How Private Keys Create Flexibility, Security, and Risk within Digital Exchange Platforms

By: Jon Avidor, Jason Gershenson and Armando E. Martinez

As cryptocurrency exchange activity continues to grow, it becomes increasingly more important to understand how to protect these assets. Storing cryptocurrency safely is often confusing for first-time and even experienced buyers. Popular digital exchange platforms often make it deceptively easy to assume that they provide retail cryptocurrency traders sufficient asset security.

Such “Custodial Exchanges” were the earliest digital exchange platforms, and necessary to conveniently trade Bitcoin, and the cryptocurrencies that followed. after the advent of Bitcoin. However, the cryptocurrency community at large recognizes the practical advantages of “Non-Custodial Exchanges”.

“If you don’t own your private keys, you don’t own bitcoin”.

The established mantra within cryptocurrency communities – “If you don’t own your private keys, you don’t own bitcoin” – is central to distinguishing the two types of digital exchange platforms. Every platform that facilitates the exchange of cryptocurrency ultimately places the purchased cryptocurrency in an off-blockchain “wallet” that the traders can access and continue to store cryptocurrency in.

A wallet’s public key (akin to bank account number) allows a cryptocurrency trader (and virtually anyone else) to see the funds within a wallet, as well as the history of transactions made with the wallet. Accessing this wallet to withdraw or trade cryptocurrency, however, requires a passcode known a “private key”. The private key is an auto-generated alphanumeric code, and the singular way to access and create transactions with cryptocurrency within a trader’s wallet. Private keys are difficult to remember, and there is often a risk of placing the private key in a location susceptible to theft, or forgetting where the private key was placed all together. Losing the private key for a wallet generally means permanently losing access to the assets within that wallet. Considering that the private key is the tool to control a trader’s cryptocurrency – what does it mean to not own it?

Custodial Exchanges (No Private Key Control)

Custodial digital exchange platforms are the ones that maintain possession of traders’ private keys. These exchanges are considered “custodial”, because at the time a transaction on the exchange is processed, neither the buyer nor seller are in possession of the traded assets – representations of those assets are exchanged off-blockchain, and entirely within the platform’s database. Most major digital exchange platforms, such as Coinbase, Gemini and Binance, are custodial exchanges.

Exchange custodianship of private keys allows crypto traders to access their wallets with a password, and in some cases, additional two-factor authentication via mobile phone. In addition to utilizing log-in processes that resemble most other online services that crypto trading newcomer already uses, custodial exchanges have the highest trade volume, customer support, insurance, and offer the ability to deposit and withdraw fiat currency.

Custodial exchanges also offer speed. Trading takes place off-blockchain, which means transactions can process quickly but at the expense of the transparency that publishing a transaction on-blockchain affords. In other words, when a crypto trader buys bitcoin on a custodial exchange, they technically buying a representation of Bitcoin within the exchange’s database (which the exchange fully controls). Traders only own actual Bitcoin upon withdrawal from the exchange’s wallet to the trader’s wallet. Until then, a trader is at the mercy of the centralized exchange.

Custodial Exchanges 

            Every year, millions of dollars’ worth of crypto are stolen from even the most established centralized exchanges. Aside from direct hacks to a centralized exchange’s customer funds in custody, two-factor authentication — the very method to protect a customer — can be a hacker’s segue for a cybersecurity attack. Other disadvantages that may negate the convenience of a centralized exchange include:

  • Inability to Withdraw Cryptocurrency: Website crashes and maintenance cause funds on even the most reliable centralized exchanges to be unavailable at any given time.
  • Missing Hard Forks: Hard forks occur when a single blockchain splits, resulting in twice the number of tokens — one for each blockchain  Immediately after the 2017 Bitcoin hard fork (which created Bitcoin Cash), and the 2019 Bitcoin Cash hard fork (which created Bitcoin SV), those that could access their private keys had the instant ability to trade the new tokens. However, Coinbase users had to wait weeks for Bitcoin Cash and months for Bitcoin SV, until Coinbase established an internal system supporting the two tokens.
  • False Trade Volumes / Manipulation: Since transactions take place on a central ledger and off-blockchain, trade data can be manipulated by the custodial exchange to produce a certain outcome.

For retail traders to ascertain that they are the only ones who have absolute control over their assets, even in the face of a cybersecurity attack, they must trade cryptocurrency using their private-key wallets on non-custodial exchanges.

