This 4/20, patent owners with Intellectual Property (“IP”) related to cannabis have one more reason to celebrate as they may be able to enforce their rights against infringers in federal court. IP rights may provide an enforceable protection against copycats and competitors in the market, and may provide significant value to a company’s balance sheet. This was demonstrated when Tilray Brands, Inc. announced its intent to acquire fellow cannabis company Hexo Corp., a Canadian entity with a large patent portfolio related to cannabis, for approximately $56 million. Previously, whether a utility patent related to cannabis could provide such value in the United States was hazy. A first-of-its-kind case in California shows that it may be more than a pipe dream for cannabis patents to bolster a company’s balance sheet. The Court held the illegality doctrine did not bar an infringement claim based on a valid cannabis related utility patent asserted against a cannabis company.
Background
Patents give a patent owner the right to exclude others from manufacturing, using, selling, or importing into the United States the invention claimed in the patent. A granted patent protects the elements of a system or method steps recited in the claims.
Gene Pool Technology, Inc. (“Gene Pool”) is an aggregation, development, and licensing company that focuses on extraction technologies in the cannabis industry. Gene Pool owns several issued patents from the United States Patent and Trademark Office (the “USPTO”). Among Gene Pool’s IP are three patents related to extracting a solute from a source material (the “Gene Pool Patents”). U.S. Patent No. 9,144,751, 18:48-49; U.S. Patent No. 9,145,532, 17:31-32; U.S. Patent No. 9,587,203, 21:63-64. The Gene Pool Patents claim a method of extracting a solute from a source material and the claims recite components and steps of the claimed system and method for extraction.
Gene Pool accused their cannabis competitor Coastal Harvest, LLC (“Coastal Harvest”) of infringing the Gene Pool Patents in a Complaint filed in the Central District of California. The Gene Pool Patents do not explicitly claim extraction from a cannabis plant. However, each was drafted broadly enough for the Court to find that “they relate more generally to extracting oils or compounds from plants.” Gene Pool Techs., Inc. v. Coastal Harvest, LLC, No. 5:21-cv-01328-JWH-SHK, ECF 101, 13-14 (C.D. Cal. Nov. 22, 2022).
For Gene Pool to win, it must show how the accused device or method met each step of at least one claim in the Gene Pool Patents. Gene Pool alleged Coastal Harvest infringed its patent rights by copying Gene Pool’s claimed extraction process. Coastal Harvest countered by arguing that—because cannabis is federally illegal—if Gene Pool’s allegations were true then Gene Pool’s attempt to obtain a licensing royalty and damages from Coastal Harvest amounted to money laundering and conspiracy to aide or abet a violation of the Controlled Substances Act (“CSA”). Coastal Harvest asked the court to throw out the case based on the illegality doctrine asserting that the Court did not have jurisdiction in a civil case over illegal activities.
The Illegality Doctrine
The illegality doctrine is the premise that courts cannot be used to engage in unlawful conduct. For example, if an individual is hired to steal from another and signs a contract to do so, that contract cannot be enforced by a court. The illegality doctrine would bar using a court to enforce the contract to commit the crime of theft. Coastal Harvest’s theory was that the alleged infringing activity of extracting solutes from a cannabis plant “implicate alleged violations of the CSA” and any royalty or damages the Court awarded would be proceeds from a crime.
The Court Denies Coastal Harvest’s Motion to Dismiss
The presumption that Gene Pool asserted valid granted patents was likely persuasive to the Court. Because issued patents are presumed valid, the burden is on the defendant to show why a patent is invalid. (“A patent shall be presumed valid”). Although 35 U.S.C. § 282(b)(1) allows a defendant to attack a patent as unenforceable as a defense, Coastal Harvest’s focus on the illegality doctrine and the alleged infringing activity did not address the enforceability of the patent. The Court found that Coastal Harvest had not shown the Gene Pool Patents and the allegations in the Complaint solely covered illegal activity and therefore the illegality doctrine did not bar the requested relief.
Coastal Harvest did not assert that the Gene Pool Patents were invalid. Instead, Coastal Harvest tried to have its cake and eat it too by arguing that a royalty payment would amount to money laundering as proceeds from a crime but also refusing to affirmatively state its activities violated the CSA. Instead, Coastal Harvest “d[id] not concede that they have broken any federal law.” Piercing through Coastal Harvest’s smoke, the Court focused on Coastal Harvest’s alleged conduct of extracting cannabis material and found that the allegations were broad enough to include activities not prohibited by the CSA.
