IP Strategies, Enforcement Considerations, and Potential Ethical Pitfalls in the Quasi-Legal Cannabis Industry
Notwithstanding its illegality under federal law, cannabis is now legal for medical and/or adult recreational use in a majority of states. The tension between state and federal law (and the newness of a quasi-legal cannabis industry), however, complicates the legal representation of cannabis industry clients and raises potential ethical pitfalls. The representation of cannabis clients in Intellectual Property (IP) matters is no exception and implicates unique strategic concerns.
Larry Sandell - Hi, my name is Larry Sandell and I am presenting on IP Strategies, Enforcement Considerations, and Potential Ethical Pitfalls in the Quasi-Legal Cannabis Industry. So I wanted to start off by talking a little bit about the cannabis industry in general. Over the last few years, it has grown tremendously. It's gotten a lot more acceptance in many states of this country. And I wanted to put out some statistic out there for people to realize how big it actually is. In 2019, there was $13.2 billion in quote, unquote, legal sales. And I'll get into that in a little bit pretty soon. In 2020, that grew to $20.1 billion. And this event is projected to double by 2025. And that only accounts for the states that were legal or when cannabis was legal for either medical or recreational purposes in 2020. And since that time, quite a few more have come online. So the projection to double to $40 billion by 2025 is actually probably quite conservative.
And as we talk about the cannabis industry here, it's important to think of it in two main concepts, two main types of business. There are the plant-touching businesses and there are the ancillary businesses. The plant-touching businesses are just like it sounds, those are the businesses that actually touch cannabis or the chemical compounds derived from it. These are business that may be involved in growing cannabis, processing it, distributing it, conducting retail sales. And the plant includes the cannabis flower itself, what is generally understood to be smoked and the part of the plant that contains most of the active chemicals, edibles which may include varieties of gummies, cookies, you name it. I'm sure at this point, we could spend a full hour just discussing that. Vape cartridges with CBD or THC as well as wide variety of cosmetics, oils, tinctures. There are bath bombs. The number of plant touching products and therefore, plant touching businesses is quite large.
The other half of the cannabis industry are the ancillary businesses and this is sort of with respect to the gold rush, akin to selling the pickax. So these are people who sell technologies that are used for growing smoking, vaping, trimming, extraction of chemicals. They may sell smell proof or childproof containers that the retail sellers use. They may sell growing equipment or supplies or they may provide chemical or laboratory services and sales. Quite a large number of actually well-known lab and chemical companies actually have their own cannabis-related branches, but by not actually touching the plant and just dealing with people who may be in that business, they're able to avoid a lot of the legal scrutiny and potential legal risk that's there. And the final category of ancillary businesses are ones that a lot of you may be in or may hope to be in, providing legal services to cannabis companies. It would be some ancillary business as well as accounting, banking, regulatory, and state licensing. Security issues, which I'll get into it a little bit as well as well as software and data analytics.
So I'll presume that not everyone here is familiar with the cannabis plant. But it's important to define some terms before we get going. The scientific name for the plant is Cannabis sativa and there are two main cannabinoids within cannabis that are currently most consumers will focus on in somewhere or the other, and that I'm sure most people have heard of. One is delta-9-tetrahydrocannabinol known as THC and this is the main psychoactive ingredient in cannabis. The second one that is pretty well known is cannabidiol, which is what usually referred to as CBD. This is not psychoactive, but a lot of people say that it has a lot of different properties. I am not gonna go into that at the moment, but these are just two of approximately 144 other isolated cannabinoids. There's CBN, CBG are ones that are talked about a lot in the industry as potentially having a lot of medical use or common properties. But THC and CBD will do for the purposes of this. And the Cannabis sativa plant and products can generally be split legally into two groups. There is hemp and there is marijuana. Now, hemp is defined as having a low level of THC. There are a lot of industrial uses for hemp. Textiles, food, paper, biofuels. I've even heard of people talking about carbonized hemp fiber being used to create microchips. We'll see where that one goes. And then they're also medical uses, which is the CBD that is extracted from hemp is legal, and the CBD may be used by itself. And when I say it's legal, it's legal under very, very certain circumstances. And then there is marijuana and this is what cannabis has typically been known for for many, many decades. Marijuana has amounts of THC that can cause a psychoactive effects. It also has CBD and there are medical and recreational uses for it.
