Tag Archives: litigation

Commercial Litigation in the Cannabis Space: Resolving Disputes Like Every Other Industry Does

Seth Goldberg
Seth A. Goldberg

As a commercial litigator who has handled a broad range of claims in highly regulated industries over the past 20 years — particularly in complex matters such as class actions involving claims brought by consumers and shareholders — and given my experience spearheading the development of Duane Morris’ cannabis industry group, which has included providing regulatory and business advice to a number of businesses and individuals with cannabis-related interests, I have been expecting the maturing cannabis industry to eventually mirror other industries when it comes to using commercial litigation to resolve disputes between businesses and to address claims of injury allegedly experienced by aggreived consumers and shareholders. It appears the time has come. Now, as opposed to even just a few months ago, not a day goes by when the daily legal news outlets that report on litigation matters filed in federal and state courts around the country do not include matters pertaining to adult use marijuana, medical marijuana, and/or hemp.

Today alone, legal news outlets are reporting about a shareholder deriviative action being filed against the manufacturer of cannabinoid-containing transdermal patches, a maker of mobile hemp dryers suing a distributor for alledgedly stealing trade secrets, a publicly-traded company that owns cannabis brands being sued for breach of contract by an MSO arising out of a failed merger agreement. Claims like these are among the many product liability, stock-drop and securities fraud, tradmark infringement, FLSA, and employment litigation matters to be filed in 2020 relating to cannabis; not to mention the federal and state regulatory cannabis-related enforcement actions also commenced. Just as in other industries, COVID-19 is likely to spur litigation in the space because of strains on resources and performance caused by business disruptions and the slower economy.  To be sure, the plaintiffs’ bar has cannabis on its radar.

Thus, now more than ever, it is critically important for cannabis businesses to implement the necessary compliance measures, including making sure appropriate insurance coverage, e.g. premises, products, and D&O, has been obtained, that could protect their businesses from the cost and disruption of commercial litigation. Likewise, cannabis-specific nuances, such as the enforceability of contracts and jurisdictional questions, require careful evaluation by experienced counsel advising plaintiffs and defendants who are considering filing, or who have been brought into, a commercial litigation.

 

 

Cannabis patent litigation update: construing cannabis claims

Because enforcement of patent rights in the U.S. is governed by federal law, the Schedule I status of cannabis continues to cast uncertainty over whether cannabis patent rights can actually be challenged or enforced. That uncertainty diminished with the filing of the first patent infringement case in federal court on a patent covering a cannabis-related technology on July 30, 2018 when United Cannabis Corporation (“UCANN”) sued Pure Hemp Collective, Inc. (“Pure Hemp”) in the United States District Court for the District of Colorado (United Cannabis Corporation v. Pure Hemp Collective, Inc.(Case No.: 1:18-cv-01922-NYW) for patent infringement. (https://www.duanemorris.com/articles/patent_litigation_cannabis_industry_2_cases_to_review_0319.html) UCANN alleged that Pure Hemp is selling products that are encompassed by the claims of its patent, US 9,730,911. Pure Hemp denied infringement and counterclaimed that the UCANN patent is invalid and should never have been granted because similar products were well known long before the filing date of the patent.

These proceedings have now moved to the claim construction stage, a stage specific to patent litigation, The claims in a patent specify the rights to which the patent owner is entitled, just as language in a deed to real property specifies the boundaries of the real property. But, unlike the quantitative verifiable measurements taken to define the boundaries of real property, claim language can be imperfect and open to more than one interpretation. Continue reading Cannabis patent litigation update: construing cannabis claims

Business as usual at the Patent and Trial Appeal Board: the first cannabis related Patent and Trial Appeal Board decision at the United States Patent and Trademark Office

Cannabis patent proceedings are no longer something reserved for a hypothetical future when cannabis becomes legal at the federal level. On January 3, 2019, the Patent Trial and Appeal Board at the United States Patent Office (USPTO) issued its decision in the Inter Partes review, Insys Development Company, Inc. v. GW Pharma Limited and Otsuka Pharmaceutical Co., (IPR 2017-00503). This is the first time that a patent covering a cannabis-related technology has been the subject of an inter partes proceeding at the USPTO. Even though cannabis remains a Schedule I controlled substance under U.S. federal law, the USPTO, a federal agency of the U.S. Department of Commerce, routinely grants patents covering cannabis-related technologies. Because enforcement of patent rights is governed by federal law, the Schedule I status of cannabis has cast uncertainty over whether cannabis patent rights can actually be challenged or enforced. The recent PTAB proceeding shows that they can be challenged.

