One-Hit Wonders
Illegality Doctrine Rejected in Legal Cannabis Patent Case, Confirming Patent Enforceability
Published
2 years agoon
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admin
As discussed below, in some contexts, federal courts have dismissed plaintiffs’ claims under the old common law “illegality doctrine,” which holds that litigants engaged in unlawful practices may not access the court system to enforce their rights to proceeds of illegal acts. At the same time, the federal government has readily issued utility patents on legal cannabis inventions. The primary right accompanying an issued patent is the right to exclude others from practicing it – which generally requires the patent owner to sue in federal court. As a result, the enforceability of legal cannabis patents directly impacts their value.
Until recently, however, no federal court had addressed whether it would open its doors to legal cannabis businesses seeking to enforce their issued patents, injecting some uncertainty into the industry. InGene Pool Technologies, Inc. v. Coastal Harvest, LLC,1a California federal judge ruled that the legal cannabis patents asserted in the case were enforceable, rejecting a motion to dismiss based on the illegality doctrine.
The illegality doctrine in federal court
Dating back to at least the 18th century, English and American courts have declined to extend their jurisdiction to cases in which a claim arises from acts that are themselves a violation of law. This rule has been termed the “illegality doctrine,” orex turpi causa.2In the words of the US Supreme Court, “[n]o court will lend its aid to a party who founds his claim for redress upon an illegal act.”3Given that hemp is now fully legal under federal law, cannabis has been legalized in dozens of states,4and with legal cannabis inventions clearly patentable (also under federal law), legal cannabis businesses have been left to question whether adversaries might raise the illegality doctrine in an effort to thwart legal claims.
Mixed results for legal cannabis litigants in non-patent federal court contexts
Operators of legal cannabis businesses have pursued a variety of claims in federal courts. In some cases, courts have declined to accept jurisdiction, while in others, the courts have held that merely alleging that a litigant was engaged in a business in conflict with the Controlled Substances Act (CSA) should not effectively immunize that litigant from claims that it violated other federal – or state – laws.
Results for legal cannabis businesses so far have been mixed. Federal courts have declined to provide jurisdiction to legal cannabis businesses in some contexts. Bankruptcy courts, for example, have declined to extend the protections of the bankruptcy code to debtors whose businesses clearly violated the CSA.5Other types of claims, such as for violation of the Lanham Act and related Racketeer Influenced and Corrupt Organizations (RICO) Act claims, have similarly been dismissed when courts further determine that accepting jurisdiction would effectively perpetuate an activity that is clearly illegal under federal law.6
Legal cannabis businesses have fared better in other cases and contexts. Other federal courts considering claims for bankruptcy protection or breach of contract have rejected the illegality doctrine as a defense.7As another example,in a case presenting claims for trade secret misappropriation and breach of contract, a federal court found it had jurisdiction to hear the claims because “plaintiffs are not seeking a remedy that would compel either party to violate the [CSA]” and “the dispute in this case does not involve the actual production or sale of cannabis.”8 The court further stated that even if a defendant was allegedly engaged in a business violative of one federal law, that would not “give it license to violate another.”
These varying outcomes create uncertainty for owners of issued patents covering legal cannabis inventions. Although patent infringement is a strict liability tort, and courts have generally been reluctant to apply the illegality doctrine in the context of tort claims,9no court had yet ruled on whether it would enforce issued patents against infringers. As discussed below, theGene Pool Technologiescase provides an initial answer to this question.
