My previous post discussed Engrossed Senate Bill 5131, which adds new provisions to existing marijuana laws. The bill explicitly allows marijuana licensees to enter into third party licensing and consulting agreements.
Many marijuana businesses in Washington State are already parties to licensing,consulting, and branding agreements. The new legislation confirms that these types of agreements are in fact legal under state law. What is new, however, is the affirmative duty of the licensee to disclose these types of agreements to the Washington State Liquor and Cannabis Board (“LCB”).
Marijuana licensees have always been obligated to disclose any agreements related to financing and/or ownership of the license. These are ongoing obligations of the licensee and thus, licensees are not only obligated to disclose ownership and funding at the time of license issuance, but are also required to disclose any new funding and ownership changes.
Additionally, consulting or licensing agreements that based compensation upon a percentage of profits were always required to be disclosed since anyone receiving a percentage of profits via a contract would most likely be deemed to be a “True Party in Interest” pursuant to WAC Chapter 314-55. True Parties in Interest are required to go through the same background checks as a licensee.
Now under ESB 5131 all consulting and/or licensing agreements, whether fixed fee or profits based, will need to be disclosed. Presumably, the state desires that these agreements be disclosed to ensure that all True Parties in Interest are properly vetted. In other words, the LCB will likely be reviewing these agreements to determine if any consultants or licensors are running afoul of the True Party in Interest rules by exerting too much control over the licensee or receiving a profits and/or equity stake in the licensed business.
The good news, however, is that the new legislation exempts trade secrets, technology and proprietary information contained in consulting and licensing agreements from public disclosure. Although licensees are unable to obtain meaningful intellectual property protection due to the federal illegality of marijuana, this provision will at least help keep some proprietary data private.
Consequently, licensees should disclose all licensing and consulting contracts to the LCB before these agreements go into effect. I emphasize disclosure prior to contract commencement as otherwise a licensee could be faced with having to unwind an invalid contract and/or run the risk of license cancellation for violating True Party in Interest rules or other LCB regulations.
For more information on the regulation of marijuana businesses in Washington State, please contact Heather Wolf.