Nine Steps Cannabis Companies Can Take to Protect Trade Secrets

Dec. 15, 2020, 9:00 AM

The 2020 election is now (mostly) over, and with Democrats taking the White House, there is greater confidence legal recreational cannabis is here to stay.

Even if the Senate maintains a narrow Republican edge, both sides of the political aisle have expressed willingness to legalize cannabis or amend the federal Controlled Substances Act so that cannabis is no longer a Schedule I drug. This would open cannabis firms to listing on U.S. stock exchanges, and allow them to more confidently operate without fear they will be blocked from federal banking and regulatory protections.

At the state level, legalization also continues expanding; on Nov. 3, five additional states legalized recreational cannabis, totaling 16 states to do so.

As cannabis companies face an expanding and maturing market, they should take appropriate steps to protect their intellectual property assets, in turn increasing market competitiveness and enhancing enterprise value.

Nine Key Steps

A trade secret is confidential information from which a business derives actual or potential economic value by not being known to others outside of the business. In the cannabis industry, examples of a trade secret may include cultivation techniques, fertilizer or soil recipes, extract flavoring recipes, customer or vendor lists (if not disclosed to third parties), pricing lists, specialized product creation methods, business growth plans and strategies, and even marketing techniques.

Businesses achieve trade secret protection by taking reasonable steps to ensure the information is actually protected from disclosure.

This secrecy requirement can be challenging, especially given the short tenure of cannabis employees in the industry, who may take confidential information with them to a new employer. There are also many third-party vendors and contractors who may glean a company’s confidential information from their time in cultivation and manufacturing facilities.

Below, we outline the nine key steps we believe cannabis companies can take immediately to protect trade secrets.

First: A cannabis business must perform a comprehensive review of its business and identify what trade secrets and confidential information it possesses.

Second: Cannabis businesses should require employees to sign confidentiality agreements at the commencement of their employment, geared toward maintaining trade secrets and other confidential business information. These agreements are common in many industries and can even protect information not properly categorized as trade secrets.

Although a business’s first instinct may be to broadly define the information that must be kept confidential, a confidentiality agreement using vague or overly broad language is less likely to be enforced. Indeed, defendants to trade secret actions have increasingly argued that overly broad language in such agreements create de facto non-compete obligations, which are unlawful in several states.

Third: Cannabis businesses should create post-employment checklists that employees must sign reflecting that they have returned all company property (including confidential information and trade secrets) and acknowledging that their post-employment restrictions on use or disclosure of the company’s confidential information (including trade secrets) remain in full force and effect.

Fourth: Businesses in the cannabis industry should craft clear employer policies around the use and disclosure of confidential information and implement training for positions entailing regular exposure to trade secrets and confidential information.

The policies and training materials should explain the importance of maintaining secrecy of company information and emphasize that disclosure of confidential company information to others may result in discipline, immediate termination, or legal action.

Fifth: Cannabis businesses should take a close look at their electronic device and social media usage policies. In highly confidential work environments (cultivation facilities, for instance, where techniques, formulas, and recipes are subject to trade secret protection), businesses should consider limiting or prohibiting personal devices use during work hours. This would reduce the risk that employees publicly post videos or photos of proprietary techniques online, or store videos and photos for later disclosure to outside third parties.

Sixth: Cannabis businesses should take comprehensive steps to ensure third parties (such as vendors and suppliers) are monitored while on company grounds, to safeguard against any intentional or inadvertent acquisition of confidential information or trade secrets. This includes, for instance, requiring visitor sign-in and sign-out sheets, implementing keycard access to sensitive areas of a facility, and monitoring staff and third parties with security cameras.

Seventh: Cannabis companies are subject to numerous regulatory requirements under state and local law, running the risk that they may be required to disclose confidential or trade secret information to the government as a part of its regular submissions necessary to maintain good standing and licensure.

Cannabis companies must implement processes by which such information is identified in these submissions. Such information must be either redacted or flagged for regulators as confidential information that must not be used or disclosed for anything other than determining licensure.

Eighth: When employees with access to confidential information or trade secrets leave, businesses should review the former employee’s company-issued devices and e-mail accounts to ensure trade secrets or other confidential information were not disseminated outside the company.

Ninth: Finally, cannabis companies must enforce their right to maintain the confidentiality of their trade secrets at the appropriate time. This includes sending correspondence to former employees or other third parties who a company believes may have absconded with confidential information (or received it from another source) and taking prompt legal action to preserve trade secret protection where appropriate. That would include seeking a preliminary injunction at the start of any legal action precluding any further use or dissemination of the company’s confidential information or trade secrets.

Although businesses may initiate an action under federal law through the Defend Trade Secrets Act, 18 U.S.C. § 1836, et seq, nearly all states have adopted some form of the Uniform Trade Secrets Act, which contains protections substantially similar to the federal counterpart law.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Christine Streatfeild is a partner at Baker McKenzie, a member of its North American Trade Secrets practice, and focuses on intellectual property matters.

William Dugan is a partner at Baker McKenzie, a member of its North American Trade Secrets practice, and an employment law expert.

Colton Long is an associate at Baker McKenzie, a member of the North American Trade Secrets practice, and an employment law expert.

Each author has substantial experience relevant to assisting cannabis companies with IP, trade secret, and employee mobility issues and disputes.

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