Cannabis News

Common Pitfalls in Cannabis Brand License Agreements

Published

8 months ago

March 12, 2024

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Cannabis companies and (depending on the state) brands often use license agreements to grow their brands. If done correctly, they can be a huge driver of revenue for the brands and licensees, and can grow the good will of the brand across a particular territory. However, they are notoriously easy to botch. A bad license agreement can be devastating for a cannabis brand. In this post, I’ll examine some of the most common problems I’ve seen in license agreements across a host of different states.

It may help if I first explain what I mean by “license agreement.” I’m using the term loosely to refer to a situation where a company (a licensor) licenses its intellectual property (like its brand name) to a third party to use in a defined way. There are a million different ways license agreements can take shape.

One common example would be a license of IP to a cannabis company for purposes of manufacturing and selling the branded products. In general, this is the kind of license agreement I want to focus on in this post.

#1 Failure to consider regulatory impact

Cannabis is a highly regulated industry. So it should come as little surprise that regulators often care a lot about the types of people that licensed entities deal with. Intellectual property licensors are one such group. Many states put roadblocks in front of IP licensors, making it difficult or even impossible to do license agreements. Sometimes, regulations are so onerous that deals must be completely reformatted, at risk of great penalty to one or both parties.

I say this a lot here, but it’s really important to figure this out before paying an attorney to draft and negotiate a license agreement. Not only will parties potentially waste money by failing to do that, but they will also potentially put themselves at risk of regulatory penalties later down the road.

#2 Poorly defined payment terms

I’ve done more license agreements than I can count. Usually, they start with a client or opposing counsel relaying agreed-in-principle deal terms. And often, I hear something like “royalties will be X%.” My next question is always, “X% of what?” You’d probably be surprised how often I hear crickets in response.

It often takes a lot of handholding or wrangling to figure out the precise calculation of royalties. And that’s just one of myriad payment terms. Things like payment timing, expense payments, invoicing and fee disputes, credits, etc. all require additional thought and detail. Parties often don’t appreciate that a license agreement sets the state for a long-term, sometimes multi-year relationship, and so are very different from one-time purchase agreements. If parties execute license agreements with unclear or vague payment provisions, they should not be surprised when disputes inevitably arise.

#3 Unclear order process

While I spend a lot of time working my way through unclear payment terms, by far the most common issue I see in license agreements is an unclear order process. Sometimes, license agreements completely fail to say anything about the process for making and/or ordering goods. In an agreement where the whole purpose is the manufacture and sale of goods, this is… a problem. But it happens all the time.

To be fair, some license agreements may not require an order process to be spelled out in detail. If an unlicensed brand (in a state that permits it!) licenses IP to a cannabis company to make and sell products to whomever it can sell them, then that cannabis company may have discretion as to how and when to make products. But license agreements may not be as clear as that and you may see situations where both the licensor and licensee agree to market and sell products.

In these types of cases, the licensor will need some clarity about how it can order products, how much of a lead time there must be to do so, and so on. If it is not clear how the parties will dictate or request for these processes to happen, then things are bound to go south.

#4 Pricing problems

Let’s go back to the example of an unlicensed brand licensing its IP to a cannabis company for a full suite of manufacturing and distribution services. Chances are the brand will be paid a royalty that is some percentage of the sales price of each unit of product sold. So obviously, the brand will want the sales price to be as high as possible. There are a few potential things that brands can get really wrong here.

First, some license agreements may not say anything about sales prices. In an extreme case, the licensee could sell the products at such a low rate that the brand got little back. On the other hand, if a brand sets a minimum sales price too high, the licensee may not be able to sell any product and both parties are out of luck. I’ve seen companies on the verge of litigation over these issues. In my view, a lot of this is easily avoidable.

Savvy brands have a few options here. At the very least, they could include a contractual duty to use “best” or “commercially reasonable” efforts to sell the products for the highest possible price. But this is still pretty squishy and up for debate. Brands could also include “tiered” pricing options, setting a “target” price and a lower minimum price. That way the licensee would need to try for the target price, but could have wiggle room to lower it a bit. Or, the parties could agree on a price but opt to revisit it periodically depending on sales levels.