So the first thing that stands out when you're discussing cannabis law is the tension between state and federal law. And this raises its head in many, many aspects as you'll see through this presentation. And I don't commonly quote Justice Clarence Thomas, but this is one occasion that I do. And in denying a cert for a Colorado medical marijuana dispensary regarding an IRS investigation, he stated, "Once comprehensive, the federal government's current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana. This contradictory and unstable state of affairs strains basic principles of federalism and conceals traps for the unwary. The disjuncture between the government's recent laissez faire policies on marijuana and the actual operation of specific laws is not limited to the tax context. Many marijuana-related businesses operate entirely in cash because federal law prohibits certain financial institutions from knowingly accepting deposits from or providing other bank services to businesses that violate federal law. A prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the federal government's piecemeal approach.
And so with that, I'll turn to what the federal law on cannabis is. Under the Controlled Substances Act, marijuana is a Schedule I drug, and that means by legal definition, although not necessarily according to the real world scientific data as well as the experience of many, it has no medical value and a very high potential from abuse. The only portion of marijuana that is cut out from Schedule I is the fiber straw. But as I will get into a little bit later with the passing of the Farm Bill defining low-THC cannabis as hemp, hemp is not a Schedule I drug. But when we're talking about marijuana purely, prohibition is still on the books. And there are quite severe felony penalties that are still there. They're right here for you, many, many years in jail and many millions of dollars in fines are there for people who grow a lot of marijuana. The other part of federal law that's reducing the effect of this a bit is the Rohrabacher-Farr budget rider and that bars federal expenditures for prosecutions and appeals if state medical marijuana law is strictly followed. So for people who are selling medical marijuana and they're strictly following their state law, their risk of being hit with these penalties is effectively zero currently. Of course, this can change in any congressional budget.
The major issue here is this is limited only to medical marijuana laws and it doesn't apply to state legal recreational cannabis. So as I mentioned before, the 2018 Farm Bill has now per permitted the growing of hemp under certain circumstances. And it effectively legalized CBD that is extracted from hemp because it because the hemp is now legal as well. It's important to note that CBD extracted from hemp is absolutely indistinguishable from a CBD that is derived from marijuana, but that is like I guess an enforcement issue that's out there. There are also some major banking issues with cannabis. There's something called the Cole Memo in 2013 that memorialized the DOJ's tolerance of the cannabis industry. So long as there were robust state regulatory schemes and that were extended to financial institutions in 2014. But under Trump, former Attorney General Jeff sessions rescinded this memo, but guidance from FinCEN remained. So cannabis banking is effectively in limbo. It's a lot of businesses to operate very largely in cash a lot. There are some other credit card processing companies that have come up that are, I guess, towing the line of legality here, but this it very much remains an issue for cannabis.
For taxes, there's one provision that's worth looking at if you ever have a cannabis client or at least speaking with an accountant who is familiar with this and that's 26 U.S.C. 280E and it prevents certain federal tax deductions that relate to illegal goods. And this was actually the case that Justice Thomas spoke of when he was denying cert that I quoted earlier. The upshot of section 280E is that federal taxes for a cannabis business can exceed the profits if businesses are not careful in structuring what their expenses are and how that works. Turning to the FDA, CBD is actually considered a drug by the FDA. There is a drug called Epidiolex. It has been approved for epilepsy uses and it's sold by a company called GW Pharmaceuticals. As a result of this, and you'll see how this becomes important later, CBD is not legally permitted in food, beverages or in other unapproved pharmaceuticals. Currently when the FDA enforces the ban on CBD, they have generally limited it to presenting warning letters for companies who make claims as to the effectiveness of CBD when companies sell CBD. And don't say much about it, then there's usually not too much of a problem, but if they say this will cure anxiety or cure headaches, the FDA is sort of ready to jump on that. And on this slide, the FDA has quite an extensive Q and A on CBD. And if you have clients working in that area, it's certainly worth looking at.
