Critical do’s and don’ts for marijuana licensing agreements

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As global demand for cannabis products continues to heat up, more companies are pursuing licensing agreements to quickly launch their brands in fast-growing markets.

The complicated deals are among the most intimate in the industry with firms agreeing to share closely held business secrets with partners, including intellectual property (IP), product formulations, trademarks and more.

Here’s a breakdown of some top points that experts say you should keep top of mind as you’re crafting your firm’s licensing agreement:

  • Leaning on template licensing agreements can prove a mistake.

Executed well, the agreements allow firms to tap know-how and quickly expand a brand’s reach into new U.S. and global markets, said Chuck Smith, CEO of Dixie Brands.

The Denver edibles company has used licensing agreements to become a global brand with partnerships across the United States, Australia, Canada, Mexico and New Zealand.

But the deals can also be fertile ground for a host of legal snafus that can pose big risks – including costly litigation and the potential for your company to lose its IP, cautioned Alison Malsbury, intellectual property attorney with Harris Bricken/Canna Law Group, a Seattle firm that focuses on the cannabis sector.

“The biggest problem that comes up is that some of these deals are thrown together using template licensing agreements from traditional business sectors,” Malsbury said.

“That doesn’t work in the cannabis space, because there are so many unique issues to consider and companies really have a lot at stake.”

  • Knowing your IP and trademark laws is key.

Among the most complicated issues facing the cannabis industry is a firm’s ability to prove exactly what IP it owns, Malsbury said.

“Far too regularly, cannabis companies come to us with proposed licensing deals where basic due diligence quickly reveals the licensor simply does not own what it claims to own,” Malsbury wrote in her weekly CannaLaw blog.

Because of the plant’s federally illegal status, the U.S. Patent and Trademark Office won’t issue trademarks for cannabis and many MJ-related products.

Without that protection, dealmakers must adhere to state-based trademark rules.

States also have adopted rules that vary depending on a licensing deal’s structure.

In some states – including California and Oregon – deals crafted with royalty-payment structures tied to revenue or profit will trigger financial interest-holder rules that often come with additional reporting guidelines.

“When you choose your deal structure, attention to the nuances of the laws in each state is critical, because there just is not tried-and-true boilerplate framework for these deals,” said Lily Colley, national marketing director for Colorado-based edibles maker Incredibles.

“Literally, every new deal in this industry teaches us one more thing.”

  • Assuming your new business partner has everything covered can result in significant strain.

From marketing and advertising budgets to investing in software platforms and IT , the best licensing agreements map out exactly what each party – the licensor and licensee – will be responsible to execute and pay for, Colley said.

Earlier this year, the firm launched a licensing agreement with Liberty Health Sciences as exclusive producer and provider of its cannabis products across Florida.

“Often, one of the things that causes the most trauma in a lot of these deals is that one partner assumes the other partner has it covered,” Colley said.

Items left unaccounted for in an agreement can lead to “large deficits and undue tension” between business partners.

“The end result is that brand and the products suffer in the marketplace, which is the top thing everyone wants to avoid,” she said.

  • Talking about the potential that things won’t work out upfront is smart.

Examples of well-intended licensing deals gone bad continue to pile up in the cannabis industry.

This month, Canopy Growth ended a licensing agreement with Bedrocan International after a dispute that sent the two partners to arbitration over “support” of Canopy Growth’s intellectual property.

Earlier this year, Evergreen Licensing and its founder, Brian Vecchio, filed a lawsuit against Tommy Chong and other business partners alleging the celebrity tried to cut the company out of profits tied to a licensing deal that had been in place for nearly three years.

“You really want to make sure you enter these deals with someone who is committed to being a guardian of your brand,” Colley said.

Her top advice: “Outline your divorce upfront.”

She suggests “getting in the weeds, early” in the deal-making process to “make sure you align on what your end goals are early on.”

Both parties should be ready and willing to map out a plan – such as arbitration – to deal with conflicts that arise.

“If you can’t be willing to talk about difficult things like how you’re going to leave each other if things don’t work out,” Colley said, “it’s probably a signal that it might not be a strong partnership.”

  • A morality clause can stave off potential embarrassment.

Increasingly, celebrities are becoming the face of some of the fastest-growing cannabis brands.

Adding a morality clause to your licensing agreement guards both licensees and licensors against behavior that brands want to avoid being associated with, Malsbury observed.

And it doesn’t have to be limited to criminal acts.

“Through a morality clause you can outline the situations in which certain conduct would be problematic,” she said.

“You always want the ability to cut ties when you’re partnering with others that have engaged in conduct that’s problematic or has the ability to harm your business or brand.”

Lisa Bernard-Kuhn can be reached at