents difficulty due to cannabis being federally illegal.

“If it’s hemp-related, that’s OK,” McCarthy says, adding, “We can trademark t-shirts, or hats or equipment.”

He stated that in many cases, state trademark and copyright registration can be very powerful and much less expensive compared to registering federally.

Another large issue for hemp farmers is the idea of “testing hot,” where a state official shows up to make sure that hemp doesn’t contain more than the legal amount of THC. In hemp, plants can’t have more than 0.3%THC. If a farmer’s hemp plants test too high for THC, that farmer will lose their entire crop.

Tips on Intellectual Property

In any emerging industry, laying claim to your ideas through patenting and trademarking is absolutely paramount. While the cannabis industry has many similarities to any industry when it comes to protecting intellectual property, there are a couple of tricks and suggestions that can make things easier for people starting up in cannabis.

 “From an intellectual property standpoint, you want to invest in anything that you believe will be a differentiator for you in the marketplace,” McCarthy says. “Whether it’s the trademark, or the product itself, those are the types of things that you want to protect.”

Another key tip is to register your company under an abbreviation of your business.

“For example, my company Cannabis Venture Capital is doing business as CVC Inc.,” Williams says. “The reason that we do that is, even in hemp today, banking is very challenging. You want to make sure you pick a name for your business that will be approved by all other business vendors and customers that you’re going to be doing business with.”

He added that one should use a DBA or trade name to represent the company, and then try not to bring any relationship back between the two companies.

Another tip was to simply put the TM on anything that you think you or your company might use.

“You can’t really use it wrong,” says TJ Mantooth, an intellectual property attorney. “Use it on everything. It tells the world ‘I plan on protecting that.’ It establishes a date and a time where you can say ‘I started using my brand at this time.’”

Perhaps the most agreed upon piece of advice offered was the most obvious: consult a lawyer.

“It’s one of those areas where a legal counsel can really help you through a couple of those pitfalls,” Williams says. “One event where you always want to get a lawyer is to respond to another lawyer.”

 Attorneys can also help settle disagreements between partners. Lastly, the panel urged the crowd to research non-disclosure agreements (NDA) and, when in doubt, keep your mouth shut.

“Don’t forget confidentiality as well,” McCarthy says. “You don’t have a patent until you have a patent. Don’t ever talk to anybody without a good NDA.”

Hickey concluded the panel with the two things he’s learned in the cannabis industry.

“This is not a get rich business. A lot of people seem to think that’s the case,” Hickey says. “This is very hard work. It’s very time-consuming. But it can be very lucrative if you do it right. The fact that you’re here listening and learning is a step in the right direction.”

Marshall Dunham is a journalism student in Fort Collins. He participated in a partnership between Colorado State University and ColoradoBiz magazine that brought students from Fort Collins to Denver Startup Week 2019.