California federal judge rejects illegality doctrine in legal cannabis patent case
On November 22, 2022, Judge John W. Holcomb ruled on the defendant’s motion to dismiss based on the illegality doctrine in theGene Pool Technologies, Inc. v. Coastal Harvest, LLCpatent infringement case pending in the US District Court for the Central District of California.10 The plaintiff, Gene Pool Technologies, Inc., sued the defendant, Coastal Harvest, LLC, alleging infringement of several patents claiming methods for extracting oils and other compounds from plant material.11Coastal Harvest filed a motion to dismiss based on the illegality doctrine, arguing that the issues raised in Gene Pool’s complaint were nonjusticiable in federal court, because, they alleged, the matter involved cannabis-related commercial activity that would violate the CSA.12
This was a case of first impression for utility patent litigation. The argument had not been raised in previous cases, including high-profile cannabis utility patent suits.13In 2021, a federal court rejected a motion to dismiss a design patent infringement case based on the illegality doctrine, but no court prior to this case had addressed the issue in the context of a utility patent applicable to the legal cannabis industry.14
Judge Holcomb delivered his decision at an oral hearing, denying Coastal Harvest’s motion and clearing the case to proceed through discovery and trial. The district court decision provided an analysis of each of the party’s arguments and a review of its legal reasoning. The primary points raised in the decision are summarized below as guidance for future patent litigants.
No controlling authority
At the outset, the district court noted the lack of any controlling “authority addressing the application of the so-called illegality doctrine in the patent infringement context generally.”15The district court further highlighted the lack of any case law cited in the defendant’s motion that addressed the federal justiciability of cases “where the illegality arises from the defendant’s (as opposed to the plaintiff’s) alleged illegal conduct; that is, where a defendant seeks to use its own illegal conduct as a shield to allege tortious conduct.”16In this case, plaintiff Gene Pool was presented as an intellectual property holding company, without any alleged ties to cannabis production or sales, making Coast Harvest’s cannabis extractions the only activity that could be allegedly illegal.
Complaint did not necessarily invoke illegality doctrine based on guiding case law
Without any controlling precedent, the district court looked to other cases for guidance. Judge Holcomb placed emphasis on theSiva Enterprises v. Lance Ottcase discussed above, in which the court accepted jurisdiction to hear a trade secret misappropriation dispute because “plaintiffs were ‘not seeking a remedy that would compel either party to violate the [CSA],’ and the dispute did not involve ‘the actual production or sale of cannabis.’”17
In evaluating whether the dispute necessarily involved a violation of the CSA, the district court raised the following points:
- Complaint allegations do not read on a violation of the CSA–The district court found that Gene Pool’s complaint did not necessarily seek damages based on an alleged violation of the CSA by Coastal Harvest. The complaint alleged improper extraction of products and solutesfrom cannabis, which the court noted could also encompass extractions of low-THC “hemp” varietals expressly excluded from the CSA ever since the 2018 amendments to the Farm Bill.18Thus, the district court held that the “complaint’s allegations concerning extraction of cannabis material are broad enough to include types of cannabis material excluded from the CSA.”19
- Damages not based on lost profits of sales in violation of the CSA– The district court further distinguished its decision from the cited ruling inShulman v. Kaplan,noting that “Gene Pool does not seek damages based on its own cultivation or sales of marijuana,” but was instead merely the holder of allegedly infringed IP.20
- Asserted patents and claims are not expressly limited to cannabis– The district court also noted that the asserted “patents do not mention cannabis or marijuana” but rather “relate more generally to extracting oils or compounds from plants” generally.21Thus, the sole connection to cannabis and any potential violations of the CSA were from the defendant’s use of the technology, and the claimsper se did not expressly involve cannabis.
Judge Holcomb also took notice of the federal government’s self-imposed prohibition on “prosecutions of private individuals or organizations that produce, distribute, or possess marijuana in accordance with state medical marijuana laws.”22The court reasoned that such prohibition on prosecution would likely apply to the cannabis extraction activities alleged in the complaint, and by extension to the government’s assessment of any alleged aiding and abetting that would arise from a court’s resolution of the patent infringement dispute.23In short, the district court held that the fact that “certain marijuana-related activity may be deemed [il]legal under federal law, does not in and of itself transform an unrelated federal cause of action with entirely different goals (for example, protecting employees orpromoting innovation) into facilitating a crime.”24
The decision is welcome news for holders of US cannabis patent rights, and although not necessarily binding on other courts, it provides a first guidepost through which parties can assess IP infringement and enforcement risks and strategies.