Non-Custodial Decentralized Exchanges

            Non-custodial exchanges can take many forms, including in-person trading, linking an external wallet to a central “bank” to buy or sell cryptocurrency, linking a wallet to an exchange. In all cases, the primary feature is that each cryptocurrency trader can always remain in control of their wallet funds by way of private key ownership.

            The analogues to digital custodial exchanges — decentralized exchanges (DEXs)— are built using a blockchain infrastructure, inherently never controls users’ assets, and allows traders to conduct transactions from their own external wallet, or a wallet on the exchange’s blockchain that the user controls. On a DEX, a trader’s Cryptocurrency is deposited into a smart contract which processes then transaction, never interacting with the private key. With no centrally controlled ledger or funds accounts, exposure to hacking and theft is significantly decreased.

However, DEXs still pale in popularity compared to their centralized, custodial counterparts. DEXs often require more technical knowledge to use, exhibit slower performance (issues with scaling the blockchain), and often cannot facilitate trades “cross-chain” (e.g. Bitcoin for Ether). DEXs certainly require more effort and patience from traders, but cryptocurrency communities are committed to solving the accessibility, scaling, and transaction issues in order to increase security, and subsequently, wider cryptocurrency adoption.

When determining which type of exchange to use, prospective or current cryptocurrency traders must decide what is more valuable to them: easier access to one’s digital assets or complete, unequivocal control of these assets. Institutional traders cannot risk any of their respective clients losing access to their assets, so they might choose to operate on a custodial exchange, especially since some custodial exchanges offer insurance against cybersecurity attacks as well as other traditional client services. On the other hand, retail traders might want to overlook the convenience of a custodial exchange to ensure that they are the only ones who have absolute control over their assets by using their private keys within non-custodial DEXs.

It is still too early to determine which type of exchange is “better” for any type of trader. With creative paths to security, access, and complete control, however, both custodial and non-custodial exchanges will entice more activity within the cryptocurrency space in the coming years.

Cannabis Advertising Laws: The States’ Way or the Highway

By: Jon Avidor, Sarah Siegel and Liam McKillop

As cannabis continues to be classified as a Schedule I drug under the Controlled Substances Act, federal law prohibits any written advertisement placed in a newspaper, magazine, on the internet, or in any other publication which has the purpose of “seeking or offering illegally to receive, buy, or distribute [cannabis].” While this broad legislation significantly limits the available advertising options for cannabis companies and retailers, it only applies to advertisements that seek to facilitate a transaction of the good and is silent as to advertisements whose purpose is to promote the use of cannabis. However, most states have enacted legislation that places further restrictions on the content, nature, location, and size of cannabis advertising. This article seeks to give an overview of the various forms of state regulation—with a specific focus on states with legal recreational programs—on cannabis advertising, by exploring the similarities and differences between the legislation and examining the different rules in place for both traditional advertising and digital advertising.

Digital Advertising Landscape

The digital marketing platforms available to cannabis companies and retailers are currently extremely limited. In general, TV and Radio broadcasters steer away from cannabis advertisements, largely due to uncertainty about FCC policy and concerns with their FCC licenses being taken away. Further, Google and Facebook—the two companies which dominate the online digital advertising market—currently severely restrict the advertising options for cannabis businesses. Google lists cannabis under the headline of “dangerous products and services” which it bans in order to keep people safe from the “promotion of some products or services that cause damage, harm or injury.” It is quite telling of Google’s view on cannabis, as the other good and products listed within this category are guns, explosives, and tobacco; at the same time, Google has a completely separate policy for alcohol advertising. Facebook has a similar ban on advertisements that promote the sale or use of illegal or recreational drugs and provides specific examples of prohibited advertising activity (which includes using images of smoking-related accessories like bongs and rolling papers or images which simply imply the use of a recreational drug). While Facebook has flirted with the idea of revamping its current policies, and recently began to allow the pages of legally operating cannabis retailers to appear in Facebook searches, it’s strict advertising policies still remain intact, much to the dismay of cannabis communities.

