WA House COG - Committee Meeting
(February 7, 2019)

Here are some observations from the February 7th Washington State House Commerce and Gaming Committee (WA House COG) Committee Meeting.

My top 3 takeaways:

• The committee hosted a public hearing for HB 1794, “Concerning agreements between licensed marijuana businesses and other people and businesses, including royalty and licensing agreements relating to the use of intellectual property.”
  • Committee Staff Counsel Peter Clodfelter introduced the bill (audio – 2m, video).
  • From the House Office of Program Research Bill Analysis:
    • Updates terminology regarding authorized agreements that licensed marijuana businesses may enter with other parties related to goods or services with trademark or other intellectual property protections.
    • Specifies the authorization encompasses, among other agreements, agreements related to goods or services registered as a trademark under another state’s law or international trademark law.
    • Lists specific types of contract provisions that may be included in an agreement, such as (1) royalty fees based on net revenues or sales of certain products, (2) terms giving either party exclusivity to the use of intellectual property, and (3) quality control standards as necessary to protect the integrity of the intellectual property.
    • Prohibits agreements in compliance with the authorization from subjecting the other party to investigation or qualification by the Liquor and Cannabis Board (LCB).
    • Removes the requirement that marijuana licensees must disclose these types of authorized agreements to the LCB, and adds a requirement that these agreements are subject to recordkeeping requirements established under the LCB’s rules.
  • Chair Derek Stanford, the bill’s prime sponsor, told the committee it addressed “complex details” over a “lack of clarity” when the legislature passed ESSB 5131 in 2017. He said the bill reflected intellectual property (IP) standards in other industries (audio – 1m, video).
  • Chris Marr, testifying for Spokane processor Grow Op Farms, identified HB 1152 from 2017 as the last effort to address intellectual property licensing agreements. Noting the bill’s inclusion as an amendment into ESSB 5131 that year, he added, “As of today, although we have seen a couple drafts, we have no promulgated rules from the LCB in place.” Marr, a former State Senator and WSLCB Board Member, said the most recent rule proposal was “at odds with the intent” of the earlier bill and adopted law because it treats licensee agreements differently than other sectors with trade secrets. He outlined how the bill addressed the problems in the agency’s approach (audio – 6m, video).
    • The WSLCB draft rules did not allow royalty-based agreements, just fixed payments or hourly rates. Marr called those methods “uncommon,” particularly compared to royalty-based contracts.
    • Marr said drafted rules from WSLCB wouldn’t allow for exclusivity: “The right to be the sole-user of a trade name or trade secret is really at the heart of intellectual property licensing agreements. There’s no value in paying for, to use something which a competitor can use for free.”
    • Marr claimed the planned rules hurt owners’ ability “to control how that licensed intellectual property is used subsequently” saying licensors wouldn’t have to enforce covenants of a licensing agreement.
    • Marr called HB 1794 an “alignment” of the intent of the legislature, but added that a cap on royalty amounts in agreements should assuage fears of “undue influence or True Party of Interest.”
    • He closed by mentioning Kelly Ogilvie, CEO of Deep Cell Industries, and a policy advisor to Governor Jay Inslee. Marr told members Ogilvie’s company licensed “Ruby Sugar” a utility patent on a binding process that connect THC to sugars. He said Ogilvie’s testimony to the committee cited around 38% of America’s Gross Domestic Product (GDP) being attributable to “IP-intensive industries“ accounting for 28 million jobs.
  • Andy Brassington, CFO of Seattle licensee Evergreen Herbal, supported the bill to “remove unwarranted administrative obstacles…allow enterprise values to flourish…and to provide common-sense, well-established business practices available to this nascent industry.” Brassington was frustrated the issue wasn’t settled: “It’s like going into business with one hand tied behind your back and blindfolded.” Even though the rulemaking was required by law, Brassington believed they weren’t making it a priority, and the state was “left behind” by other legal jurisdictions on the issue (audio – 3m, video).
  • Chris Masse, a Partner with Miller Nash Graham & Dunn, started by apologizing that the topic had to be back before the legislature: “I really thought we fixed this two years ago.” After hearing nothing for “years” the draft from WSLCB came abruptly and was “completely at odds with intellectual property law altogether.” She agreed with prior comments on royalties and exclusivity but said the rules drafted would prevent parties control over their brand, its identification, materials, or ingredients: “If you do not protect the integrity of your brand, you lose your trademark. Period.” Masse argued courts defined that as a “naked license,” but that WSLCB’s plan might require it as the agency is “rulemaking to the lowest common denominator” under an assumption licensees will behave in bad faith. She told members the enforcement division could still target bad actors while allowing branding deals. Masse called the legislation “prescriptive” out of necessity (audio – 3m, video).
