You were lucky enough to get a license to operate a legal cannabis business in one state. You are making money but the special tax rules for your business are draconian

In addition, the state legislature is so enamored with the revenue from the legal cannabis business that they are starting to consider raising the price of licenses and/or issuing additional licenses.

If you could expand your distribution area, you could increase your revenue. However, your license is limited to one state. Even if you could get a license in another state, transporting your product across state lines would be illegal due to federal laws.

How IP can help solve those problems

The federal government awards intellectual Property (IP) rights. Interstate trade in IP rights via licensing or sale is permitted. If someone violates your IP rights, you can file a civil suit against them in a Federal court in the relevant district.


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This means that if you secure IP rights you can charge someone in another state to use those rights. Depending on the type of IP, the thing being transported across state lines would be technology or a mark that identifies a product.

What kinds of IP are suitable?

In the context of the legal cannabis industry, patents, plant patents and trademarks can help you expand your business to one or more additional states. Each of these types of IP allows you to prevent others from making using or selling the protected item.

Patents can be granted on industrial processes, compositions of matter, devices and articles of manufacture. For purposes of the legal cannabis industry industrial processes and articles of manufacture are the most interesting.

An industrial process is analogous to a recipe for making a product. If you have developed a new value added product, the process you use to make it might be patentable. If you file a patent application on the process, and your patent is granted, you are in a position to license or sell your technology in any state in the United States. Of course, your actual market will only be in states that have a legal cannabis business.

Articles of Manufacture & Plant patents

These are combinations of known goods in a specific configuration. A familiar example is the coffee capsule used in Keurig® or Nespresso® coffee makers.  The development of the legal cannabis industry has spurred a parallel development of cannabis use machinery such as vaporizers.

Especially in the medical cannabis sector, there is a demand for uniform pre-measured doses to load into vaporizers.  A capsule or cartridge (like a coffee capsule) configured to fit a specific vaporizer model could be in great demand.  The current legal situation requires that these capsules/cartridges be filled in the state where they are to be sold. However, the specifications and permission for making these capsules/cartridges can be traded across state lines in the form of patent rights.

Another familiar example of an article of manufacture is a transdermal patch. While these are generally known, a specific formulation may be a patentable article of manufacture.

If you file a patent application on your article of manufacture, and your patent is granted, you are in a position to license or sell your technology in any state where there is a legal market for it.

Plant patents are granted to an inventor who has invented or discovered and asexually reproduced a distinct and new variety of plant. Although cultivation of cannabis is illegal at the federal level, at least one plant patent on a cannabis strain has been granted. A plant patent on a cannabis strain, if granted, will allow you to license or sell the technology (as opposed to the plants) in any state where cultivation of the strain is legal.

Trademarks are symbols or goods used to identify goods. The original purpose of a trademark was to inform consumers concerning the origin of goods bearing the mark. Currently, trademarks are often licensed for application to products produced by someone else. For example, many famous beer brands are produced under license in countries far from their original site of production.

Because the legal cannabis market in the US is divided by state, it seems likely that there will be a demand for “famous” brands from states that were early to legalize in states that legalize later. This may prove true for cannabis strains, value added products, articles of manufacture and even dispensary names. Note that the trademark regulations forbid a mark which “Consists of or comprises immoral, deceptive, or scandalous matter”.

The Supreme Court recently called that prohibition into question, but there is no case law relating to cannabis that I am aware of. Cannabis per se presents an interesting question in terms of what class of goods to register the mark in. Class 31 (natural; agricultural products) and Class 5 (pharmaceutical products) seem most relevant although neither of them lists cannabis specifically.

Tax issues

The IRS only permits legal cannabis businesses to deduct costs directly related to cultivation as business expenses.

Registration of IP rights costs money. If that money is spent by your “main” cannabis business it is not a deductible business expense. If there is a separate IP holding company that engages in procuring and licensing IP rights, the holding company can probably deduct costs associated with filing and prosecuting applications at the patent and trademark offices as well as the cost of maintain an office and paying the staff.

*Disclaimer*

This article is for purposes of information only and does not constitute legal, business or tax advice. Before taking any action, consult with a licensed professional about the specifics of your case.

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