So the big question is when is cannabis going to be legalized? When is marijuana going to be legalized? Is it going to be legalized? There was a lot of hope for this at the beginning of 2021 after the Democrats won control of both Houses of Congress. As I've quoted here, there's no stopping the industry now according to Politico at that time. But the legalization has not really panned out, at least so far. The House has passed some other reforms that haven't quite gotten there. There's the Secure and Fair Enforcement Banking Act known as the SAFE Banking Act. And that would remove a lot of the limbo when it comes to at least the financial institutions and ensuring that this business is not often carried out in cash. And there was also a stronger bill of the MORE Act and that passed in 2020 that would've descheduled marijuana and expunged prior convictions. This would've been a full legalization. It passed in a prior session but not this one yet. And the majority leader, Chuck Schumer, had promised to prioritize events in cannabis reform. If Democrats retook the Senate, of course, Democrats have retaken the Senate, but there has not been much progress on this at least to date. Looking at state law, there's a bit of a hodgepodge here. This is a map that was recent as of February 2022, and it changes quite frequently. The dark green is for states where there's both adult use, which also known as recreational use as well as medical use. And there's some states with comprehensive medical cannabis program and those are generally understood to have effective medical cannabis laws. And then there's some other states that have some sort of medical cannabis laws, CBD might be legalized or low THC. A low THC prescriptions or recommendations might be legalized but they're generally not considered to be effective. And those are the light greens here.
Now, for those who may have been better versed in cannabis and less versed in IP, I'll start from the basics here and go through these pretty quickly because all are become important when we start talking about cannabis and how cannabis clients can be helped as far as protecting their IP. Trademarks are used to protect words or symbols that designate the origin of a product or service. These are your brands, these are your slogans, copyrights protect writings and illustrations or works of authorship. There are design patents that protect ornamental designs for manufactured items. This is the aesthetics as to way a manufactured item might look. Their utility patents, which are the main patents that people discuss and those protect technologies, machines, formulas, compositions of matter and various processes. IP can also be protected as a trade secret. Trade secrets don't offer any protection if somebody else is able to fairly reverse engineer your technology or if they're able to come across it independently or derive it independently, but they will protect your secrets that give you a competitive advantage. Your technology or protocols and client lists if a disgruntled ex-employee or some decides to try and sell your secrets or if somebody hacks into them. So long as you've taken reasonable measures and precautions, you do have some protections to claw that back effectively.
There are also plant patents that protect asexually reproduced plants. As we'll see, these are used for cannabis plants. When cannabis has grown or marijuana's grown, it's generally taken as clones from plant varieties that have been deemed to have great properties. This is actually quite similar to the way that apples have been grown for many, many years. While they can be grown from seed, the best varietals are usually just cloned exactly there is over and over again. And some companies have been successful in obtaining plant patents for cannabis. And I'll get into that a little bit later. And then they're also plant variety protection certificates. These are not issued by the USPTO but rather the USDA and that protects seed propagated plants. And once the farm will pass, the USDA begin accepting hemp seed samples to provide these PVPC protection. So with that a overview of both cannabis, the cannabis plants and a bit of cannabis law in mind, I want to direct everyone's attention to the ethical rules that lawyers are required to follow. And there's some interesting dilemmas here and I'm probably going to be presenting a few more questions than I can give concrete answers for the most part.
But we will start with the ABA Model Rule 1.2 . And this is a rule that many of, or I guess most states have something very, very similar. And that is that a lawyer shall not counsel a client to engage or assist a client in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed courts of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law. And so where this immediately takes us is, of course, the bold and underlying portion that a lawyer cannot counsel a client to engage in or assist a client in engaging in conduct that the lawyer knows is criminal. And as everyone's seen from one of my earlier slides talking about the Controlled Substances Act, the sale of marijuana, not hemp, but marijuana is federally criminal in many, many circumstances here. So this is what's going to be raising its head. And as attorneys, obviously, we want to be able to provide our clients with the best counsel possible, but we also have to ensure that we don't violate the ethical rules. So the USPTO's rule is actually quite similar. It has similar language that a practitioner, which will include patent attorneys and trademark attorneys as well as patent agents are not permitted to counsel a client to engage or assist a client in conduct that the practitioner knows is criminal. And again, the practitioner may discuss the legal consequences of any proposed course of conduct and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law. Turning to state law and the ethical rules.
There were really four types of regimes that states have adopted so far. The first regime is silence, which is effectively that a state has not said anything special about cannabis. The ABA Model Rules or some similar rules stands as it is. There's also a tab what I've called category B. And those are states that have ethics rules that explicitly permit cannabis-specific attorney representations. And in these, we'll have to discuss well, what is carved out from what a lawyer is not allowed to do? There are also ethical rules that generically address the federal and state law tensions. These are probable, I think, is probably the best course for states to take because if there is another type of law that has similar tensions, it will automatically address that and doesn't need to be rewritten. So that may be helpful for those who are promulgate bar ethics rules. And then in category D, there are a number of states that have issued ethics opinions relating to cannabis representations.