Overall, theGene Pool Technologiescase suggests that courts are open to accepting jurisdiction in cases where owners of patents on legal cannabis assert claims to enforce their patent rights, so long as there is a plausible basis for the court to find that the power of the federal government is not being used to further illegal activity. Innovators who are inventing new technologies in the legal cannabis market can maximize the likelihood that their patent rights will be enforceable by working with experienced patent counsel to draft claims in a manner that avoids reading exclusively on illegal cannabis-related activities, as well as strategically and selectively enforcing patent rights in a manner that allows federal courts to conclude that granting relief to the plaintiff will not make the court – and by extension, the federal government – an accessory to illegal activity.
Take-home lessons for the legal cannabis industry
Several lessons for the industry are apparent from the ruling in theGene Pool Technologiescase:
- Patent owners considering future enforcement suits should consider placing their IP in non-plant touching entities that would not be subject to any allegations of illegality. Such strategies, however, should be carefully reviewed with IP counsel to guard against potential adverse impacts to available remedies and damages theories.
- Courts may focus on whether a complaint clearly alleges that any money damages would necessarily flow from activity illegal under the CSA, implying that any complaint for patent infringement should be drafted so that infringement and damages are not necessarily limited to activity that violates the CSA.
- Legal cannabis businesses seeking patent protection should obtain claims of varying breadth, as well as claims that cover practices that are clearly legal under both state and federal law.
- Patent owners seeking to enforce their legal cannabis patents in federal court should seek to assert claims against infringing practices that are clearly legal under both state and federal law, and consider out-of-court strategies – such as licensing – to exercise their patent rights in other contexts.
Notes
- Gene Pool Technologies, Inc., v. Coastal Harvest, LLC, No. EDCV-21-01328-JVS (C.D. Cal. Nov. 22, 2022).
- Ex turpi causa non oritur actio(“From a dishonorable cause an action does not arise”).
- The Florida, 101 US 37, 43 (1879);see also, Ewell v. Daggs, 108 US 143, 149 (1883).
- See, e.g.,Cooley alert, “2018 Farm Bill Enacted With Important Provisions for Plant IP and Cannabis-Related Business,” January 10, 2019.
- See, e.g., Sensoria, LLC v. Kaweske, 581 F. Supp. 3d 1243 (D. Colo. 2022);see also, In re Medpoint Management, LLC, 528 B.R. 178 (Bankr. D. Ariz. 2015).
- See, e.g., S Shulman v. Kaplan, Civ. No. 2:19-cv-05413-AB(FFMx) (C.D. Cal. Oct. 29, 2010).
- See, e.g., Sensoria, LLC v. Kaweske, 548 F. Supp. 3d 1011, 1026 (D. Colo. 2021) (“The mere fact of marijuana’s involvement does not by itself automatically preclude … redress.”);Polk v. Gontmakher, Civ. No. 2:18-cv-01434-RAJ (W.D. Wash. Mar. 22, 2021) (“recent case law involving cannabis-related business contracts does not espouse an absolute bar to the enforcement of such contracts”);In re Burton, 610 B.R. 633, 637-38 (B.A.P. 9th Cir. 2020) (noting that “the mere presence of marijuana near a bankruptcy case does not automatically prohibit a debtor from bankruptcy relief.”)
- See Siva Enterprises et al. v. Lance Ott et al., Civ. No. 2:18-cv-06881-CAS(GJSx) (C.D. Cal. Nov. 5, 2018). A similar result was reached inGreenwood v. Green Leaf Lab LLC, Civ. No. 3:17-cv-00415-PK (D. Or. July 13, 2017).
- See, e.g., Mischalski v. Ford Motor Co.,935 F. Supp. 203, 206-07 (E.D.N.Y. 1996);Dream Games of Arizona, Inc. v. PC Onsite, 561 F.3d 983, 990-91 (9th Cir. 2009).
