We are seeing an uptick in requests for licensing agreements with regard to marijuana businesses. Existing licensees in Washington State are seeking to expand on their success by allowing other licensees to use their brand name, logo, etc. Similarly, out of state businesses are seeking exposure in Washington State’s legal marijuana market via brand licensing contracts.
One issue that frequently arises in regard to licensing contracts is control. The Washington State Liquor and Cannabis Board (the “LCB”) deems anyone that exercises control over a licensed business to be a “True Party in Interest”. A True Party in Interest must meet all state licensing requirements (including residency), and be vetted and listed on the marijuana license. Thus, parties entering into a licensing agreement will want to ensure that the licensor is not exerting control over the licensed business so as not to run afoul with the LCB rules.
The LCB does not define what constitutes “control over a licensed business.” Presumably, however, the LCB does not want to see a 3rd party controlling the operational aspects of the licensed marijuana business. For instance, an entity that is licensing a store name to another licensed retailer should likely not also control what products the retail store can carry, administrative operations of the store, etc. Rather, a brand licensing agreement should most likely confine itself to setting forth how the brand is used and displayed, such as controlling color scheme, packaging, and the like.
Another issue in regard to licensing agreements is compensation. The LCB considers any person or entity that has a right to receive a percentage of the profits of the licensed business to be a True Party in Interest. Thus, a contract that is based on a percentage of revenues could violate LCB rules. Parties entering into licensing contracts should therefore consider fixed fee or unit based compensation, making sure that any compensation is commercially reasonable.
Finally, we continue to receive inquiries in regard to out of state ownership of Washington Marijuana Businesses since many marijuana businesses operating in other states would like to enter into Washington’s legal marijuana market. But, so far we are not really seeing any meaningful movement on allowing out of state ownership in Washington. Thus, any type of franchise agreement* with an out of state entity is off the table for Washington State marijuana licensees at this time.
For more information on the regulation of marijuana businesses in Washington State, please contact Heather Wolf.
*Note that franchise agreements in WA state are subject to the State’s Franchise Investment Protection Statute