Traditional Advertising Landscape

While there is a larger market of available options for cannabis companies and retailers when it comes to print, billboard, and signage advertisements, there are still many restrictions in place which vary from state to state. Colorado—the first state to legalize the recreational use of cannabis—enacted cannabis advertising legislation which is very similar to the state’s laws related to alcohol advertising. The use of outdoor public advertising for cannabis retailers in Colorado is extremely limited, with fixed signs on the zoning lot for the purpose of identifying the location of the business is the only thing permitted. While retailers are prohibited from using billboards in Colorado to advertise their stores and products, about half of the state’s “Adopt-a-Highway” signs display the logos of local cannabis businesses, a “loophole” being exploited by these businesses. Further, the billboard laws do not apply to cannabis companies such as WeedMaps—an app that primarily provides locations and reviews for dispensaries—as the company is not in the business of selling cannabis, permitting the companies “Weed Facts” campaign to be run on billboards within the state. New York has similarly strict restrictions on external signage, requiring the publicly viewable signage of medical cannabis retailers to be non-illuminative and only in black and white colors; just across the water, the state of New Jersey also has identical restrictions in place.

Health and Safety Concerns

The Federal Trade Commission—a government agency in place to protect American consumers—regularly monitors health-related advertising claims and routinely sends warning letters to cannabis companies whose advertisements promote the prevention, treatment, or cure of symptoms without proven scientific evidence to backs up such claims. The FTC takes these matters extremely seriously, requiring any company that receives a warning to notify the FTC of the specific action they took to remedy the agency’s concerns. The warning letters also serve to inform offending cannabis companies of the legal consequences of the prohibited unsubstantial health promotion, which can result in an injunction to both stop sales and force the refund of money to consumers. Most states have further legislation in place to enact specific requirements for cannabis advertisements which make health claims, with all of them requiring similar scientifically proven substantiation of any claims being put forward. The state of Alaska requires five different warnings to be placed on all advertising, including statements such as “[cannabis] has intoxicating effects and may be habit forming and addictive” and  “[t]here are health risks associated with consumption of [cannabis].”

Beyond health concerns, many state laws have checks to ensure that advertisements are not targeting individuals under the age of 21. For instance, California laws require any cannabis advertising placed in digital communications to be displayed only where “at least 71.6% of the audience is reasonably expected to be 21 years of age or older” while also prohibiting signage within 1,000 feet of any elementary school, high school, playground or youth center. The state’s laws further forbid the use of cartoons, music, and symbols which are known to contain elements that appeal to persons younger than 21. 

Conclusion

As the world of cannabis advertising is filled with strict policies that vary across state lines and general confusion about federal guidelines, it is important for a business to err on the side of caution and consult with legal experts when creating advertising campaigns. While successful advertising is rife with creativity, the rigorous health and safety requirements work to remove such ingenuity from the cannabis advertising industry. This puts cannabis retailers and companies in a tough spot, as they need advertisements to promote their business, but always have to keep the consequences of the law in the back of their minds.

A Limited Shield of Privacy for New York Residents

By: Steve Masur

New York Governor Andrew Cuomo signed the Stop Hacks and Improve Electronic Data Security Act (the “SHIELD Act” or the “Act”) into law on July 25, 2019, nearly two years after the bill was originally proposed. The SHIELD Act amends New York’s General Business Law to reflect the data privacy needs of its residents. The Act implements additional security parameters for entities that own or license private information of New York residents. Additionally, the Act broadens the definitions of “private information” and “breach” to better protect New York residents against the unauthorized access of personal data. 

Reasonable Data Security Requirements

New York joins a growing list of states that have enacted more modern data privacy laws.  The Act requires businesses that own or license the private information of New York residents to have  “reasonable” technical, physical, and administrative safeguards in place in order to protect the security, confidentiality, and integrity of the residents’ private information. This replaces the old standard by which New York residents and entities were only protected if business was conducted within the State of New York. The Act offers several examples of measures that can be implemented to ensure compliance with the necessary safeguards such as training of management and employees in cybersecurity practices, regular monitoring, testing and upgrades to address key controls and systems, and disposal of private information in a timely fashion. Small businesses, however, need only “reasonable administrative, technical, and physical safeguards” that are tailored to the size of the business, the “nature and scope” of the business’ activities, and the sensitivity of the personal data the business holds.  

Private Information under the SHIELD Act

Another key feature of the Act is the wider scope of the definitions of “private information” and “data breach.” Under the Act, “private information” now includes biometric information, financial information (such as account numbers or credit or debit card numbers), and usernames or e-mail addresses in combination with password or security questions. While this is an improvement from the past definitions, it still falls behind the definitions provided in the privacy laws of other states, which include medical information and certain health insurance identifiers in the definitions. Further absent from the new definitions are personal identifiers such as consumers’ health insurance information and passport numbers. 