- See Gene Pool,supran.1.
- US patents 9,144,751; 9,145,532; 9,587,203; 9,604,155; and 9,757,664.
- See Gene Pool,No. EDCV-21-01328-JVS (Dkt. 1).
- See, e.g., United Cannabis Corp. v. Pure Hemp Collective, Inc., No. 1-18-cv-01922 (D. Colo.).
- See Lifted Limited, LLC v. Novelty, Inc., Civ. No. 16-cv-03135-PAB-GPG (D. Colo. Sept. 30, 2021).
- See Gene Poolat 12.
- Id.
- Id.at 13.
- Id.at 14.
- Id.
- Id.at 13.
- Id.
- Id.at 15.
- Id.at 15 –16.
- Id.at 17 (emphasis added).
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One-Hit Wonders
Minnesota Office of Cannabis Management Issues Rejections to Majority of Social Equity Applicants
Published
2 weeks agoon
November 21, 2024By
admin
The Minnesota Office of Cannabis Management (“OCM”) has begun issuing final denials to the overwhelming majority of previously qualified social equity applicants (“SEA”s) ahead of its first statewide cannabis lottery on December 2 for 280 available “preapproval” cannabis licenses.
Per reporting from MJ Biz Daily, “The applicants who are barred from the lottery failed to complete the application process or acted improperly by submitting multiple applications or disguising the true investors in their companies, according to [OCM].” Obviously applying for more licenses than is allowed and/or concealing owners or financial interests are clear grounds for SEA application rejection. Other alleged “deficiencies” though may not be so cut and dry.
While state law does not permit appeals from denied applicants (which is not uncommon for states with cannabis licensing programs), impacted SEAs can still secure a review of their records submitted to the OCM within seven days of the rejection decision (by logging into their Accela Citizen Portal and pulling the internal record there).
The main issue emerging as a result of these rejections is the fact that the OCM did not consistently issue deficiency notices to rejected applicants if there was a material problem with their submitted applications (although as of October 16, the OCM had sent out deficiency notices to over 300 SEAs). In turn, there are instances here where SEAs were rejected for minor, seemingly non-material deficiencies in their applications (things like submitting incorrect corporate documentation that still contained the same information the OCM sought, or re-submitting documents upon request by the OCM only to be rejected for lack of the same document after-the-fact, or even blank denials altogether with no stated reason for rejection).
In an interview with the Brainerd Dispatch, Charlene Briner, the interim director of the OCM, cast these denied SEA applications into four categories:
- Failure to meet the basic qualifying standards under state law (i.e., social equity applicant owning at least 65% of the business among others)
- Failure to provide the requisite verification documents (i.e., legitimate business plans, source of funds, ID, etc.)
- Hidden or inconsistent ownership or true parties of interest
- Fraudsters (i.e., those trying to game the system by flooding it with multiple applications via proxy or otherwise by using the same address or phone number tied to the same person on multiple applications)
The first and second bullet points above are going to be the ripest ground for rejected SEAs to try to stop the OCM prior to the December 2 lottery, but that’s only if those rejected SEAs can very quickly obtain copies of their submitted documents (within 7 days of the rejection) and start the administrative litigation process and/or seek injunctive relief at the same time against the OCM.
What was once more than 1800 qualified social equity applicants for the lottery has been winnowed down to around 640. The OCM rejected applicants for a multitude of reasons, some of which are clearly legitimate and some of which appear to be questionably enforceable from the perspective of complying with Minnesota’s state constitution and its administrative procedure act.
If you’ve been impacted by an OCM rejection, you do not have much time to act ahead of the December 2 lottery. If you have questions about your potential civil or administrative claims against OCM due to a questionable SEA rejection, contact Jeffrey O’Brien, Hilary Bricken, or Nick Morgan.
