Protecting Trade Secrets When Applying for a State Cannabis License in California

May 16, 2018 – Imagine the following scenario.  A well-known cannabis manufacturer with registered trademarks obtains a local permit and a temporary state license.  The temporary state license is valid initially for only 120 days, so the licensed manufacturer submits a complete application for an annual license in order to get a 90 day extension of the temporary license.  The annual application also asks for operating procedures and protocols, and the license holder provides the requested operating procedures and protocols, without claiming trade secret protection (since the manufacturer is unfamiliar with trade secrets) or otherwise marking the documents as confidential.

The manufacturer’s competitor issues a request under the California Public Records Act for the manufacturer’s application materials.  Since none of the application materials were marked as containing trade secrets or other confidential information, the Manufactured Cannabis Safety Branch within the California Department of Public Health provides copies of the manufacturer’s application, including standard operating procedures (SOP’s).  The competitor uses this information to obtain a significant competitive advantage.  When the manufacturer issues a request under the California Public Records Act for the competitors’ application materials, the Manufactured Cannabis Safety Branch refuses to release the competitor’s standard operating procedures (SOP’s) because the competitor designated this information as a trade secret.

This thought-experiment illustrates the importance of claiming trade secrets during the annual licensure process.

Overview of Trade Secrets

California is a hotbed of innovation, and the Golden State pioneered the law of trade secrets with the Uniform Trade Secrets Act of 1984 to protect the intellectual property of California innovators. In the cannabis space, licensed California companies are identifying and securing their trade secrets to take advantage of California law, which has recognized and protected trade secrets for decades.  For a primer on cannabis trade secrets, please read our introductory blog post here.

One advantage of trade secrets protection is that it protects cannabis companies whose workforce is highly mobile.  In California, non-competition agreements are generally unenforceable, but non-disclosure agreements (NDA’s) can generally be enforced, especially in order to deter and/or remedy the theft of trade secrets.  Under California law, workers are free to go work for a competitor, but they are not free to take their employer’s trade secrets with them, and there are severe criminal and civil penalties to deter the misappropriation of trade secrets.

Another advantage of trade secrets protection is that, often, it is the only form of intellectual property available.  For example, take recipes. Recipes cannot be patented, so the only way to protect, say, a recipe for an edible cannabis product, is as a trade secret.  The recipe must be reduced to writing, designated as secret, and protected by reasonable security measures to ensure its secrecy. If the secret recipe is, for example, posted on the wall and visible during factory tours open to the public, it has little hope of being deemed a trade secret in court.  Conversely, if the secret recipe is protected by extensive security measures, disclosed only to individuals who have signed a Non-Disclosure Agreement (NDA), and the dissemination of the secret recipe is strictly monitored and restricted, then the assertion of trade secret status will be taken much more seriously by a reviewing court.

A famous example of a trade secret is the recipe for Coca-Cola, which has been a closely guarded trade secret for more than a century.  Even if the recipe for Coca-Cola could be patented, the patent would be of limited duration (approximately 20 years), and Coca-Cola would have little incentive to disclose its secret recipe to the world in exchange for the exclusive right to use that recipe for a couple of decades.  Thus, because of the limited duration of patents, sometimes trade secret protection, which has no time limits, is preferable.

A different example of a trade secret, in the cultivation context, would be a secret combination of growing techniques designed to synergistically maximize the chemotypic potential of a specific strain, say Sour Diesel.  While this secret combination of techniques may be difficult to patent, it could nevertheless qualify for protection as a trade secret as long as there are reasonable efforts to maintain its secrecy.

Another example, in the context of cannabis distribution, would be a comprehensive list of common “rookie mistakes” for a new distribution company to avoid (which would be difficult to patent with a business method patent) but which can save considerable time, energy, and expense, and thus confer a significant competitive advantage if not generally known.

Trade secrets, unlike other forms of intellectual property, are unique in that they cannot ordinarily be filed with official government registries, such as the U.S. Patent and Trademark Office (for patents and federally registered trade and service marks), the U.S. Copyright Office (for copyrights), or the California Secretary of State (for state-registered trade and service marks).  Because disclosure of the very existence of a trade secret would tend to compromise its secrecy, there is no central registry of trade secrets.

Official Recognition of Trade Secrets in Manufacturing Regulations 

Yet, there may be a way to obtain official recognition of trade secrets by California regulators.  The Emergency Regulations administered by the California regulatory agency overseeing cannabis manufacturers (the Manufactured Cannabis Safety Branch within the California Department of Public Health) expressly recognize trade secrets.  Title 17 of the California Code of Regulations, at § 40131, recognizes that operating procedures and protocols disclosed to regulators may be claimed as trade secrets if appropriately identified as “confidential”:

Any manufacturer submitting operating procedures and protocols to the Department pursuant to the Act and this chapter may claim such information as a trade secret or confidential by clearly identifying such information as “confidential” on the document at the time of submission. Any claim of confidentiality by a manufacturer must be based on the manufacturer’s good faith belief that the information marked as confidential constitutes a trade secret as defined in Civil Code section 3426.1(d), or is otherwise exempt from public disclosure under the California Public Records Act in Government Code section 6250 et seq.