So for the first rule here, I'll pick on Virginia. Virginia recently legalized cannabis, but they would fall under this category A for silence. Their rule of professional conduct 1.2 is akin to the ABA's Model Rule. And lawyers are effectively left to fend for themselves to decide what courses of conduct are ethical and what are not ethical. But I would suspect within the next year or two, we would at least see some opinions on some matters here. Now, other states have very explicit carve-out provisions. And again, as I mentioned, it's important to see what is carved out.
So New Jersey, which has had legal medical cannabis for little while and more recently has had starting up with legal recreational cannabis states that a lawyer may counsel a client regarding New Jersey's medical marijuana laws and assist the client to engage in conduct that the lawyer reasonably believes is authorized by those laws. And the lawyer shall also advise the client regarding related federal law and policy. So in some New Jersey law says it's okay to counsel clients regarding their medical marijuana laws as of yet. Perhaps okay to do so regarding recreational cannabis. And the law's also very clear that an attorney needs to talk about the federal state conflict here and teach their client what murky waters that they are waiting into.
Colorado in a note to its rule 1.2 states that a lawyer may counsel a client regarding the validity, scope, and meaning of Colorado Constitution article 18, sections 14 and 16. And their cannabis statute and may assist the client in conduct that the lawyer reasonably believes is permitted by these constitutional provisions and the statutes, regulations, orders and other state or local provisions implementing them. So in Colorado, the whole concept of federal illegality is essentially excised here. Colorado attorneys can feel a little bit ethically safer in representing their counties on cannabis matters. The last line is similar to that of New Jersey that in these circumstances, the lawyer shall also advise the client regarding related federal law and policy.
Now Pennsylvania has another... Pennsylvania has a generic carve-out rule and it's safe that the lawyer may counsel or assist a client regarding conduct expressly permitted by Pennsylvania law provided that the lawyer counsels the client about the legal consequences under other applicable law of the client's proposed course of conduct. So the Pennsylvania rule really permits Pennsylvania lawyers to counsel as to anything that maybe legal under Pennsylvania law. It's important to, of course, again, the lawyer must mention federal law and any state and federal conflict. That becomes very important again here. But it's stated in a general manner. And again, this is kind of one of the laws that I personally favor and avoids a rewriting.
Maryland falls under the category of having ethical rules. And medical marijuana is legal and-One ethics opinion stated very clearly that Maryland attorneys are not prohibited from advising clients as to medical marijuana businesses, business related activities in Maryland or providing legal services such as contracting or negotiating to advance such projects and Maryland attorneys are not prohibited by the rules of professional conduct from owning a business interest in such a venture. However, the committee emphasizes that this opinion is subject to several limitations. And so, and from there on, it talks about the committee's opinion being limited to the Maryland Rules of Professional Conduct to activities that the DOJ has acquiesced to under Maryland's medical marijuana law. So there and it's referring to that Rohrabacher-Farr amendment where speaking of cannabis or marijuana businesses that are safe, that's strictly hue to Maryland medical marijuana's laws. And it also says that there's always remains a possibility that certain acts of council or clients could be deemed by the DOJ is outside the scope of conduct permitted by the law. So the Maryland Ethics Department here doesn't want to fully assure any attorneys that they are federally safe. And I think that is probably wise on their part.
California also has an ethics rule. California was actually the first medical marijuana state dating all the way back to 1996. So they've had a little bit of a while to think about it. And so they have a formal opinion that states that a lawyer may ethically advise a client concerning compliance with California's cannabis laws and may assist the client in conduct permit by those laws despite the fact that the client's conduct may violate federal law. So this is helpful for California attorneys. It makes it clear where they are safe and it states further such advice and assistance may include the provision of legal services to the client that facilitate the operation of a business that is lawful under California law. So they contemplate at least implicitly here that some of these businesses are lawful under California law but may or may not be fully lawful under federal law but still California attorneys are permitted to provide their services. And now, of course, this opinion continues quite a bit more. A lawyer may not advise a client to violate federal law or provide advice or assistance in violating state or federal law in a way that avoids detection or prosecution of such violations. And the lawyer must inform the client of the conflict between state and federal law including the potential for criminal liability and the penalties that could be associated with the violation of federal law. And finally, and this is quite an important point, which I'll jump into a little bit more in a few slides, but where appropriate, California lawyer must also advise the client of other potential impacts on the lawyer client relationship including on the attorney client privilege that could result from the fact that a client's conduct may be prohibited under federal law. So there is quite a lot to think about if your legal practice is entirely within a single state, all your clients are there as well and you're advising them. It can be a bit more straightforward, but if your practice like mine includes a federal patent practice and you have clients that whose businesses may touch in multiple states, things can get a little bit more murky.