Minnesota Office of Cannabis Management Issues Rejections to Majority of Social Equity Applicants
One-Hit Wonders
Wait? My CBD Business May Be Racketeering? A Potential Existential Crisis We Have Been Warning About
Published
1 month agoon
October 23, 2024By
admin
Even the most responsible hemp operator should understand that it operates in a world full of risk. But I doubt many of them believe they might be accused of racketeering. Last week, the U.S. Supreme Court heard arguments about whether to sanction a commercial trucker’s attempt to bring a racketeering claim against CBD companies, whose allegedly mislabeled products the trucker claims led to his firing.
As always, Sam Reisman at Law360 distills the issue nicely:
The case concerns an allegation that companies sold CBD products with detectable amounts of THC, purportedly costing plaintiff Douglas J. Horn his job as a commercial trucker after he tested positive on a drug test. Oral arguments on Tuesday hinged largely on whether Horn’s claims stemmed from a personal injury — which would be excluded from the Racketeer Influenced and Corrupt Organizations Act, or RICO — or whether his firing was an economic injury and therefore redressable under RICO.
In taking the case, the U.S. Supreme Court could resolve a 3-2 circuit split over whether the civil prongs of the RICO statute allow a plaintiff to seek damages for economic harms stemming from injuries to their person.
Again, from Reisman:
During oral arguments on Tuesday, the liberal wing of the high court expressed skepticism with the CBD companies’ rendering of the case, which they said foregrounded Horn’s ingestion of the product as the source of the injury, as opposed to his firing for a positive drug test.
…
Lisa Blatt, an attorney for the CBD companies, told the justices that agreeing with Horn’s interpretation of the statute would open the door for virtually limitless personal injury cases under civil RICO, as long as plaintiffs could allege some connection between their ingestion of a product and a loss to their business or property: “Respondent’s rule also leaves the personal exclusion [in civil RICO] toothless, since virtually all personal injuries result in monetary loss,” Blatt said. “It is utterly implausible that Congress federalized every slip-and-fall involving RICO predicates. Personal injuries are serious and may support state tort claims, but they are not the stuff of RICO.”
On the other side, conservative justices attempted to discern how to draw a line between bona fide economic claims and personal injury claims pleaded as economic claims.
Easha Anand, arguing on behalf of Horn, said the vast majority of personal injury claims, such as those alleging pain and suffering or emotional distress, would still be excluded even if Horn was permitted to pursue his RICO claim against the CBD companies: “In your average slip-and-fall case, you’re not going to be able to prove a predicate act, let alone a pattern of predicate acts, let alone a pattern carried on through a racketeering enterprise,” Anand said.
…
Justice Neil Gorsuch observed, “There’s a failure to warn that this product contains ingredients that your client didn’t know about and should have known about and had a right to know about. I would have thought that that would have been kind of a classic personal injury.”
The Takeaway
This is pretty scary stuff for CBD and other hemp operators. RICO is no joke and carries very serious penalties (both civil and criminal depending on who is bringing the suit).
From the perspective of a CBD manufacturer, it seems unfair to hold the manufacturer responsible to control how its products are used and, as in this case, the implications of that use (here, an alleged economic injury).
If the Court rules that CBD and other hemp manufacturers are subject to RICO charges simply by selling their products to people who do things outside of the manufacturers’ control, it could pose an existential crisis to the industry with potentially unlimited civil (and maybe even criminal) liability. We have warned about this before.
That said, while it’s always difficult to predict how the Supreme Court will vote on any issue, I do not believe the Court will push the hemp industry to the brink. I suspect the Court will either rule that the claims in the present case are personal injury claims excluded from RICO and/or provide guidance for how lower courts should examine such “mixed” claims.
We’ll of course provide additional information once we hear from the Court. Stay tuned.
One-Hit Wonders
What ‘material’ about therapeutic goods is considered advertising?
