A little over two years ago, a California company called Headspace Int’l LLC sued Podworks, makers of the popular line of TopShelf cannabis concentrates, for a trademark violation. The lawsuit alleges that TopShelf’s line of “Top Shelf Clear” products violates Headspace’s trademark for “The Clear,” a line of C02 extracts they peddle across the country. They trademarked the line in California in 2013, and began selling it in Washington in 2014.
“Headspace is arguing that anyone using the term ‘Clear’ needs to choose another descriptive word for their product,” Marijuana.com reported, back when the lawsuit was first filed. Two people with similarly named products, competing in the same market. Pretty straightforward stuff, as far as trademark disputes go.
But that’s not the interesting part. The interesting part is that, after much back and forth wrangling, Podworks was able to win a key victory — their motion opposing a preliminary stop-sale injunction was upheld — and that they won that victory in part by producing failed pesticide testing results for Headspace’s products. What do failed pesticide tests have to do with trademarks? It’s complicated, but bear with me.
Headspace’s complaint was initially dismissed, as Podworks successfully argued that “Headspace failed to allege lawful use of its mark in the ordinary course of trade in Washington,” based on the fact that they do not technically hold a Washington State cannabis license. Rather, they have a licensing agreement with X-Tracted Labs, an arrangement common among out-of-state brands that want to enter markets where out-of-state ownership is prohibited.
The flawless answer for today’s concentrate enthusiasts.
— clearconcentrate (@_theclear) October 5, 2018
Headspace, on appeal, was able to reinstate the complaint by arguing that “its license agreement with X-Tracted included terms that provided Headspace sufficient quality assurances.” The Court of Appeals concluded that “the hypothetical quality control terms in the license agreement or Headspace’s hypothetical reliance on X-Tracted’s quality control measures would satisfy the applicable test for quality control.”
In plain English, the case was valid because Headspace could say that they had control over how “The Clear” products were made, making those products subject to their trademark. Whether that arrangement constitutes a true party of interest violation is something for the Liquor and Cannabis Board to decide, of course, but state law makes clear that, in order for a trademark to be valid, the owner must have “sufficient control over the quality of the goods or services provided to customers under the licensed mark.”
This is where the pesticides come in. TJ Werth, Podworks’ owner, has quietly been pesticide testing his competitors, apparently. Paranoid, perhaps, but that paranoia paid off big time for him in this case. As Podworks’ lawyers wrote, in response to the injunction Headspace requested after the case was reinstated, “testing of marijuana distillate manufactured by X-Tracted shows unacceptable levels of at least the following compounds: myclobutanil, piperonyl butoxide, and pyrethrins […] In particular, myclobutanil is not approved in Washington State for use on plants that are combusted, such as tobacco or cannabis, because myclobutanil is known to emit hydrogen cyanide when heated. Hydrogen cyanide, sometimes called prussic acid, is a toxic compound that has been used as a chemical weapon due to its deadly effects.” [emphasis mine]
Podworks’ countermotion was granted on May 29, a mere two weeks after it was filed. The court concluded that, due specifically to the test results submitted by Werth, “Headspace may not have exercised the required control over quality necessary to establish trademark rights through use by a licensee.”
This is all great news for Werth, even if he hasn’t won the entire case yet, but the real news here is that pesticides are a way bigger deal than previously thought. While the presence of pesticides in legal cannabis products is already a massive consumer safety issue, this case is the tip of an iceberg’s worth of business liability. Certainly, losing consumer confidence over pesticides can cost cannabis companies a great deal of money — Ionic’s sales plummeted from $332,000 in November 2018 to a little under $13,000 in February 2019, after failing two rounds of OK Cannabis testing, according to 502data.com — but so can losing lawsuits. In a market as competitive as Washington’s, a trademark is no laughing matter.
— Ionic Premium Cannabis Oils (@IonicSocial) May 27, 2019
There’s also the matter of business insurance, which frequently requires policyholders to warrant that they’ve taken steps to assure the quality of their products, including pesticide testing. That’s its own iceberg, but suffice to say that it is entirely within reason for an insurance company to refuse to cover a business in the case of a pesticide-driven loss if that business didn’t take steps to test their products.
While it might be too much to hope for that the new crop of interstate, IPO-obsessed cannabis companies would pesticide test products out of the goodness of their hearts, cases like this are pretty good news for consumers.
Companies as well capitalized as Headspace have always been able to afford to test, they just haven’t had a financially compelling reason to. Now, however, they might not be able to afford not to.