There has been explosive growth in the cannabis industry, and there is a dizzying array of choices for those looking to invest in this emerging industry. Who will be hot and deliver strong returns? Who will fizzle and fail in the wake of growing competition? Who is investing in innovation and differentiation? In our view, one way to measure the prospects of a cannabis company’s future success is to look at its level of innovation and its commitment to securing intellectual property rights (IP) for those innovations. While cannabis companies may face issues with respect to the enforceability of their IP rights in the US since cannabis remains illegal at the Federal level, ignoring the potential value of IP in a quickly evolving global landscape could leave investors empty handed.
IP-savvy cannabis companies can and should use utility patent protection to protect new and useful things they develop, where they are sufficiently valuable. For example, a utility patent might cover new methods of efficiently extracting the psychoactive and/or medicinal components of a cannabis plant, some aspect of the plant itself (e.g., a modified cell), or even the entire plant in some places. Where an invention is patented, its owner gets the exclusive right to practice that invention for a period of time (e.g., 20 years), which can lead to significant advantages vis-à-vis competitors. In addition, a patent can be used to prevent others from unfairly extracting the value associated with another’s invention (e.g., copying and utilizing an innovative method). Where a cannabis company creates something that gives it an advantage, it should at least explore whether and where it can be protected via patents, to protect that advantage.
In the United States, companies can secure patent protection over many plants themselves, which gives the owner the exclusive right to grow and sell a particular plant for 20 years. Of note, this protection is limited to asexually reproduced plant varieties. While at first blush this seems to exclude the cannabis plant because it is often reproduced via sexual reproduction (i.e., seeds), a new variety can be eligible for patent protection as long as it was, in fact, generated by asexual means (i.e., the fact that it could be derived sexually is irrelevant). For example, in 2016, a US Plant Patent PP27,475 was issued claiming a cannabis plant named “Ecuadorian Sativa.” One key advantage of patent protection is that it does not require a seed or tissue culture deposit, which can be challenging in the cannabis industry given current conflicting state and Federal legal positions. Note that patent protection is limited to the exact variety claimed, including materials harvested from it, but does not extend to essentially derived varieties. In Canada, the law does not permit plant patents, although certain important elements like modified genes or cells can be patented.
Cannabis companies can also seek protection over new varietals of cannabis plants they develop via so-called plant breeders’ rights (PBR). Like many countries, Canada and the United States offer PBR protection to new varieties or cultivars of plants, including Cannabis sativa or Cannabis indica, which gives the owner a period of time (e.g., 20 years) of virtual exclusivity to grow, sell, and propagate the protected variety. In both Canada and the United States, PBR exclusivity extends to harvested materials, such as the bud or calyx, which includes the terpenes and cannabinoids (e.g., THC), and essentially derived varieties. To obtain PBR protection, a cannabis company must show that its variety is new, distinct, uniform, and stable. While seeking PBR protection quickly is important, Canadian and US laws allow a company to make an application provided it has not sold the applied-for cannabis variety within Canada or the United States for more than one year before filing an application, or more than four years earlier globally.
To secure PBR protection, the applicant must establish proof of distinctiveness, uniformity, and stability via scientific assessments often referred to as “DUS” testing. In Canada, DUS testing is conducted by cannabis companies or their service providers, which must submit data showing that the variety is distinct, uniform, and stable. The Plant Breeders’ Rights Office reviews that data and conducts an independent trial to verify the results. By contrast, in the United States, those seeking PBR protection can self-report distinctness and uniformity data, although stability must be independently verified via an official seed-certifying agency. In addition to proving these elements, cannabis companies must submit a seed or tissue culture deposit of the protected variety as part of the PBR process.
Despite the availability of these protections, it appears that only about 370 applications to protect new Cannabis species varieties have been filed globally in the last 20 years, which includes varieties for both agricultural (i.e., hemp) and pharmacological (i.e., marijuana) purposes. Of these, just 14 were filed in Canada and 6 in the United States. This relatively low rate of filing to protect new cannabis varieties contrasts with the surge of interest and investment in breeding and supporting industries (e.g., genome mapping). Leaving new cannabis varieties unprotected is like leaving cash at the door, and a lack of IP filings could reflect either a dearth of innovation or a risky lack of commitment to protecting and monetizing innovation that can create a valuable market advantage driving demand, sales, and growth.
It is always hard to know which players in a new industry will achieve their potential. When assessing the potential of a particular cannabis company, one might look at its IP-related activities, since this can offer valuable insight into whether or not a company is innovative, responsible in protecting what it’s created, poised to enforce its rights and maintain its advantages, and thus a sound investment. In an industry that is filled with participants vying for the title of “next hot pot company,” IP is one objective metric that investors can look to when assessing whether a company is worth its weight in cannabis.