Published
2 months agoon
October 10, 2024By
admin
It is important to note that advertising health services is subject to different regulations than advertising therapeutic products. Consequently, advertisers, manufacturers and sponsors must evaluate whether their business name could be interpreted as an advertisement for therapeutic goods. If so, they should consider whether the business name, including company or trading names, could be viewed as a ‘reference’ that draws the audience’s attention to medicinal cannabis, as any mention or similar terms to ‘cannabis’ are likely to have that effect. It is essential to recognise that the impact of promoting the use or supply of medicinal cannabis does not depend on a single promotional element but rather on the overall promotion. This includes all components of the promotional information and materials that accompany the name or branding. Advertising can result from the combination of separate statements, images or designs that collectively promote the use or supply of therapeutic goods.
Advertising
The prohibition on advertising medicinal cannabis to the public is determined by the context in which the material is perceived. When evaluating whether information about therapeutic goods qualifies as advertising, it is essential to consider the broader context of the material’s presentation. This encompasses various factors that influence the conveyed message, including the context of the information or activity, the intended audience and their likely interpretation of the message, as well as the presence of non-verbal and unwritten cues, such as visual elements. These factors can significantly affect communication and may alter the message perceived by consumers.
For example, if an advertisement for a health service, such as a pain treatment service, includes references to medicinal cannabis, even in the company name or trading name, a reasonable consumer may conclude that the advertisement seeks to promote both the use of medicinal cannabis for pain relief and the pain treatment service itself. Including a disclaimer, such as advising the consumer to consult a health professional regarding suitable treatment options, does not exempt the advertiser from complying with legislative requirements.
The distinction between promoting a health service and the therapeutic product utilised in its delivery can be nuanced. Therefore, it is crucial for advertisers to consider how a typical consumer might perceive their advertisement in relation to the promotion of the therapeutic product.
Legal Compliance
To ensure legal compliance in promoting a business or service, advertisers should focus on the health services they provide and avoid referencing medicinal cannabis. For instance, stating “Our clinic offers consultations related to pain management” is a more compliant approach. The Therapeutic Goods Administration’s interpretation of advertising for medicinal cannabis is broad, covering all methods of promoting its use or supply. This includes company names, product names, abbreviations such as CBD and THC, colloquial terms, and any imagery related to cannabis. Any combination of statements or images that implies medicinal cannabis can be considered advertising, even in the absence of explicit promotional language.
Summary
In summary, it is prohibited to mention prescription medications in advertisements for therapeutic goods. If content discusses health conditions and consumers can reasonably infer, either from the context or through direct or indirect references, that medicinal cannabis or any other prescription medication is intended for use concerning these conditions, the content may be deemed an unlawful advertisement for therapeutic goods. Not all information related to therapeutic goods is classified as advertising. However, if the content aligns with the definition of ‘advertise’ as outlined in the Therapeutic Goods Act 1989 (Cth)—which includes anything that is directly or indirectly intended to promote the use or supply of therapeutic goods—then the relevant legislative requirements for advertising such goods must be complied with.
“Indirect intent” in this context does not refer to the explicit intention of the party responsible for the content, but rather to what a reasonable consumer might infer as the intent behind the content. Terms such as “plant-based medicine,” “plant medicine,” “cannabidiol” and “CBD oil,” which relate to medical cannabis products, may be considered promotional if they suggest a connection to medicinal cannabis. Businesses promoting a health service must ensure they do not inadvertently advertise a prescription medicine in their marketing materials. If the consumer is encouraged to seek out a health service based on the therapeutic goods available, the content is likely to be regarded as an advertisement for those therapeutic goods.
For additional information, the Therapeutic Goods Administration has established the Medicinal Cannabis Hub, accessible at https://www.tga.gov.au/products/unapproved-therapeutic-goods/medicinal-cannabis-hub, and has also provided advertising guidance for businesses involved in the medicinal cannabis sector, which can be found at https://www.tga.gov.au/sites/default/files/advertising-guidance-businesses-involved-medicinal-cannabis-products.pdf. These resources are designed to assist both consumers and industry professionals in understanding their obligations.
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