Breach of the Security System and Penalties under the SHIELD Act

The Act also updates what is considered a “breach of the security in a system.” Mere access to such privileged information now constitutes a breach, a change from the old standard that only restricted the acquisition of private information. While the SHIELD Act does implement stronger penalties for data system breaches, it does not entitle residents to a private right of action. Instead, the Act allows the New York State Attorney General to have broader oversight in bringing actions and obtaining civil penalties on behalf of residents. The new penalty for knowingly and recklessly violating the Act is a $20.00 fine for each instance of a failed notification, with a cap of $250,000. The Act further implements penalties for certain violations to the new data security standards, which can reach up to $5,000 per violation with no cap. It is unclear what constitutes a “violation” under the Act.

The Hazy Relationship between the FDA and CBD

By: Jon Avidor, Sarah Siegel and Liam McKillop

Walking around New York City, it could be easy to be under the impression that the sale of certain CBD products is legal. You can walk into your local convenience store and buy CBD-based chocolate candies over the counter, or you may have walked by one of the various CBD dedicated stores operating in Manhattan. However, in most instances, that is not the case. The legality of the CBD industry is not clearly defined, especially when it comes to CBD-based products such as foods, drinks, cosmetics, and pet goods and how the Food and Drug Administration (“FDA”) regulates the manner in which these products are sold and marketed.

The FDA, which operates as a science-based regulatory agency committed to protecting and promoting public health, has worked to balance the significant public interest and demand for CBD products while continuing to maintain their rigorous public health standards as it relates to drug approval. However, as the popularity of CBD and the industry in general continues to grow—evidenced by estimates that U.S. consumers spent $300 million on CBD foods and drinks throughout 2018—the FDA has continued to come under public pressure to regulate and stay up to date on the legal status of CBD products. 

There are two types of CBD: (1) hemp-based CBD, and (2) THC-based CBD. While both types come from the same plant—Cannabis sativa L.—there are major differences between the chemical makeup of the two after post-harvest, leading to a difference in how the two products are regulated by the FDA. As both types of CBD are common, the legal status of the two individual products has created confusion throughout the CBD industry. 

When the 2018 Farm Bill was signed into law in December 2018, the definition of “hemp” was amended to now be defined as “all parts of the plant Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration (the component of the plant which is responsible for the “high” attributed to cannabis) of not more than 0.3%.” Further, hemp was removed from the Controlled Substances Act, allowing for hemp-based CBD products to be put into interstate commerce. The result of this is that a majority of CBD products that are sold commercially are hemp-based. However, the Farm Bill ensured that the FDA would continue to have the authority to regulate products that contain cannabis or cannabis-derived compounds under the Federal Food, Drug & Cosmetics Act (“FDC Act”). The FDA has continued to maintain its position that it is currently illegal for THC-based CBD products like foods and drinks to be placed into interstate commerce and/or marketed as a dietary supplement.

Under the FDC Act, any product (excluding foods and drinks) which intends to provide either a therapeutic or medical effect on the body of humans or animals, is a drug. To date, Epidiolex—which is used as a treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome—is the only drug containing CBD which has been approved by the FDA. Further, the FDA has different regulatory standards when it comes to products like foods and drinks and even further differing standards for cosmetic products, with the latter being generally considered to be much less rigorous. For example, with cosmetic products (products which are considered to be “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the body”), there are no pre-approval requirements when it comes to the addition of CBD into these products. 

Meeting the definition “hemp” is only the first step to legally sell a specific type CBD product. The legal status of the product will also depend on its intended use, how the product is labeled and how the product is marketed. For instance, the FDA has concluded that no THC-based CBD product can be marketed or advertised as a dietary supplement, as the FDA has yet to discover scientific evidence which backs up the proposition. The FDA is currently unaware of any evidence which supports CBD products being used as a dietary supplement, and will therefore enforce against companies that market products as such.  it looks to enforce against products which market themselves as such. The FDA worries that such deceptive marketing claims can put the public at risk as individuals may be inclined to attempt to use such products instead of approved treatment methods for their conditions.  

Due to the rapid rise in popularity of CBD and the recent law changes related to hemp and cannabis (which continue to vary at the state and local level), it seems that the goalposts for FDA regulation of CBD products continue to be moved. While the FDA continues to consider public health above and beyond public demand, the FDA also understands that companies are begging for clearer guidelines related to the marketing and sale of their products and that the public wants to know more about the prospective therapeutic and medical benefits of CBD. However, as an agency, the FDA needs to be comfortable with the scientific evidence which supports the purported benefits, and due to the current status of tests and clinical trials, the FDA is not yet there.