#5 Packaging and labeling fiascos

I’ve seen plenty of license agreements that give the licensor complete discretion over what goes on a product’s packaging or labeling. That may be fine for products that are not over-regulated, but it can be a problem for cannabis transactions. Cannabis label laws are notoriously complicated – so much so that I’ve had at least a few changes on 100 percent of the labels I’ve reviewed. For example, California has different sets of detailed requirements that apply to manufactured and non-manufactured products that are extremely technical and complicated down to things like font size and text placement.

Even putting regulations aside, a licensee probably wants at least some level of assurance that its licensor is not going to do something that brings an infringement case on the licensee (see here for some examples). So leaving a label up to a licensor, who may not even be a licensed company, is a major risk.

When I am representing the IP licensee, one of the first things I do is look at who makes the call on labeling content. I don’t see a ton of pushback when licensee clients ask for some approval rights over label content. In fact, we usually end up with a licensor creating the initial label and editing it based on inputs from the licensee. But as with anything else, it’s important to get this in the contract so that there are not disputes later down the road.

#6 No guardrails on marketing

Similarly, cannabis marketing laws are complicated. If a license agreement allows licensees to conduct marketing activities, the license agreement should at the very least obligate the licensee to comply with laws while doing so. But strong license agreements may take things further, and require the licensee to abide by certain standards or guidelines above and beyond what the rules require. After all, marketing materials can both comply with the law and cause harm to the reputation of the licensor or good will of the licensed brand.

#7 Failure to protect the licensor and brand

The final common problem I’ll address today is a license agreement’s failure to adequately protect the licensor or brand. With respect to brand protection, a good license agreement will include a laundry list of provisions restricting how the licensee can use, sublicense, or delegate the licensed IP, and will require the licensee to provide assistance in or participate in intellectual property disputes. Without locking a licensee’s use in place, the licensor could jeopardize legal protection for its brand. And this totally defeats the purpose of the license.

More broadly though, license agreements often fail to address potential harm to the licensor itself. In the example I’ve been using here – a brand licensed to a company for manufacture, distribution, and sales – the licensor would have no part in the manufacturing and distribution process. In that case, it would want to be shielded from liability to the maximum extent possible. There are several contractual provisions that the licensor could include to accomplish this, such as:

Contractual indemnity provisions, to require the licensee to cover the licensor’s costs should it be roped into a lawsuit as a result of the licensee’s conduct.
Requirements for the licensee to procure insurance with additional insured coverage for the licensor.
Liability limitations that would limit the licensee’s ability to recover from the licensor.
Covenants and other provisions that would make crystal clear that the licensee (and not the licensor) remained responsible for certain conduct.
Carveouts from indemnification or liability limitation provisions that benefit the licensee if the licensee engaged in prohibited conduct.

This last point bears a bit more explanation. License agreements often require the licensor to indemnify (i.e., cover costs) the licensee for certain things, like if the licensee gets sued by a third party because the licensor’s IP is allegedly infringing. But a licensor-friendly license agreement will often carve out obligations where the licensee itself did something wrong. So for example, if a licensee markets a licensor’s brand in a way that leads to a third-party infringement suit, then the licensee may not be entitled to indemnification.

Conclusion

The above issues are some of the more common ones I’ve seen crop up over the years I’ve reviewed, drafted, and negotiated license agreements. They are by no means exclusive and there can be many other problems, especially when you start getting into more “exotic” agreement types, like tri-party agreements.

If you’re interested in other important provision in license agreements or other kinds of B2B cannabis contracts, check out some of our other posts below:

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Latest Trump Weed Rumor – Trump Will Federally Deschedule and Decriminalize Cannabis, but Not Legalize It

Published

6 hours ago

November 14, 2024

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trump on marijuana reform

In a recent interview, former New Jersey Governor Chris Christie made headlines by asserting that President-elect Donald Trump will pursue significant reforms in federal policies regarding marijuana and cryptocurrency. As the nation grapples with evolving attitudes toward cannabis and the burgeoning digital currency market, Christie’s predictions have ignited discussions about the potential implications of such changes on both industries. This article delves into Christie’s insights, the current state of marijuana and cryptocurrency regulations, and the broader implications of these anticipated reforms.