Other states that have a ruler ethics opinion include Alaska, Arizona, Connecticut, Hawaii, Illinois, Maine, Minnesota, Missouri, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Washington, and West Virginia. And that was just as of early 2020. So I wouldn't be shocked if there were a few more states on that list by now. So turning back to privilege implications as noted by the California Ethics Board, there is the crime-fraud exception. This is, I guess, the clear privilege implication that we're looking at here. And the attorney-client privilege according to the Supreme Court, the attorney-client privilege must necessarily protect the confidences of wrongdoers. But the reason for that protection ceases to operate at a certain point namely where the desired advice refers not to the prior wrongdoing, but to future wrongdoing. And so it is the purpose of the crime-fraud exception to the attorney-client privilege to assure that the seal of secrecy between lawyer and client does not extend to communications made for the purpose of getting advice for the commission of a crime.
And looking back again at the Controlled Substances Act, assisting a client to sell marijuana is perhaps contributing to their future commission of this federal crime. So it is important to know that your communications with your client that otherwise, our normal attorney-client communications, you may be talking about corporate issues, you may be talking about IP issues, other business issues, real estate, anything, if they can be considered for the commission of a federal crime, there is a chance that all these communications might not be protected. So I believe that it is important to inform your client of this risk. And on that same note, it may be worth considering the form of communications that you use. Detailed emails may or may not be a good idea given the potential that they could revealed in a future litigation. So other potential implications come about when you look at Federal Rule of Evidence 501. You have to see how privilege will be assessed in the federal courts. And FRE 501 provides that the common law governs a claim of privilege unless any of the following provides, otherwise, the US Constitution, federal statute or Supreme Court rules. And the last line of FRE 501 is probably the most important one here is that in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision.
So for normal business law, if you are talking about suits that may end up in federal court for diversity reasons, you're probably okay relying on what the state law is, perhaps, what the state ethics school state as well. But if you're talking about any federal question jurisdiction in federal courts, state law is not what governs. A lot of my work is in the patent area as well as in the trademark area. And when I'm in federal courts, that's what we are talking about. And I think from FRE 501, what's best to assume for now is that federal common law is going to be what governs privilege. And because marijuana is illegal under federal law, there is a decent chance that crime fraud exception may pierce attorney client privilege if in the future. And I think within the next five or 10 years, we may say some very interesting ethics cases focused on this. So now that I've discussed probably a little bit too much of the dry ethics law, I wanted to start talking about IP and cannabis a little bit more clearly.
This is the first slide that I always like to present when I talk about cannabis patents. And this is a patent called cannabinoids as antioxidants and neuroprotectants. The date of the patent is 2003. It has been here for a quite a long time. And the reason I like to talk about this first is because of who the assignee of this patent is. And the assignee is the United States of America represented by the Department of Health and Human Services. And it is focused on methods of treating diseases using non-psychoactive cannabinoids, which may include CBD, which while today is outside, maybe outside of the Controlled Substances Act, it certainly was not in 2003. So when we talk about patents and the ethics of prosecuting patents are relating to cannabis, the fact that the federal government duly issued a utility patent to the federal government, I think that speaks volumes to make people comfortable about prosecuting patents for cannabis clients.
There are also plant patents that have issued, I believe it's about 15 to 20 at this point. This is one of the earlier ones. A cannabis plant named Ecuadorian Sativa. It issued in 2016. And I just wanna highlight here the part of the MPEP states that a, which is the Manual of Patent Examining Procedure for those not familiar, that a deposit is not necessary for the grant of a plant patent in the United States. And given the current legality of marijuana, a deposit is certainly unadvisable, I would say. So is prosecuting a cannabis patent assisting a client in conduct that the lawyer knows as criminal? I think this is one of the easier ethical questions when it comes to representing cannabis clients.