Inter Partes Review (IPR) is a trial proceeding at the Patent and Trial Appeal Board (PTAB) of the USPTO that permits a third-party to challenge the validity of claims of a granted patent. If the challenger demonstrates that the claimed technology was known to the public before the patent application was filed, then the claims fail to meet the novelty and/or nonobviousness requirements and the Board can declare the patent invalid. Continue reading Business as usual at the Patent and Trial Appeal Board: the first cannabis related Patent and Trial Appeal Board decision at the United States Patent and Trademark Office

Contingency Fees and Commercial Litigation Hit the Cannabis Space

Seth Goldberg
Seth A. Goldberg

As the values of transactions in the cannabis industry grow, commercial litigation is certain to follow.  One reason for this is that lawyers may be more inclined to represent clients on a contingency fee basis.  Where the value of a cannabis transaction is small, the expense of litigation may not be worthwhile for an individual or business feeling cheated, and any settlement or judgment would likely not cover the costs of an attorneys’ contingency fee.  However, where the value of a cannabis transaction is sufficiently high, say the upper six-figures or more, a lawyer may be more inclined to take the case for a contingency fee because the lawyer’s percentage of any recovery is likely to be greater than the costs the lawyer will incur in litigating the matter.  A contingency fee arrangement may also be utilized to the advantage of a party that believes threatened or actual litigation might shift the leverage in negotiations and result in more attractive commercial terms.

A recently filed action captioned Silver v. High Street Capital et al., 2:18-cv-00020 (E.D. PA. 1/3/18), appears to result from the type of high value transaction that might warrant a contingency fee in a commercial litigation.  The plaintiff, industry consultant Harris Silver alleges that, in connection with their bid to obtain a license to grow and process cannabis pursuant to Pennsylvania’s Medical Marijuana Program, defendant High Street Capital and other defendants associated with High Street promised Silver a lucrative compensation package, including (a) $180,000 to prepare the license application; (b) a $150,000 cash bonus upon the granting of a license and a 4% non-dilutable equity stake in any licensee; and (c) a salaried position with the licensee.  Silver claims that notwithstanding his work on the High Street application, for which a permit was granted, the High Street defendants never paid Silver the valuable consideration that was contingent on the permit being granted.  Thus, based on a host of factual allegations detailing various communications he had with the High Street defendants, and other allegations detailing his efforts on their behalf, Harris asserted claims against the High Street defendants for breach of contract, common law fraud, promissory estoppel, unjust enrichment, securities fraud and civil conspiracy. Continue reading Contingency Fees and Commercial Litigation Hit the Cannabis Space

The Federal Antitrust Laws May Not Protect Competition and Consumers In The Cannabis Industry

Seth Goldberg

To assert a federal antitrust claim, a plaintiff must have standing under Article III of the U.S. Constitution and must also have suffered an injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants acts unlawful. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977).  The Brunswick standard generally benefits consumers who have paid artificially high prices as a result of a defendant’s anticompetitive conduct, or a competitor of a defendant that abused its market power to compete unfairly.

The federal antitrust laws, including the Brunswick standard, are one of the many protections intended to keep competitors on an even playing field and striving to beat one another by offering the optimal combination of quality and price to consumers, and to protect consumers from overreaching and opportunistic manufacturers that use nefarious means to impose a price they would be otherwise unable to charge.  These laws have been critical in shaping industries.

However, it may be that the federal antitrust laws are among the federal laws unavailable to cannabis industry participants, as the federal antitrust laws are limited to commerce “among the states,” i.e., interstate commerce.  Because cannabis is still prohibited under the Controlled Substances Act, its legal manufacture and distribution is generally limited to intrastate activities.  Thus, competition for legal cannabis is, by and large, necessarily intrastate.   Fortunately, most states have antitrust laws that mirror federal antitrust laws, and borrow from the federal judicial precedent they have generated.  However, as a general matter, the federal courts and federal judges are more experienced than the state courts in the complex economics underlying most antirust matters.

For the burgeoning cannabis industry, this may be yet another problem arising out of the federal prohibition of cannabis.  It means that consumers of cannabis products, such as cannabis, vapes, edibles, and possibly ancillary flower-touching products, may not be protected from inflated prices resulting from anticompetitive conduct, such as price-fixing agreements or agreements to allocate markets, and competitors for those products may not be able to ensure a level playing field with the largest companies, allowing the powerful companies to take advantage of their position by inflating prices.

The bottom line is that as the cannabis industry continues its growth at breakneck speed, manufacturers of cannabis, cannabis-infused, and cannabis-related products, may be tempted to engage in the types of anticompetitive conduct the federal antitrust laws are best able to correct, with the help of experienced federal judges, and consumers of those products may unfortunately be exposed to artificially inflated price increases flowing from such conduct left unchecked.  While not all cannabis manufacturers or cannabis-related products are limited to competing in a single state, the bulk are.

To this point, the role the  federal antitrust laws (or state for that matter) can play in shaping the cannabis industry has not been tested.  That day may be on the horizon, however, as some companies continue to grow into industry giants, while others struggle to compete.  Cannabis space participants, especially the larger players, should be aware of the compliance measures taken in other industries to protect themselves from the possibility of antitrust claims brought by their competitors or consumers.