How Cannabis Companies Can Shield Their Trade Secrets

By: Matthew D. Kohel, Justin E. Tepe | 10.26.20 | Media

Protecting intellectual property also helps cannabis companies grow their bottom line.

Trade secrets are valuable assets that can provide a substantial boost to a cannabis company's bottom line and long-term success. While many companies diligently protect their patents, trademarks and copyrights, trade secrets are often overlooked. But they are critical pieces of intellectual property that can give your business an advantage in the marketplace — so long as the proper protections are put in place.

What Are Trade Secrets?

Trade secrets are proprietary information, such as formulas, processes, methods and compilations of data, that are not generally known to the public and subject of reasonable efforts to maintain their secrecy. Trade secrets are similar to patents, in that both are used to protect valuable information related to a company's goods or services. However, there are significant differences between them.

Patents are publicly available documents that disclose the owner's invention with enough detail that it can be recreated or carried out by a person with knowledge in the pertinent field. By contrast, trade secrets are purposefully withheld from the public to maintain their economic value. In addition, the exclusive rights to make, use and sell that come with a patent last only 20 years, while trade secret protection lasts indefinitely (as long as the trade secrets are properly maintained).

Patents are also usually more expensive to obtain than trade secrets, since an applicant typically must hire an attorney to file and prosecute the patent application. Trade secrets have no such costs, but only the expenditures related to their development and protection — costs that often apply to patented inventions as well.

The Value of Intellectual Property

By understanding its intellectual property, a cannabis company is better able to protect and exploit its value. Because trade secrets can be processes, methods and compilations of data, companies that grow and process cannabis are likely to own trade secrets that give them a competitive edge.

For example, cannabis growers may have protectable trade secrets in different strains that it has created and the methods used to develop and grow them; although new varieties of the cannabis plant can be patented, a company may have strategic business or financial reasons for maintaining the novel strain as a trade secret. A grower may claim it owns trade secrets in the amount of light, the temperature and how it circulates and ventilates air in its gardens.

Similarly, a company that processes cannabis plants may come up with unique ways to extract its active ingredients. Short of applying for a patent, a processor can protect trade secrets related to the cannabinoid and terpene profiles extracted and implemented in processed products. A cannabis company that can do this well is likely to have a higher quality product, enhance its brand and goodwill with customers and reap the financial rewards of its time-consuming research and development work.

But if a trade secret is not protected properly, the legal protections against its misappropriation are lost forever. In other words, if an individual has intimate knowledge of your business operations but no obligation to keep that information confidential, then your company is essentially giving the results of its research and development efforts to competitors for free.

Protecting Trade Secrets

Identify and document your trade secrets.

The first step in protecting your trade secrets is to identify them. This can be done through a comprehensive audit of a company's intellectual property or a more focused effort to identify trade secrets related to a particular process, product or strategic initiative.

A company's trade secrets should be memorialized in documents or a database. Next, as noted above, the trade secret owner must make reasonable efforts to maintain their secrecy. This can be done by stamping documents that describe the trade secrets as "Confidential" and then restricting their circulation and access to employees who have a need to know that information. For instance, hard copy documents that contain sensitive business information should be kept in locked file cabinets. Trade secrets that are maintained electronically on computers, servers and databases should be password-protected or accessible only to employees who use the trade secrets in the normal course of their job responsibilities (such as marketing employees and scientists).

Make sure you have the right contracts.

Having the proper contracts in place is an important and potentially necessary requirement to maintain your trade secrets. Courts have found that non-disclosure agreements (NDAs) are a basic measure that companies should utilize for their sensitive commercial information to qualify as a trade secret. NDAs are commonplace in many industries and particularly among small companies that invest substantial financial and other resources in research and development. The cannabis industry is no different, and NDAs should be obtained to protect against internal and external threats to your business. Although a discussion of the value of a non-competition agreement is outside the scope of this article, non-competes frequently accompany NDAs and are another useful measure that a cannabis company can have in place to protect its sensitive information being misused by its employees.

Cannabis companies should enter into NDAs with their employees that prohibit them from making unauthorized disclosures of the company's trade secrets and confidential information. Having the right protections in place with third-party contractors and vendors is critically important as well. All such contracts should have provisions that require them to maintain the confidentiality of your trade secrets. And those obligations should flow downhill, meaning that contracts with your company's general contractors should require them to obtain written agreements with their subcontractors and vendors that have the same level of protection to which they are bound.

Create standard operating procedures.

There are also practical and effective steps a cannabis company can take to protect its trade secrets. Good practices include the creation of SOP documents for employees that explain what intellectual property is and what employees should do to protect that valuable asset, and to have periodic employee training on the SOPs. Additionally, consideration should be given to using multiple different vendors for production and other confidential processes, so that one company does not have enough information to reverse engineer your trade secrets and become a competitor.

Just as it is important to develop unique products and processes, it is equally important to shield them. By taking steps to protect your company's trade secrets, you can prevent competitors and others from improperly profiting at your expense — and ensure that your own bottom line continues to flourish.

Matthew D. Kohel is a partner and Justin E. Tepe is an associate at the law firm Goodell DeVries. Matt Kohel provides counsel in commercial litigation and intellectual property matters and can be reached at mkohel@gdldlaw.com. Justin Tepe represents licensed entities and ancillary businesses in the cannabis industry as outside general counsel and can be reached at jtepe@gdldlaw.com.

This article was originally published in Marijuana Venture, a leading business magazine for the legal cannabis industry.