Fundamentally, a patent is a right to exclude and it doesn't actually give your client the right to practice the invention, the right to sell the cannabis, the right to sell the derivative or grow the cannabis. And the fact that the USPTO has issued these patents and that the US government has held cannabis patent rights, this all suggests that you're probably in a fairly ethical safe space here. Of course, it's always best practice to inform your clients about federal law and federal illegality of marijuana and the plant patent, plant material patents are a bad idea. There are some other specific issues with considering in patent prosecution. One is the duty of disclosure. For those of you who are not familiar with patents, everyone who is involved in trying to obtain a patent from the USPTO is required, and this includes the attorney as well as the inventors and perhaps, other people in the business who are intimately familiar with the patent and the technology, they need to disclose all prior art that's materially related to the invention that they're trying to get patent claims for, but only to the extent that they know of it. So one thing that's a little bit unusual in the cannabis field and it's getting a little bit less unusual as time goes on is the limited art that examiners have to search from when they try and determine whether a patents claims may be obvious or anticipated by something out there.
There are relatively few old patents out there and also relatively few academic, old academic publications on cannabis. And those are really the main things that patent examiners usually look for. but all known public sales and use that the inventors and the patent attorney is known about need to be disclosed. And this presumably will would include what is effectively a legal prior art if somebody publicly used or offered for sale in a legal cannabis product, that would, at least in theory, be prior art to the filed patent. And so due to federal prohibition, a lot of priority may be hidden, but it's important to note that medical marijuana became legal in California in 1996. So we're more than 25 years now. So for a lot of this stuff might be out there. And it's really just important to impress upon your clients the duty tell you what they know about it. They don't have a duty to search for more, but whatever they know, you need to make sure that you're not trying to claim something that fits squarely within prior art that your clients know about.
Now, in 2018, the first federal patent, federal cannabis patent case was filed. It was directed to a patent focused on liquid formulations of highly enriched extracts of plant cannabinoids. And unsurprisingly, this first case was filed in Colorado, which has quite a robust cannabis industry. Now, here is the patent at issue. Just looking at these claims, if you are a patent practitioner you'll probably recognize that they are quite broad or if you're very familiar with cannabis, you'll recognize how broad they are. Claim 10 is a liquid cannabinoid formulation where in at least 95% of the total cannabinoids is CBD. So if any vape cartridge has more than 95% of its cannabinoids being CBD or for Claim 20, THC and CBD, that would infringe this patent. This case has since been dismissed. The company, finally, it is now attempting to undergo bankruptcy proceedings, which are very much so complicated by federal illegality of cannabis and trying to claim federal bankruptcy for at least theoretically illegal business. I'll move on to another patent enforcement case that has made quite a few more headlines due to the size of the companies involved.
At the end of 2020, Canopy Growth Corporation sued GW Pharmaceuticals, which as I mentioned earlier, is the company that produces Epidiolex. The CBD FDA-approved drug for epilepsy. This patent was filed the same day that the... Sorry, this litigation was filed the same day that Canopy had that patent issued, and the accused product is Epidiolex. And just to give a little context here, GW Pharmaceuticals is traded on NASDAQ. It has a $7 billion market cap and a Canopy Growth Corporation is also traded on NASDAQ and its market cap is around $10 billion. These, of course, fluctuate and it may not be in that area by the time you hear this presentation. But these are these are big boys fighting here. The patents claims here look a bit thicker than the ones in the first Colorado suit. And even though of this patent issued in 2020, the priority date goes way back to 2001. I'll refrain from reading the entire claim here, but suffice it to say that that this claim is at least generally directed to a process known as CO2 extraction, which at least for a long while and to a large extent, still is, was among the most prominent extraction methods by which cannabis scientists can extract THC and CBD from the cannabis plant.
This case substantially came down to claim construction as many patent cases often do. There was one phrase in there that discussed us subjecting the cannabis plant material or primary extract thereof to CO2 in liquified form under subcritical pressure and temperature conditions to extract cannabinoid components. And so in the Markman order, GW's claim language interpretation prevailed, which strongly indicated that there would not be any patent infringement here. The graph on the right in the diagonal slashed area, that is essentially the portion that was... The portion of claims scope that was in dispute. GW interpreted the claim to mean that both pressure and temperature had to be sub-critical. And that is the striped area in the phase diagram here. Unsurprisingly, Canopy advocated for the opposite. And as a result of that, that would've resulted in infringement.