The Current Landscape of Marijuana Legislation

Federal vs. State Laws

Marijuana remains classified as a Schedule I substance under the Controlled Substances Act (CSA), which places it in the same category as heroin and LSD. This classification has created a complex legal landscape where states have moved to legalize cannabis for medical and recreational use, while federal law continues to impose strict prohibitions. As of now, over 30 states have legalized marijuana in some form, leading to a burgeoning industry that generates billions in revenue.

Challenges Faced by the Cannabis Industry

Despite its legality in many states, the cannabis industry faces significant hurdles due to federal restrictions. These challenges include:

Banking Access: Many banks are hesitant to work with cannabis businesses due to fear of federal repercussions, forcing these businesses to operate largely in cash.

Taxation Issues: The IRS enforces Section 280E of the tax code, which prohibits businesses engaged in illegal activities from deducting normal business expenses, leading to disproportionately high tax burdens for cannabis companies.

Interstate Commerce: The lack of federal legalization prevents cannabis businesses from operating across state lines, limiting their growth potential.

Chris Christie’s Perspective on Marijuana Reform

Christie, a former presidential candidate known for his tough stance on drugs during his tenure as governor, has evolved his views on marijuana over the years. In his recent statements, he emphasized that Trump is likely to pursue descheduling cannabis, which would remove it from the Schedule I classification. This move would not only provide clarity for businesses operating in legal markets but also open avenues for banking and investment.

Christie highlighted that descheduling would allow for a more regulated market where safety standards could be established, thus protecting consumers. He believes that this approach aligns with a growing consensus among Americans who support legalization and recognize the potential benefits of cannabis use for both medical and recreational purposes.

The Future of Cryptocurrency Regulation = The Rise of Cryptocurrencies

Cryptocurrencies have surged in popularity over the past decade, with Bitcoin leading the charge as the first decentralized digital currency. The market has expanded to include thousands of alternative coins (altcoins), each with unique features and use cases. As cryptocurrencies gain traction among investors and consumers alike, regulatory scrutiny has intensified.

Current Regulatory Challenges

The cryptocurrency market faces several regulatory challenges that hinder its growth and adoption:

Lack of Clarity: Regulatory frameworks vary significantly across states and countries, creating confusion for investors and businesses.

Fraud and Scams: The rapid growth of cryptocurrencies has led to an increase in fraudulent schemes targeting unsuspecting investors.

Consumer Protection: Without clear regulations, consumers are often left vulnerable to risks associated with volatile markets.

Christie’s Vision for Crypto Regulation

Christie believes that under Trump’s leadership, there will be an effort to find a “sweet spot” for cryptocurrency regulation balancing innovation with consumer protection. He argues that overly stringent regulations could stifle growth in this emerging sector while too little oversight could expose consumers to significant risks.

In his view, a balanced regulatory framework would include:

1. Clear Definitions: Establishing clear definitions for different types of cryptocurrencies and tokens to differentiate between securities and utility tokens.

2. Consumer Protections: Implementing measures to protect investors from fraud while promoting transparency within the market.

3. Encouraging Innovation: Creating an environment conducive to innovation by allowing startups to thrive without excessive regulatory burdens.

Christie’s insights reflect a growing recognition among policymakers that cryptocurrencies are here to stay and that appropriate regulations are necessary to foster growth while safeguarding consumers.

Implications of Proposed Reforms

Economic Impact

The potential reforms proposed by Christie could have far-reaching economic implications:

Job Creation: Legalizing marijuana at the federal level could lead to significant job creation within the cannabis industry—from cultivation and production to retail sales.

Investment Opportunities: Descheduling cannabis would open up investment opportunities for institutional investors who have been hesitant due to federal restrictions.

Boosting Local Economies: Legal cannabis markets have proven beneficial for local economies through increased tax revenues and job creation.

Similarly, clear regulations around cryptocurrencies could stimulate investment in blockchain technology and related industries, fostering innovation and economic growth.

Social Justice Considerations

Both marijuana legalization and sensible cryptocurrency regulations have social justice implications:

Addressing Past Injustices: Legalizing marijuana could help rectify past injustices related to drug enforcement policies that disproportionately affected marginalized communities.

Financial Inclusion: Cryptocurrencies offer opportunities for financial inclusion for those underserved by traditional banking systems, particularly in low-income communities.

Political Landscape

The political landscape surrounding these issues is complex. While there is bipartisan support for marijuana reform among certain lawmakers, challenges remain in overcoming entrenched opposition. Similarly, cryptocurrency regulation has garnered attention from both sides of the aisle but requires collaboration to establish effective frameworks.

