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Pot Companies Need Creativity To Protect Their Brands

Law360 (October 23, 2019, 11:56 AM EDT) -- You could call John Oram a cannabis business owner, but he's really more of a mogul.

He's the CEO and founder of NUG, a company that is growing marijuana, extracting THC and manufacturing products out of three different buildings in Oakland, California. But his vision for NUG goes beyond that — that's made clear by the huge collection of framed trademarks on the wall of his office.

"Everybody sells flower, everybody has a chocolate bar, everybody has, you know, a concentrate or a vape pen," Oram said. "And so we've been very focused on building our brand, building consumer loyalty around our brand, protecting our brand through intellectual property protections."

The focus on brand is part of a strategy built on the belief that federal prohibition will end, and companies that had previously stayed away from selling an illegal product will come flooding in.

That future is driving a sweeping wave of mergers and acquisitions in the cannabis industry. It's like musical chairs, with the music stopping when federal prohibition ends. Companies are trying to figure out where they should be when that moment happens — but no matter what, they know it involves having an established brand.

Oram isn't certain what will happen with NUG. Its brand could be strong enough to carry the company forward on its own, or the company could be acquired.

"The way I envision this going, if we're able to build a strong brand, the acquirer is going to pay for the brand, not just the products that we produce," Oram said. "So strengthening the brand, building the ownership of that brand into the company and protecting that is critical to creating a valuable business."

Building an IP Fence

But how do you protect your brand when your product is against federal law? Creatively, intellectual property experts told Law360.

"When you're applying for a trademark registration, your application has to identify both the mark and the goods and services with which it will be used," said Amanda Conley, co-founder of Brand & Branch LLP, an intellectual property firm that works with cannabis businesses.

"And so if those goods and services are not federally lawful, the federal trademark office generally will not approve that application," Conley said. "So it does create a real problem. There are strategies for addressing it, but that's the primary issue."

Using intellectual property laws to protect a federally illegal product takes some finessing of the federal trademark system, but also takes knowledge of what other federal agencies and states can offer a cannabis company.

"What we try to advise our clients to do is to become the most dextrous at navigating regulatory terrain before it exists, at navigating IP terrain before it exists," said Tom Zuber, managing partner of Zuber Lawler & Del Duca LLP.

For example, Zuber says some CBD brands can now apply to be designated as generally recognized as safe or as an approved new dietary ingredient with the U.S. Food and Drug Administration. It's a way to get ahead of the FDA's regulations before they create them.

And the U.S. offers a plant patenting process that has been successfully applied to cannabis strains, Zuber said. Since many businesses tinker with their strains and move on to new ones relatively quickly, the plant patents are only something he recommends if a company is confident that its strain is distinctive and will remain valuable for years to come, he said.

But registering trademarks is what most businesses are looking for, when it comes to protecting a brand.

Some states offer their own trademark registration system. Other types of businesses might not have a use for one, but cannabis businesses are very interested, according to Shabnam Malek, Conley's co-founder at Brand & Branch.

It fleshes out the cannabis brand's common law rights, she said, and provides something they can't get through the U.S. Patent and Trademark Office.

"It is sort of an answer to the unavailability of the federal trademark registration in cases where they want a registration that the document itself would say, you know, 'Brand X, Acme Brand' marijuana," Malek said.

While cannabis brands can get a state-registered trademark that actually protects their cannabis product, they can't get a federally registered one. But they can use the federal trademark process to build a fence around their cannabis product, with the idea that it will protect their product if it becomes legal.

The way that fence is built is by registering trademarks on the cannabis business' legal products and services, according to Conley and Malek.

"Many of those goods and services are so close to the actual plant-touching activities that arguably the power and strength of the federal trademark registration could cover some of the other activities that they offer," Malek said.

So while the USPTO is not going to award a cannabis company a trademark registration on its marijuana, it can give the company trademarks on its website, branded clothing and any other legal products.

If cannabis becomes federally legal, the business should be able to point to the trademarks it has on associated goods and say it should have rights to the marijuana product under that brand as well, Conley said.

"So through this patchwork of the federal registrations for the lawful goods and services, and then the common law rights and sometimes state registrations that support those state common law rights, we do develop and we do see that cannabis companies have essentially a brand portfolio or trademark portfolio that is strong, it's enforceable and it confers a lot of value on the company," Malek said.

Jockeying for Position

NUG has a pretty developed intellectual property strategy, one that takes a lot of work because of how common the word "nug" is in the marijuana world. NUG has registered federal trademarks on its legal stuff, and it has California trademarks on the actual marijuana products.

The strategy is all about where the company will be in the future, with the expectation that at some point, the federal prohibition against marijuana will be lifted. Oram wonders how all of it will hold up if cannabis is federally legal, he said. But the company is doing all it can right now to stake its claim.

Why the concern about the end of prohibition? Because that is when the marketplace will open up for the country's biggest consumer goods companies, according to Dena Jalbert, the founder and CEO of Align Business Advisory Services, a mergers and acquisitions firm that handles tie-ups between cannabis companies.

Right now, those companies risk losing their financial support or running afoul of stock exchange rules if they enter an illegal market, Jalbert said.

"But once that illegality no longer exists, then they can get in, and they'll be able to get in quickly because they have decades of prior infrastructure built that they can just immediately leverage and put into the market," Jalbert said. "So I think they're prepping behind the scenes, but they're just not able to get in yet."

So existing businesses have a choice to make: When the market opens up, are they going to compete with the big players, or are they going to be acquired?

That choice builds on what has already happened in the cannabis M&A space, which has been a hotbed of M&A activity for years, Jalbert says.

Initially, it was all about companies trying to acquire operations in as many different states as possible, she said, just to grow quickly.

But in recent months, it's all about brands. Cannabis has been a legal product in some states for awhile now, so the consumers are more particular about what they want. They gravitate toward certain brands, so acquirers are going the same way, Jalbert said.

That M&A isn't going away anytime soon, she said. And now, more and more of the companies working with Align are looking for well-developed intellectual property portfolios in the companies they're buying.

"If they have that portfolio of it, when the consumer product companies and the big tobacco companies or the big alcohol companies or whomever make their presence into the industry, they will either have to buy them or license this IP in order to participate," Jalbert said.

But even if a cannabis company isn't interested in acquisition, it still needs a well-defined brand if it is going to compete, Oram said.

While he could be open to acquisition one day, NUG's IP strategy also works if the company decides to stick it out on its own.

"Brand becomes critical in both directions," Oram said. "And that's going to be attractive either to an acquirer or to a more cult, organic type following of a private business."

--Editing by Breda Lund.

This is the fourth in a series of articles that accompany episodes of our new podcast, Law360 Explores: Legalization. Come back tomorrow to read the next installment on the risks facing attorneys who take on cannabis clients. You can also subscribe to the show on Apple Podcasts, or find all the episodes here.

For a reprint of this article, please contact reprints@law360.com.

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