The Washington State Legislature signed a new bill into law this session concerning agreements between licensed marijuana businesses and those providing intellectual property goods and services. Engrossed Substitute House Bill 1794 revises existing law as to the types of agreements that licensed marijuana businesses can enter into and the manner in which compensation can be paid.
One of the biggest hurdles that marijuana licensees faced in negotiating licensing agreements was how to payment would be made to the intellectual property holder. Until now, payment for goods or services could not be based upon a percentage of sales or profits. This restriction made drafting licensing agreements very difficult in terms of coming up with a compensation scheme that worked for both parties.
In order to remedy this issue, the new law allows a royalty fee based upon product sales as long as 1) the royalty fee is calculated based upon the sales of each product that includes the licensed intellectual property; and 2) the royalty fee does not exceed an amount equal to ten percent of the licensed marijuana business’ gross sales derived from that product. The new law also allows for a flat rate or lump sum based upon time or milestones.
Additionally, the new law clarifies that the following specific types of contract provisions may be included in licensing agreements:
- Terms giving either party exclusivity to the use of intellectual property;
- Quality control standards to protect the integrity of the intellectual property;
- Enforcement obligations to be undertaken by the licensed marijuana business;
- Covenants to use the intellectual property; and
- Assignment of licensor improvements of the intellectual property
Finally, the new law exempts non-licensed parties to authorized intellectual property agreements from qualifying for a marijuana license for purposes of the agreement. Licensing agreements, however, remain subject to the record keeping and disclosure requirements of the Washington State Liquor and Cannabis Board.
While far from perfect, this new law should give marijuana licensees more flexibility in negotiating licensing agreements with third party intellectual property holders. Keep in mind that this law encompasses agreements for the use of goods or services under any unregistered trademark or trademark registered under any state law, federal law, or international law as well as any type of trade secret, technology, or proprietary information provided to a marijuana business. Thus, licensees will want to carefully review this new law before entering into a new licensing agreements.
For more information on the regulation of hemp and marijuana businesses in Washington State, please contact Heather Wolf.