Conclusion

Chris Christie’s predictions about President-elect Donald Trump’s approach to federal marijuana descheduling and cryptocurrency regulation suggest a potential shift in U.S. policy that could significantly reshape both industries. As public opinion evolves on these issues, lawmakers have an opportunity to enact meaningful reforms that promote economic growth while ensuring consumer protection. The anticipated changes could foster a more robust cannabis industry that contributes positively to the economy and addresses social justice concerns, while clear regulatory frameworks for cryptocurrencies could encourage innovation and protect consumers in the digital economy. Stakeholders in both sectors are closely watching these developments, eager to see how potential reforms might impact their futures. While the realization of Christie’s predictions remains uncertain, it’s clear that the conversation around marijuana and cryptocurrency regulation is ongoing and far from settled.

TRUMP 2.0 ON CANNABIS REFORM, READ ON…

TRUMP 2.0 ON FEDERAL CANNABIS REFORM – WHAT DO WE KNOW?

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Webinar Replay: Post-Election Cannabis Wrap – Smoke ’em if You’ve Got ’em

Published

1 day ago

November 13, 2024

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On Thursday, November 7th, Vince Sliwoski, Aaron Pelley and Fred Rocafort held a post election discussion “Post-Election Cannabis Wrap – Smoke ’em if You’ve Got ’em”. Watch the replay!

Key Takeaways from the “Smoke ’em if You’ve Got ’em – 2024 Post Election Cannabis Wrap” Webinar:

Panelists:
- Vince Sliwoski: Oregon Business lawyer specializing in cannabis and commercial real estate.
- Aaron Pelley: Experienced in cannabis law since Washington’s legalization in 2012.
- Fred Rocafort: Trademark attorney working closely with the cannabis team.
Election Results Overview:
- Most 2024 cannabis ballot measures did not pass.
- Florida, South Dakota, and North Dakota saw failures.
- Nebraska became the 39th state to legalize cannabis for medical use when it passed two cannabis initiatives, Initiatives 437 and 438.
Federal and State-Level Developments:
- Medical use is currently legal in 38 states, and 24 states allow recreational use.
- Republican support for marijuana legalization is growing.
Federal Policy Implications:
- Schedule III Rescheduling: The process to move cannabis to Schedule III is ongoing, which could significantly impact the industry.
- Importance of Federal Appointments: The future of cannabis policy depends heavily on who is appointed to key positions in the administration.
International and Domestic Trade:
- Schedule III status could ease import/export restrictions on cannabis.
- Unified control of House, Senate, and presidency might expedite legislative progress.
Economic and Industry Impact:
- Cannabis stocks experienced volatility post-election, reflecting investor uncertainty.
- Federal legalization and banking reforms are crucial for industry stability and growth.
Future Outlook:
- The potential for federal rescheduling remains strong, with hearings scheduled for early 2025.
- State-level initiatives and regulatory developments will continue to shape the industry.

Watch the replay!

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I Had Just One Puff

Published

1 day ago

November 13, 2024

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one puff of a joint a drug test

“How Long Does One Puff of Weed Stay in Your System?”… This topic can be difficult to answer since it is dependent on elements such as the size of the hit and what constitutes a “one hit.” If you take a large bong pull then cough, it might linger in your system for 5-7 days. A moderate dose from a joint can last 3-5 days, whereas a few hits from a vaporizer may last 1-3 days.

The length of time that marijuana stays in the body varies based on a number of factors, including metabolism, THC levels, frequency of use, and hydration.

Delta-9-tetrahydrocannabinol, or THC, is the primary psychoactive component of cannabis. THC and its metabolites, which remain in your body long after the effects have subsided, are detected by drug tests.

Since these metabolites are fat-soluble, they cling to bodily fat molecules. They could thus take a while to fully pass through your system, particularly if your body fat percentage is higher.

THC is absorbed by tissues and organs (including the brain, heart, and fat) and converted by the liver into chemicals such as 11-hydroxy-THC and carboxy-THC. Cannabis is eliminated in feces at a rate of around 65%, while urine accounts for 20%. The leftover amount might be kept within the body.

