Don’t overlook the value of IP assets when analyzing a cannabis business for a receivership

By Dotan Y. Melech

In the cannabis industry, intellectual property often gets overlooked by court-appointed receivers seeking to restructure and turn around a company. This is a real problem because the IP that a company created during its existence holds substantial value, despite the fact that federal trademark protections are largely unavailable because cannabis remains federally illegal

Here’s a closer look at protecting cannabis IP, and the role it can play in the various goals of receivership, whether it’s a return to solvency, completing a transfer of interest of the privileged licenses, resolving debts to creditors or maximizing the value of an estate ahead of liquidation.

How Cannabis Receivers Tackle Due Diligence

The first priority of a receiver tasked with operating as an officer of the court to address a distressed cannabis business: lots of due diligence. 

This begins with a review of the entire estate. When going through the company’s records, the receiver should try to identify anything the company created by way of IP—brands, logos, recipes, manufacturing processes—anything that is unique and special to the organization. 

During this early stage it is worth taking the time, effort and resources to hire some type of external support (often a lawyer, but not necessarily) to assess what IP has been or can be protected, what has value and how to monetize that perceived value. 

Even though there is no federal bankruptcy protection for cannabis businesses, the process of discovery and review of the estate should be similar. Attorney Adam J. Fromm, an intellectual property assets expert with Clark Hill PLC (a United CMC network partner), shares this insight: 

“In a receivership, intellectual property must be considered just like it is in a bankruptcy. The process and value analysis regarding intellectual property in a receivership should operate the same as it would during bankruptcy proceedings. We are always looking at everything surrounding the particular business with a defined process for gathering and analyzing the information regarding each known asset. Some people in cannabis are not certain they can protect intellectual property, including their brands and other forms of IP. But that’s a myth. Trademarks, patents and copyrights are protectable in the cannabis industry just like any other.”

Creating a Cannabis IP Protection Plan

Once the receiver has completed their due diligence they need to create a plan that can be followed—but also altered as necessary—to establish an IP asset class with real market value. This IP protection or preservation plan can be designated for pre- or post-receivership and should operate with the understanding that IP holdings must be considered in the valuation of the estate and can be liquidated if necessary. 

Beyond the inherent value of a brand itself are other potential IP aspects such as: 

  • Website domains;
  • Licensing agreements and contracts for manufacturing;
  • Software developed by the company for internal purposes;
  • Recipes and proprietary formulations;
  • Strains and genetics

There’s no one-size-fits-all approach to cannabis IP. A specific strain may not be protectable IP, but if it is inherently connected to the brand, it might be. This is where an expert in the nascent industry is essential to assist the receiver in identifying and protecting the IP.

“The value of IP is transferable,” says Fromm. “A particular machine, manufacturing process, plant genetics, brand name or any other unique property of the business where you can extract value must be considered. That includes trademarks of the business and its goods and services, whether they are registered or not. Your master grower might have techniques that could be protectable by a patent or a trade secret. There is nothing that prevents cannabis companies from getting patents on new inventions by the way. Also, if your cannabis brand is known and memorable to the consumer, that in itself is a form of valuable and transferrable intellectual property.”

Documentation is critical. All records that exist surrounding the creation of the IP should be available to support the validity and value—and potential liquidity—of the property.

Enhancing IP Value During a Cannabis Receivership

Among the myriad tasks facing a receiver, they will have to decide whether to preserve what’s there or attempt to establish new value based on the cannabis company’s particular scenario.

When maintaining business operations, the receivership can continue to establish IP for the benefit of the estate. An example of this might be an initiative to improve the image of the brand through new marketing campaigns. This is another way to not only protect IP value, but grow that value from the existing IP setup. The receiver can also attempt to attract investment to bring new IP into the distressed company’s portfolio.

Access expert guidance about all the ins and outs of what a cannabis receivership entails and the role of intellectual property in the process. Reach out to United CMC today.