In late February, the case was dismissed and Canopy has until the end of March 2022 to appeal the claim construction to the Federal Circuit and hope to revive their patent. So when it comes to patent enforcement more generally and as an overview, it's important to look at patent quality before filing a suit. It is important to look at validity. Take a hard eye at that as well as if the potential for inequitable conduct. If your client probably should have known that perhaps something was out there that had 95% of the most common cannabinoids, you should look at that before you file suit, which you also consider if the USPTO had access to the relevant prior art as you do that. When it comes to discovery, there are some interesting implications as well. You might be able to refuse discovery or your clients or witnesses may able to refuse to answer questions based on the Fifth Amendment. If the question in deposition is did you sell this cannabis of this strain or with these qualities on this date? Answering that question may be admitting to a federal crime. And as a result, you can withhold answering.
That said, the other party may be entitled to an inverse inference if we're talking about a civil litigation such as a patent infringement litigation. By that same token, this statements may also, statements that may or may not favor your client may also be able to get around hearsay exceptions because admitting to a federal felony maybe considered a statement of interest. So these are questions that have not been tested yet. I suspect at some point they will be, but I guess stay tuned there. And then, of course, there are damages considerations. Can somebody claim lost profits for something that would've been illegal? Illegal sales under federal law or can you claim a reasonable royalty on illegal sales? These are the modes of patent damages and claiming it on a marijuana may throw a big wrench in that. And that is probably a large reason why we haven't seen any marijuana focused patent cases yet, just ones focused on rather cleanly legal CBD. So turning to trademarks for a bit, trademarks, to be issued federal trademark, you have to show legal use encounters.
Now this becomes quite an issue when it comes to plant-touching businesses. The first question that the USPTO is gonna ask and that you should ask your client is whether or not the client sales are in compliance with a Controlled Substances Act. Is marijuana or a marijuana derivative being sold? If so, you are outside of the CSA. And this is essentially a question of is this derived from marijuana or is it derived from legal hemp? And another way of asking is there no THC in the product that has been sold. If there is, the USPTO is not going to allow it because you have no legal use in commerce.
Another question here and this tends to implicate CBD a little bit more and I've had now had some personal experience litigating some of these is the FTCA under the Food, Drug... The FDA essentially turns... The USPTO essentially turns to the FDA as to whether or not the CBD is technically legal while the FDA is really only enforcing in sending out letters to CBD industry participants that make claims they maintain that it is illegal to sell CBD unless you are GW Pharmaceuticals because CBD is classified by the FDA as a drug. So as a result, if CBD is being used as a drug in a food or in a beverage, it runs afoul of the FDCA. One technique that a lot of people have used though is to look for legal products or services that your client is engaged in that might have a high likelihood of confusion. If your client sells cannabis cookies, those are not gonna have any legal use in commerce yet. But if they also sell, the lack of a better word, clean cookies, they can get their trademark on their clean cookies. And there may be confusion if somebody else, it's likelihood of, there may be a high likelihood of consumer confusion if someone else sells cannabis cookies using their same mark or logo or slogan. Similarly with tobacco products or vape products, that may be a way for sellers of not legal use, not legal goods to be able to protect their marks. Of course, if you go that route, you have to make sure the descriptions of the scope of goods that you sent to that USPTO are fair and accurate as well.
For ancillary businesses, the legal use and commerce requirement is a lot easier. If these are legal products that support the cannabis industry, machinery, lab equipment, software, containers, substance agnostic vaporizers or clothing, there is very little risk here. The USPTO has generally been allowing these through. They are legally used in commerce and it has not been really a problem. Now, one interesting move forward here for the plant-touching businesses are intent to use applications. And the theory here is that a trademark applicant will represent truthfully that they intend to use their mark in lawful cannabis businesses. They intend to sell marijuana using this mark in the future with the full anticipation that such use will become legal in the future.
