Protecting Trade Secrets in the CANNABIS Industry

Originally published by Leiza Dolghih.

Because marijuana is still an illegal substance under the federal law (despite the proliferation of the state laws to the contrary), obtaining trademarks, copyrights, or patents for marijuana products is very difficult. Thus, many industry participants rely on trade secrets as the exclusive method of protecting their intellectual property related to cannabis products.

As the cannabis industry is predicted to grow to $10 billion in 2023, with everyone from Snoop Dogg to Martha Stewart vying for the share of the market, the key to building a successful cannabis business often lies in keeping the proprietary processes and information secret.

The cannabis industry is rife with information that would qualify as a “trade secret” under the federal Defend Trade Secrets Act, as well as the state versions of the Uniform Trade Secrets Act, including the following categories of information:

• growing methods
• soil mixtures
• distribution plans
• customer lists
• dying and curing processes
• extraction techniques and processes
• fertilizer recipes
• supplies lists and pricing
• edible and supplement recipes

To preserve the trade secret status of the proprietary information, the owners must take affirmative steps, such as:

• make sure that those with access to the proprietary information have signed non-disclosure agreements;
• require key employees to execute non-competition agreements that limit their ability to work for competitors for a certain amount of time after they leave their current employment;
• share the proprietary information on the need-to-know basis only with those individuals who need to access the information to do their job; and
• provide training and frequent reminders to employees and contractors about what information the company considers confidential and the consequences of accidental or intentional disclosure of such information.

Additionally, those industry participants who are planning to participate in clinical studies related to cannabis products should take certain steps regarding the proprietary information they share with the U.S. Food and Drug Administration (FDA). The agency recently released a presentation explaining how the cannabis stakeholders who are interested in studying or researching the potential drug use of the cannabis products can use the FDA’s electronic system, Drug Master Files, to make sure that the proprietary information that they share with the FDA does not fall in the hands of competitors. In fact, any time a cannabis business shares proprietary information with any government agency – federal or state – it should identify the portions of the information that it considers confidential.

Those prosecuting trade secret misappropriation in the cannabis industry should be ready that a defendant may argue that the trade secrets protections are not available due to cannabis still being illegal under the federal law. In fact, defendants in Silva Enters. v. Ott, accused of stealing a customer lists and information, argued exactly that – “that plaintiffs have not stated a claim for misappropriation of trade secrets because ‘there is no trade secret protection for ongoing illegal activities.’” 2018 U.S. Dist. LEXIS 223854, *13 (C.D. Cal. 2018). However, the district court rejected that argument stating that the Controlled Substance Act, which makes cannabis illegal, “does not immunize defendants from federal law.” Id.

However, this area of the law, is far from being settled, and major cannabis players have not been deterred from bringing trade secrets misappropriation claims, among others, related to their businesses. Most recently, a New York-based biosynthetic cannabinoid developer Lavvan Inc., sued a biotech company, Amyris, for $881 millions, asserting a claim for trade secrets misappropriation and patent infringement. In this case, the companies entered into a highly-publicized clinical research agreement in May 2019 to manufacture CBD (cannabidiol) produced via fermentation, but Lavvan has now alleged that Amyris used certain intellectual property shared during that agreement to actually compete with Lavvan.

BOTTOM LINE: Given the difficulty of protecting intellectual property related to cannabis and cannabis-based products with patents, copyrights and trademarks, any company in the cannabis industry should formulate a trade secrets protection plan from the very outset of the business, in order to ensure that the proprietary information at the center of its business does not lose its confidential status down the road.

Leiza Dolghih is a labor and employment board certified partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

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