The Alleged Infringing Activities Were Not Covered by the CSA
The CSA bars manufacturing; distributing or dispensing; or possession of cannabis. Cannabis, as defined by the CSA does not include hemp or cannabis derivates with low levels of delta-9 THC, a cannabinoid found in cannabis that is primarily responsible for its psychoactive effects. (Marijuana does not include hemp); (defining hemp as cannabis “with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis”). In reviewing the alleged infringing activity, the Court noted “[t]he Complaint’s allegations concerning extraction materials are broad enough to include types of cannabis material excluded from the CSA” namely, hemp. Similarly, the asserted claims “d[id] not mention cannabis or marijuana” and “relate more generally to extracting oils or compounds from plants.” The Court thus found that Gene Pool did not necessarily seek damages for illegal activity.
The Feasibility of Damages and Injunctions
Based on these narrow facts, the illegality doctrine may not bar an infringement suit asserting cannabis related patents. Relief from a successful patent infringement action may include damages and/or a royalty for each infringing act. Coastal Harvest argued that any damages awarded in the suit would violate money laundering statutes, because its sales of goods extracted from cannabis as alleged would violate the CSA. As discussed above, the Court was not persuaded by this argument because the Gene Pool Patents and the alleged infringing activity were broad enough to cover non-CSA activity (finding Coastal Harvest did not show that allowing the case to proceed would require or permit Coastal Harvest to violate the CSA). Because of this, the Court concluded that its involvement in the case would not cause a court of law to aid or abet a violation of the CSA. Conversely, if the claim for damages had been based on infringing activities barred by the CSA the chances of recovery may have gone up in smoke.
In addition to claiming damages, a patent owner may request an injunction to curb infringing activity. Although Gene Pool did not request an injunction, Coastal Harvest argued that even if Gene Pool had done so, the illegality doctrine would bar the Court from granting that relief. Coastal Harvest posited that an injunction would only be used as a tool in negotiating a royalty payment and licensing fee for performing the accused extraction.
An injunction is a legally binding order to stop an activity. Coastal Harvest asserted that an injunction would only be used as a tool for forcing a settlement because an injunction would force Coastal Harvest to stop the alleged infringing activity. However, what a plaintiff does with an injunction is not the issue before a court. The law allows a patent owner to obtain an injunction barring a competitor from practicing its claimed invention. The Court’s finding that the illegality doctrine does not apply would, on these narrow facts, allow both damages and an injunction to be a potential remedy if infringement occurred.
Takeaways
Future defendants in patent suits concerning cannabis should be mindful of the allure and potential limitations of the illegality doctrine. Based on these limited facts, precedent may be beginning to sprout for patent owners to capitalize on their IP. Although damages may be available in circumstances similar to those in Gene Pool, future plaintiffs in the cannabis space may find including a prayer for relief under 35 U.S.C. § 283 allows broader enforcement of their patent rights. Even if damages are barred because of the CSA, an injunction may still be available. As Coastal Harvest pointed out, injunctions can be powerful tools to leverage an advantageous settlement for a plaintiff. And even without a settlement, a court order barring a competitor from participating in the marketplace can still be a significant win for a plaintiff.
Gene Pool shows the importance of artful pleading when either party is in the cannabis space. Although some states have made cannabis legal, the federal ban remains problematic for suits filed under federal law such as patent infringement. Patent holders may find that solely alleging infringement against non-CSA related activity such as hemp extraction can help to avoid a Motion to Dismiss brandishing the illegality doctrine (finding the alleged extraction of cannabis material broad enough to include “types of cannabis material excluded from the CSA”). The Court’s holding in Gene Pool, although only the first-of-its-kind, shows the importance for potential cannabis plaintiffs to avoid CSA covered activity in their allegations of infringing activity. Defendants may be able to use the illegality doctrine to avoid infringement suits asserting patents covering CSA activity, but non-CSA activity remains at risk of infringing cannabis related patents.
The Court’s ruling in Gene Pool is the first tackling the issue of whether a cannabis related utility patent is enforceable. Patents issued by the USPTO are presumed valid in a court of law. Gene Pool provides the first sign that a utility patent related to cannabis may be enforceable against defendants in the cannabis space. Patents allow their owners to protect their innovations and deter competitors from improperly capitalizing on their hard earned advances. Gene Pool shows future litigants in the cannabis space may be able to assert their patent rights and capitalize on the value of their IP. This 4/20, cannabis innovators have another reason to celebrate. The value of utility patents related to cannabis in the United States is budding.