  • Brooke Davies, speaking on behalf of the Washington CannaBusiness Association (WACA), echoed what had been said and explained WACA’s involvement in 2017. Davies claimed public testimony made the intent of that bill explicit, but “[u]nfortunately, the LCB has not implemented laws that reflect that intent” (audio – 1m, video).
  • Representative Jesse Young presented an unusual request for the panelists’ opinions on WSLCB reasoning for their draft rules: “I want you to presuppose what you think that answer would be, just, in your opinion, and then tell me your response to that answer” (audio – 12m, video).
    • Masse felt the agency’s attitude was that non-licensees in an IP contract with a licensee “turns the holder of the intellectual property, the person receiving that share of the gross profits, into someone who has a ‘True Party of Interest (TPI)’ relationship to the marijuana licensee” meriting enhanced vetting. She pointed to the royalty cap as consistent with HB 1237, a separate bill which capped out-of-state ownership in cannabis licenses at 10%. Masse said the concern was that parties not listed on a license could still exercise control. She claimed that kind of control was not what they were advocating for, rather keeping IP control over a brand. Masse testified at HB 1237’s initial public hearing hosted by the House Commerce and Gaming Committee on January 28th.
    • Marr pointed out how untimely WSLCB’s rule draft was, and that while his comments at the time highlighted IP exclusion in the law, the agency’s draft dealt with the subject heavily. He said a “more detailed” legislative intent in the bill helps, as would more collaboration between WSLCB and stakeholders. He agreed with Masse’s point about regulating “to the lowest common denominator” and that the passage of the bill would help the industry and regulators.
    • Brassington said WSLCB has a “misintended, lack of knowledge of certain areas and subject matter” and reiterated the need for collaboration to avoid rules developed “in a vacuum.” He stated that “control” in agreements was not always over the company so much as the “quality control of a process, a formula, a recipe, a manufacturing trade secret” and that IP owners deserved that right.
  • Vice Chair Kristine Reeves asked what information they could provide on IP regulation in the alcohol and tobacco markets in Washington, “[a]nd beyond that, whether the current approach of the LCB is similar to the approach on this issue across other regulated markets or state approaches nationally.”
    • Masse said several states had limited restrictions on who could “own equity or this control piece” making IP agreements commonplace. She said some states had revenue and profit sharing limits, but none that prohibited cannabis contracts this way. For alcohol, Masse said Washington law allowed “the concept” of IP through franchising, but does not define it specifically.
  • Seth Dawson, lobbying for the Washington Association of Substance Abuse and Violence Prevention (WASAVP), said he was opposed only because he’d heard concerns from WSLCB over investigations and enforcement under the bill. “If there are such concerns, and they can’t be addressed in amendments, we would be opposed. If those concerns don’t exist or if they can be addressed through amendments we would either be neutral, or maybe even supportive depending” (audio – 1m, video).
• The committee amended and passed HB 1370, “Creating additional training requirements for licensed marijuana retailers and their employees” (audio – 10m, video).
  • Amendment AMH COG RAYM 007, offered by Ranking Member Drew MacEwen, adds a 60-day window for newly hired budtenders to obtain their WSLCB-issued permit. MacEwen said a similar grace period existed for the state’s alcohol permit. The amendment was adopted unanimously. WSLCB Director of Legislative Relations Chris Thompson anticipated this amendment at the February 6th WSLCB Executive Management Team meeting and said the agency would not oppose it.
  • Amendment AMH COG RAYM 009, offered by Representative Brandon Vick, was less related to HB 1370 but addressed a “disconnect that seems to exist right now between regulators and regulatees.” Describing the amendment as a “reset button,” Vick said it required WSLCB to complete open rulemaking before beginning implementation of a budtender permitting system. Second, it mandated the agency’s traceability system be “fully operational” and the agency confirm this to the legislature. Finally, the bill required HB 1370’s rules return to the committee for review to help “healing that divide that might exist…” Chair Stanford asked for a “no” vote on the amendment as the bill didn’t deal with traceability. The amendment was voted down.
  • After incorporating the adopted amendments, Representative Shelley Kloba called budtenders “the front line” of the industry and that they needed standardized training. Vick commented that Republican members of the committee would be mixed on their votes: “the training that’s currently done by the folks whose licenses are on the line, the retailer” was a better fit. Republicans voted against the bill with the exception of MacEwen. Democrats voted in favor except for the absent Representative Melanie Morgan and the bill was passed out of committee (video).
  • The bill returned to the House Rules Committee for next steps. Because the bill’s fiscal note shows an impact greater than $50,000, the bill must be granted a public hearing by the House Finance Committee before becoming eligible for a floor vote.
• The committee did not take action on HB 1466, “Banning marijuana billboards.” The bill has been rescheduled for executive session during the COG public meeting on February 11th.