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Licensing Trademarks to Washington Cannabis Businesses – Are You in "The Clear"?

Washington Court of Appeals' definition of trademark rights in Washington

Recently, the Washington Court of Appeals waded into the murky waters of defining trademark use when an out-of-state marijuana business licenses a trademark for the sale of cannabis products in Washington. In Headspace International LLC v. Podworks Corp, the Washington Court of Appeals considered two fundamental trademark principles: (1) to establish trademark rights, the mark owner must lawfully use the mark in commerce in the relevant jurisdiction; and (2) to enforce its trademark rights, a licensor must exercise sufficient control over the goods and services sold under the mark by the licensee. Walking a fine line between these two principles, the Court ultimately held that licensing a trademark to a Washington cannabis business is sufficient to establish “lawful use in commerce” in Washington for the purpose of establishing trademark rights. But such use is not sufficient to constitute doing cannabis business in Washington.

Headspace International LLC, a California-based marijuana business, sued Washington-based Podworks Corp., for using “CLEAR,” which Headspace claims infringes its “THE CLEAR” trademark.  But Headspace does not operate in Washington, and on that basis, the trial court dismissed Headspace’s claim, finding that it had not established trademark rights in Washington.

Headspace appealed, and the Court of Appeals reversed the trial court’s decision. Though Headspace does not operate in Washington, it does license its mark to X-Tracted Laboratories 502 Inc., which in turn uses THE CLEAR in association with the lawful sale of marijuana products in Washington. Podworks argued that Headspace was stuck on the horns of a dilemma: either the license is not sufficient to establish “use” of the mark in Washington, as necessary to establish trademark rights (and sue); or, if the license does constitute “use,” then as the licensor, Headspace must exercise control over the goods sold under the mark, which in turn requires it to be licensed in Washington to sell cannabis.

The Court of Appeals ultimately held that Headspace’s licensing of its trademark to X-Tracted constitutes “lawful use in commerce” in Washington sufficient to establish trademark rights in Washington. But merely licensing the trademark was insufficient to require licensure by the WSLCB.

What to consider in trademark licensing and usage for out-of-state cannabis business owners

While the court distinguished between the control necessary to grant trademark rights versus that necessary to trigger a full WLCB investigation, the court’s analysis is bare. But this case gives cannabis business owners a few things to keep in mind when considering trademark licensing and usage in Washington. You still will not be able to get a federal registration, which requires use in interstate commerce, but a licensing arrangement can allow out-of-state cannabis businesses to establish trademark rights in Washington.

But note, according to the Court of Appeals, entering into licensing agreements for the use of trademarks does not make an out-of-state licensor a “true party in interest” subject to reporting to the WSLCB as long as the licensor is not receiving a percentage of the profits from the Washington-based cannabis business. Be aware that since 2017, Washington companies must disclose to the WSLCB all licensing agreements relating to use of registered or unregistered trademarks, among other things. 

While trademark rights for cannabis business owners remain something of a gray area, one thing is clear from the Court of Appeals opinion: a well-crafted licensing agreement can broaden the scope of your trademark rights without requiring that you actually do business in the state. Whether you are a Washington cannabis business trying to challenge trademark use, or an out-of-state marijuana business seeking to establish or maintain trademark rights in Washington, pay close attention to licensing agreements.

Warning Regarding Federal Law: The possession, distribution, and manufacturing of marijuana is illegal under federal law, regardless of state law which may, in some jurisdictions, decriminalize such activity under certain circumstances.  Penalties for violating federal drug laws are very serious.  For example, a conviction on a charge of conspiracy to sell drugs carries a mandatory minimum prison term of five years for a first offense and, depending on the quantity of marijuana involved, the fine for such a conviction could be as high as $10 million.  In addition, the federal government may seize, and seek the civil forfeiture of, the real or personal property used to facilitate the sale of marijuana as well as the money or other proceeds from the sale. Although the U.S. Department of Justice (DOJ) recently rescinded its guidance regarding prioritization of criminal prosecutions of individuals and entities operating in compliance with effective state regulatory systems, DOJ left in place long standing guidance to federal prosecutors regarding how to exercise this discretion.  Individuals and companies are cautioned to consult with experienced attorneys regarding their exposure to potential criminal prosecution before establishing business operations in reliance upon the passage of state laws which may decriminalize such activity. Federal authority to prosecute violations of federal law as crimes or through seizures and forfeiture actions is not diminished by state law.  Indeed, due to the federal government’s jurisdiction over interstate commerce, when businesses provide services to marijuana producers, processors or distributors located in multiple states, they potentially face a higher level of scrutiny from federal authorities than do their customers with local operations.

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Foster Garvey’s Cannabis practice group comprises a premier legal counsel team who provides a full range of legal services such as regulatory compliance, marijuana licensing, business finance, contracts, labor and employment, health care, real estate, intellectual property, litigation and dispute resolution, technology and tax. Our team possesses deep and diverse industry experience and has counseled clients across virtually all industry sectors. We understand the inherent challenges that licensed marijuana and ancillary businesses in Washington state, Oregon and Alaska are burdened with in this highly regulated industry as they deal with onerous state and local regulations as well as uncertainty resulting from federal law.

We are committed to helping our clients achieve their business goals while navigating the intricacies in this rapidly changing area of law. We prize innovation and entrepreneurship, and closely monitoring industry trends. 

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