THC deposited in bodily tissues ultimately re-enters the circulation and is processed by the liver. For frequent users, THC accumulates in fatty tissues quicker than it can be removed, thus it may be detectable in drug tests for days or weeks following consumption.

The detection time varies according to the amount and frequency of cannabis usage. Higher dosages and regular usage result in longer detection times.

The type of drug test also affects detection windows. Blood and saliva tests typically detect cannabis metabolites for shorter periods, while urine and hair samples can reveal use for weeks or even months. In some cases, hair tests have detected cannabis use over 90 days after consumption.

Detection Windows for Various Cannabis Drug Tests

Urine Tests

Among all drug tests, urine testing is the most commonly used method for screening for drug use in an individual.

Detection times vary, but a 2017 review suggests the following windows for cannabis in urine after last use:

– Single-use (e.g., one joint): up to 3 days

– Moderate use (around 4 times a week): 5–7 days

– Chronic use (daily): 10–15 days

– Chronic heavy use (multiple times daily): over 30 days

Blood Tests

Blood tests generally detect recent cannabis use, typically within 2–12 hours after consumption. However, in cases of heavy use, cannabis has been detected up to 30 days later. Chronic heavy use can extend the detection period in the bloodstream.

Saliva Tests

THC can enter saliva through secondhand cannabis smoke, but THC metabolites are only present if you’ve personally smoked or ingested cannabis.

Saliva testing has a short detection window and can sometimes identify cannabis use on the same day. A 2020 review found that THC was detectable in the saliva of frequent users for up to 72 hours after use, and it may remain in saliva longer than in blood following recent use.

In areas where cannabis is illegal, saliva testing is often used for roadside screenings.

Hair Tests

Hair follicle tests can detect cannabis use for up to 90 days. After use, cannabinoids reach the hair follicles through small blood vessels and from sebum and sweat surrounding the hair.

Hair grows at approximately 0.5 inches per month, so a 1.5-inch segment of hair close to the scalp can reveal cannabis use over the past three months.

Factors Affecting THC and Metabolite Retention

The length of time THC and its metabolites stay in your system depends on various factors. Some, like body mass index (BMI) and metabolic rate, relate to individual body processing, not the drug itself.

Other factors are specific to cannabis use, including:

– Dosage: How much you consume

– Frequency: How often you use cannabis

– Method of consumption: Smoking, dabbing, edibles, or sublingual

– THC potency: Higher potency can extend detection time

Higher doses and more frequent use generally extend THC retention. Cannabis consumed orally may remain in the system slightly longer than smoked cannabis, and stronger cannabis strains, higher in THC, may also stay detectable for a longer period.

How Quickly Do the Effects of Cannabis Set In?

When smoking cannabis, effects appear almost immediately, while ingested cannabis may take 1–3 hours to peak.

The psychoactive component THC produces a “high” with common effects such as:

– Altered senses, including perception of time

– Mood changes

– Difficulty with thinking and problem-solving

– Impaired memory

Other short-term effects can include:

– Anxiety and confusion

– Decreased coordination

– Dry mouth and eyes

– Nausea or lightheadedness

– Trouble focusing

– Increased appetite

– Rapid heart rate

– Restlessness and sleepiness

In rare cases, high doses may lead to hallucinations, delusions, or acute psychosis.

Regular cannabis use may have additional mental and physical effects. While research is ongoing, cannabis use may increase the risk of:

– Cognitive issues like memory loss

– Cardiovascular problems including heart disease and stroke

– Respiratory illnesses such as bronchitis or lung infections

– Mood disorders like depression and anxiety

Cannabis use during pregnancy can negatively impact fetal growth and development.

Duration of Effects

Short-term effects generally taper off within 1–3 hours, but for chronic users, some long-term effects may last days, weeks, or even months. Certain effects may even be permanent.

Bottom Line

The amount of time that cannabis remains in your system following a single use varies greatly depending on individual characteristics such as body fat, metabolism, frequency of use, and mode of intake. Frequent users may maintain traces of THC for weeks, whereas infrequent users may test positive for as little as a few days. Hair tests can disclose usage for up to 90 days, while blood and saliva tests identify more recent use. Urine tests are the most popular and have varying detection durations. The duration that THC and its metabolites are detectable will ultimately depend on a number of factors, including dose, strength, and individual body chemistry.