And so the question here is whether intent to legally sell products that are currently legal in the future be bonafide and bonafide intent is what is required for an intent to use a trademark application. So the current answer, according to the Trademark Trial and Appeal Board is no. Now, I am involved in a case that is trying to change this answer. I have represented, am representing a client that intends to sell an iced tea beverage that includes CBD in it in the market. And had filed an intent to use application with, based on their anticipation, that CBD iced tea would be legal within the amount of time that they're permitted to send in a specimen illustrating their legal use in commerce. Now, I find this case interesting and I really like this case for a number of reasons. One, of course, is that I'm on it. The other is we're focused on CBD derived from hemp. So there is no illegality under the CSA. The USPTO has noted that it is not an issue at all. And so that so that is one thing there. The mark stands rejected. The application stands rejected on the basis that CBD is a drug and it's being used in a beverage. And because it's a drug being used in a beverage, it is illegal under the FDCA. So the TTAB followed this JJ206 reasoning, which is the prior case in the last slide and basically held that if something's illegal today, it is, as a matter of logic, impossible to anticipate selling it legally in the future. Of course, I disagree with that. I don't think it has any basis in law or logic or policy. We have appealed this to the Federal Circuit. That was our primary argument there.
Our secondary argument is the fact that the CBD industry is being treated differently than the pharmaceutical industry because pharmaceutical companies commonly file ITUs for drugs that they are developing and intend to sell in the market but could not sell in the market as a drug on the day that they file them. And the TTAB declined to address this below. And the last thing we have in our case is what I think is a lot of objective evidence of our intent in the record. We think it's quite reasonable to anticipate that CBD including food and beverage products will be able to be legally sold within a few years. And part of our evidence for this is that the FDA has explicitly and publicly said that they are looking into opening these pathways. And at this point, we have one amicus brief from International Cannabis Bar Association as well as Americans for Safe Access, which is a organization that has been around for a long time advocating for medical marijuana patients.
Now truly to trademark litigation, there is one case that anybody practicing this field should be paying attention to. And that is the Kiva case, Kiva Health Brands LLC versus Kiva Brands, Inc. This is a northern district of California case. And in this case, the defendant is a well-known seller of cannabis infused chocolates selling millions of units of chocolate every year. And through a predecessor company, these chocolates had been sold all the way back to 2010. KHB is a seller of legal health food products. They have nothing to do with cannabis at all. They had their first legal commercial use for health food products and their trademark application was filed in 2013 and they acquired federal registration in 2014. Now, one defense in federal trademark litigation that is commonly used is the prior use defense saying essentially, I was here first. I was using this mark before you. Your trademark maybe invalid, but it any rate, I'm entitled to continue the use that I have had. However, on summary judgements in the Kiva case, the district court held that federally illegal sales cannot support a prior use defense and the Lanham Act, the federal trademark law preempts California KBIs, the cannabis companies, California common law rights. So as a result, this prior use is, at least now, appears currently unavailable for any purveyors of illegal goods. The litigation continues on other grounds, but we will see where this litigation ends up. And I'll also note that in the summary judgment, the judge did cite the JJ206 case. So there's a lot of overlap here. So some key take away here, key takeaways here.
The first thing to do before representing cannabis clients in the IP industries. Consider whether the businesses are ancillary or if they are plant-touching. If they are ancillary, for the most part, your representation can proceed as it normally would. If they are plant-touching, there is a lot of hairiness to deal with and additional considerations. Be wary of the ethical pitfalls. As a general rule, it's probably always a good idea to inform any cannabis industry you have about both state and federal law. And, of course, you want to avoid assisting in criminal activity, whatever that may mean. For patent clients, I think it's important to highlight the duty of disclosure. Your client, again, may know lot more about what took place in the past and you don't wanna draft any claims that would run directly into prior art that your clients know about. And for trademark clients, it's important to pay close attention as to whether the commerce is legal under the constantly shifting state and for federal statutes and regulations and probably pay attention to how the Federal Circuit rules in re for Joy case.
And so finally, bit about me. I'm a registered patent attorney and head of my firm on Mei & Mark cannabis practice. I focus on counseling client on strategic IP matters of all kinds. Drafting and prosecuting, both patent and trademark applications, litigating patent and trademark infringement. I do this both in district court as well as the International Trade Commission. And I've argued a number of federal appeals mostly in before the Federal Circuit but also in the DC Circuit and the Ninth Circuit. I really enjoy advising startup companies as well as others with phenomenal innovations on IP matters and focus on cannabis as well as consumer electronics, medical devices, food science and software.
So thank you very much. I hope you've learned something. And if you have any questions, please feel free to reach out to me. My email is [email protected] Thank you very much.