(Emphasis added.)  In other words, even though operating procedures and protocols have to be disclosed to regulators, the applicant may claim such information as a trade secret or as confidential by marking submitted information as “Confidential” as long as the manufacturer has a good faith belief that the information constitutes a trade secret.  

What exactly constitutes a trade secret? The definition of a trade secret under California law is specified in the Uniform Trade Secrets Act, codified at Civil Code § 3426 et seq.  Specifically, Civil Code § 3426.1(d) defines a trade secret as information that derives independent economic value from not being generally known.  Such information, which can include a formula, pattern, compilation, program, device, method, technique, or process, must also be the subject of reasonable efforts to maintain its secrecy:

“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

(Emphasis added.)  Presumably, trade secrets and other confidential information would be exempt from disclosure in response to California Public Records Act requests by competitors.

The manufacturing regulations also reference exemptions from public disclosure pursuant to Government Code § 6250 et seq.  Such exemptions include protections for corporate financial records as well as corporate proprietary information in general (not simply trade secrets):

Nothing in this chapter shall be construed to require the disclosure of records that are any of the following: corporate financial records, corporate proprietary information including trade secrets, and information relating to siting within the state furnished to a government agency by a private company for the purpose of permitting the agency to work with the company in retaining, locating, or expanding a facility within California.

Government Code § 6254.15 (Emphasis added.)  Therefore, in addition to proprietary operating procedures and protocols, any other information potentially exempt from public disclosure (including corporate proprietary information) should be claimed as confidential so that it is not released in response to a competitor’s request pursuant to the California Public Records Act. 

Similarly, the manufacturing regulations recognize that the master manufacturing protocol, which must be established and followed for each unique formulation of cannabis product, may be subject to trade secret protection:

40262. Master Manufacturing Protocol. The licensee shall establish and follow a written master manufacturing protocol for each unique formulation of cannabis product manufactured, and for each batch size, to ensure uniformity in finished batches and across all batches produced.
[…]
(c) Nothing in this chapter requires disclosure of the master manufacturing protocol to any person other than the individuals conducting activities that utilize the protocol or to the Department and its inspectors and agents, or other law enforcement agencies. The licensee may consider the master manufacturing protocol subject to trade secret protection.

(Emphasis added.) Since the emergency manufacturing regulations currently in effect explicitly mention asserting trade secret protection specifically for the “master manufacturing protocol” for each unique formulation of cannabis product manufactured, every manufacturer who derives a competitive advantage from its master manufacturing protocol not being generally known (this means pretty much every manufacturer producing unique formulations) would be wise to clearly designate as confidential trade secrets all master manufacturing protocols whenever they have to be disclosed to regulators and law enforcement, most likely in the context of an inspection to confirm that there manufacturer in fact follows established master manufacturing protocols.

Notably, given that the manufacturing regulations mention trade secrets with respect to “operating procedures and protocols” in general, which must be submitted as part of the application for annual licensure, manufacturers would be wise to claim proprietary operating procedures and protocols as trade secrets.  Another option would be to provide a description of the procedures in order to avoid disclosing the details.  Indeed, the Annual Application Checklist provided by the Department of Public Health states:

If the state license is issued, it can then be inferred that the claim of trade secret or other confidential status with respect to operating procedures and protocols has been recognized, but in an abundance of caution it would be prudent to obtain written confirmation from regulators that proprietary information will not be disclosed. This ensures that valuable intellectual property is not be disclosed to competitors, who are free to make requests for application materials pursuant to the California Public Records Act.

What about cultivators, who are governed by a different set of regulations and regulated by a different regulatory agency, CalCannabis Cultivation licensing?  And what about retailers, distributors, testing laboratories, microbusinesses, and event organizers, who are governed by another set of regulations and regulated by an entirely different regulatory agency, the Bureau of Cannabis Control?

Asserting Trade Secrets and Proprietary Information in Applications for Annual Licensure

Since all types of licensed entities may have trade secrets to claim and protect, such licensees should similarly claim proprietary operating procedures and protocols as trade secrets in applications for annual licensure.  Although only the manufacturing regulations explicitly reference trade secrets, trade secret law is part of California jurisprudence, and all types of California cannabis licensees (from cultivators to distributors to testing laboratories to retailers) should protect their intellectual property during the annual license application process.

Please contact the Law Offices of Omar Figueroa for more information about how to protect your company’s intellectual property and for assistance creating a trade secret protection plan, as well as guidance on claiming trade secrets and other confidential information during the licensing process.

This information is provided as a public service, and is not intended as legal advice. For specific legal questions, please contact the Law Offices of Omar Figueroa at 707-829-0215 or info@omarfigueroa.com to schedule a confidential legal consultation.