IP Insurance: Recipe for Cannabis Industry IP Protection

Patent wars have long-dominated the emerging tech sector, and in the cannabis industry the wars have already started even before a change in federal laws because the potential to profit is huge. The cannabis patent IP wars are just getting started; broad utility patents have been filed on whole families of cannabis plants and extractions, meaning companies that want to ensure survival need to get ahead of infringement lawsuits rather than scramble to solve them.

“Litigation is expensive, the average cost of patent infringement is $2.8 million,” says Gil Shaheen, vice president of sales and marketing at Kentucky-based Intellectual Property Insurance Services Corporation (IPISC). “These cases usually take one and half to three years to litigate.”

Shaheen adds that, according to U.S. Patent and Trademark Office (USPTO) and data assembled by the American Intellectual Property Law Association (AIPLA), patent litigation has risen sharply since 2009, as much as 88%.

“There has been such an increase in patent lawsuits because there are a lot of trolls as well as larger corporations that are going after not only large competitor corporations, but even small to midsize companies. A lot of the clients we see are startup and small to midsize companies, and that is why it is so important to have an IP insurance policy,” Shaheen says.

Patent “trolls” work to secure as many patents as possible in order to demand licensing fees from potential infringers or eliminate competition. Because litigation is so expensive, it is usually more affordable for small companies to accept the licensing fees the troll is demanding. But if a company has insurance that covers the costs of litigation, they could potentially invalidate the troll’s patent while also building a bigger moat around their core business value.

“If you look at a company, their most valuable assets are their intangible assets. That’s the reason why we do what we do, to help the small company really have a chance in the fight, so to speak,” Shaheen says.

The recipe for protection is simple; identify the assets and get the right insurance coverage to protect them and the business.

Identifying the Assets

The best defense in this case is offense.  First, it is important for any business to identify the intellectual property at the core of their business and then seek out a qualified risk manager and insurance broker to make sure a policy is in place that protects them against frivolous lawsuits. Policies that cover the costs of patent infringement lawsuits do more than cover the cost of litigation, they prevent the business from having to abandon a product, from paying burdensome royalty payments, from losing market share and cash flow and reducing the pressure to enter into a settlement agreement or pricy licensing fee deal with patent trolls. It also makes the company more attractive to risk-averse investors.

Dale Hunt, Phd, is a plant biologist, partner and attorney at Hahn Loeser & Parks LLP and author of the Plant Law Blog. He has over 20 years of experience in patent law, specifically protecting plant varieties. He says the first step to protecting a cannabis businesses IP is to identify it.

The key is understanding the value of what the company has and what they are creating and determining if it is worth protecting. Does the grower or breeder truly have a unique and rare plant variety worth protecting? Are there specific slogans, logos or other branding assets that their market associates with a their product, even if they aren’t making something unique and patentable?

Hunt says that because of the underground nature of the pre-legalization cannabis industry, a lot of growers have already lost control of their work and have no recourse. One grower he worked with sold a trusted friend a clone he bred later to find it for sale by the hundreds in a catalog.

“Once they received that material they were propagating it, and [the breeder] had no recourse because they didn’t patent it. If [the breeder] sells them just one plant without restrictions, they can propagate that and sell them by the thousands if they know what they are doing. [The breeder] only gets the value of that one plant he sold them. If [a breeder is] creating value by making these strains, they have to understand that they have to protect that value,” Hunt says.

A breeder’s entire business is based in the new and unique strains they are creating, and in a legal market, variety patents  are essential to protecting the value of the business.

Hunt says that for unique varieties, patents are the best protection, but a lot of other businesses derive their value in different types of intellectual property like trademarks and trade secrets.

As an example, he points to companies that create extracts or edibles. They may not have invented a new process or bred a new strain, but they have built a brand that consumers associate with quality. In this case, he says it is important to protect that recognizable quality through branding, and protecting the brand appropriately with trademarks.

Getting Protection

Once the IP value of the company has been identified, the next step is talking to a risk manager who can help understand how to properly protect that value.

Hunt uses the “80/20 rule” when helping his clients decide how much to invest in IP protection. The 80/20 rule refers to the balance of cost versus benefit, or how much value is generated by the investment.

“It just means you don’t always get the same back for what you put in,” he says. “These numbers don’t mean as much as the concept, you might spend 20 percent as much to protect 80 percent of your relevant market, whereas if you try to go for the whole world, you might get 20 percent more relevant market while spending 80 percent more.”

Hunt points out that attorney fees mount and each country has its own legal system and approach to IP law. For small companies it is often the best investment to just protect the domestic market, and in some cases it does pay to protect abroad.

While investing in IP protection like trademarks and patents is essential to protecting the business, investing in insurance to cover the risk of being taken to court is the best IP protection money can buy.

Kirk Miller

Kirk is a proven compliance, risk analysis and business strategy leader with more than 20 years of cannabis consulting and insurance industry experience.