YOUR STATE SAYS “YES” TO CANNABIS ... BUT YOUR COUNTRY SAYS “NO”

Currently there are twenty three states and the District of Columbia that have legal cannabis in some form. Four of those states have legalized cannabis for adult recreational use: Alaska, Colorado, Oregon and Washington, as well as the District of Columbus. The trend continues to grow for legalized cannabis, whether legislatively, such as in Vermont, or through ballot inanities or amendments that will appear on ballots in California, Florida and Massachusetts, to name a few, in the 2016 election cycle.

The cannabis industry continues to grow at an accelerating rate in the states which have legalized cannabis.  So, with that in mind, on a Federal level the Controlled Substance Act (“CSA”) still rules supreme on the federal level, and the untenable Schedule I classification of cannabis prohibits national legal rights to cannabis businesses. 

The federal cannabis prohibition prevents a legal cannabis state business from deducting normal and ordinary business expenses from their gross income via IRS Section 280 (e).   Or, in other words, the federal government does not allow for business deductions for income that is derived from illegal activities because of cannabis’ federal Schedule I classification.

The federal cannabis prohibition prevents an insolvent cannabis business from seeking federal bankruptcy protection, although some limited state options may be available.  Because bankruptcy is a federal process, the courts have ruled the violation of the CSA by distributing cannabis makes cannabis-related companies ineligible for bankruptcy. In the recent Arenases case, the court stated that "possessing, growing and dispensing marijuana and assisting others to do that are federal offenses. [...] Can a debtor in the marijuana business obtain relief in the federal bankruptcy court? No.”  A very clear federal answer.

For trademarks involving cannabis related items, once again on a federal level the US Patent and Trademark Office (“PTO”) heavily scrutinizes all applications referencing the cannabis industry and it is reluctant to grant such. The Lanham Act—the controlling statute on trademarks in the United States—has been interpreted by the US PTO and courts to only allow federal registrations for trademarks used lawfully in commerce. Once again because cannabis remains a Schedule I substance under the Federal CSA —which prohibits the manufacture, distribution, possession and sale of and other substances which are deemed to be “highly addictive and having no proven medicinal benefit”—cannabis businesses are technically violating federal law, even if a state has legalized recreational and medical cannabis use due to the US Constitution’s Supremacy clause. Thus, under the Lanham Act, the manufacture, distribution, possession and sale of cannabis does not qualify federally as lawful use and  an applicant will be prohibited from obtaining a federal registration.

One of the most problematic issues to a US PTO Examiner is when an applicant’s website has a link or click through to a site which appears to be for the purchase of cannabis.  This direct link situation has been identified by US PTO Examiners as a potential violation of the CSA.  Again, under the CSA it is unlawful to have materials which feature cannabis for sale, distribution or dissemination. 

During the federal trademark application process, the applicant will have to answer five (5) important relevant questions:

1)      Does or will applicant’s identified services provide for or enable users of the services or website to directly purchase, trade, exchange, barter or sell cannabis, marijuana, hemp, marijuana-based or hemp-based preparations, or marijuana or hemp-based extracts or derivatives, synthetic marijuana, or any other illegal controlled substances?

2)      Will applicant’s services identified as “inventory monitoring and management for herbal products” require applicant to physically possess, disseminate or distribute cannabis, marijuana, hemp, marijuana-based or hemp-based preparations, or marijuana or hemp-based extracts or derivatives, synthetic marijuana, or any other illegal controlled substances?

3)      Can the applicant identify or define each and every type of “herbal product” as used in applicant’s identification of services.

4)      Does the term “herbal products” include any products whatsoever that contain cannabis, marijuana, hemp, marijuana-based or hemp-based preparations, or marijuana or hemp-based extracts or derivatives, synthetic marijuana, or any other illegal controlled substances?

5)      Are the applicant’s services lawful pursuant to the Controlled Substances Act?

If the applicant can correctly address these five important questions than a federal trademark may be possible to obtain, especially if you the applicant were operating an ancillary cannabis business which does not violate any of the above referenced criteria.

So, in conclusion it is very easy to see the real world problems and issues that must be addressed by the cannabis industry so long as the federal government continues its national prohibition, while states continue the path to cannabis legalization.  One day (soon) when cannabis no longer is stigmatized with a Federal CSA Schedule I classification, than the federal rights guaranteed to most will also be extended to legitimate cannabis business industry participants.  Hopefully, one day soon.

Barry Gainsburg, PA provides legal and consulting services to the cannabis and securities industries.  Mr. Gainsburg can be contacted at gainsburg@bellsouth.net