Breaking Up Is Hard To Do: Big Tech and the Coming Antitrust Assault

By: Rob Griffitts

Big tech has been under assault by Europe’s regulators for years now, but until recently, not much has been happening in the US.  But after a series of scandals, most notably Facebook’s privacy issues with Cambridge Analytica and a shift in the political climate, a US backlash is gaining momentum.  Detractors on both sides of the political aisle claim big tech is hurting consumers, our democracy and our economy.

The biggest tech companies – namely Facebook, Amazon, Apple, and Google –  are under investigation from multiple federal, state and congressional regulators.  

Google faces four antitrust cases and is being accused of using its stranglehold on the internet search to the detriment of others.  Facebook, which also owns some of the world’s largest messaging apps, also faces four antitrust cases (and five other cases for privacy practices).  Amazon faces three antitrust cases, and questions center on whether the giant favors its own private label goods over those of third parties. And Apple faces three antitrust investigations that focus on whether its app store practices harm competitors.

Put simply, they are being accused of being too big and wielding too much power. The conversations being had about these antitrust investigations assume that, if the companies lose, they will be broken up.  That’s highly unlikely, though.

First, historically, antitrust cases have been brought in situations where consumers are harmed due to a lack of competition, which usually took the form of a monopoly that charged excessively high prices.  That’s not the case here. In fact, the opposite is true: services are continually expanding, and prices – if they aren’t already at zero – are decreasing. This would complicate any argument that consumers are being harmed, and antitrust laws are all about protecting harm to consumers.

Second, antitrust cases take a very long time to resolve and are difficult for regulators to win.  Take the case against Microsoft. The FTC started its investigation in 1990, and the Justice Department started its own case in 1998, claiming that the bundling of its Internet Explorer browser with Windows created an unfair advantage over other browsers.  Not until 2002 – 12 years later – was the case settled, on terms significantly diluted from what regulators were initially asking, even though when the case was brought, Microsoft owned about 90 percent of the PC market. These are lessons that regulators are not likely to have forgotten. 

It’s also worth noting that “behavioral remedies” are increasingly out of fashion among regulators, meaning they’re more likely to seek civil damages or fines.  And if big tech’s responses to Europe’s fines are any indication, fines levied here in the US will have little, if no impact.

All that is not to say the whole affair will be a walk in the park.  To the contrary, responding to years-long investigations from multiple agencies will prove to be a big distraction, and one only needs to look at the depressed stock prices of companies under investigation to see how the markets feel about all the uncertainty.

LA’s Social Equity Program: Transforming Past Wrongs for a Just Future

By: Steve Masur

It is no secret that minority communities have been adversely affected by the War on Drugs.  Though the need for prison reform has recently come to the political forefront, it has not solved the current problems of the newly released.  Higher instances of imprisonment among marginalized groups have led to disenfranchisement as well as general exclusion from the workforce.  As a result of being targets for years, many people who were once convicted for drug charges, specifically cannabis charges, have been excluded by the legal cannabis industry today. Although states have been legalizing recreational cannabis at a rapid rate, the growing cannabis industry’s blind spot to underserved communities is finally being addressed. 

A year after the legalization of recreational cannabis use in California, the city of Los Angeles is looking to balance the scales in terms of business ownership.  The City of Los Angeles Department of Cannabis Regulation (DCR) has adopted a Social Equity Program that offers business support to individuals who have been disproportionately impacted by the previous criminalization of cannabis activities. The program not only offers business support but also expedited cannabis license application and renewal processing. Implemented earlier this year, the program’s benefits and tiered system are based on the findings of the Social Equity Analysis.  This research study aimed to locate the communities negatively affected by cannabis laws as well as disproportionately targeted by law enforcement. 

Using this research, the Social Equity Program created three tiers of program eligibility. The tiers are broken down by ownership of a business as well as economic factors. The first tier requires that an applicant must be low-income and either a) have a cannabis arrest in California prior to 2016 or b) have been a resident in a “Disproportionately Impacted Area.”  The Disproportionately Impacted Area refers to a set of zip codes that the Social Equity Analysis identified as being unfairly targeted by law enforcement.  Tier two requires the applicant to be low income and have lived in one of the above-mentioned areas for 5-10 years.  Tier three is interesting because it does not necessarily apply to marginalized groups.  Instead, tier three states that the applicant must provide business licensing and compliance support to the tier one and two applicants.  This third tier seeks to support the workforce and provide job placement for those who do not own or do not wish to own their own cannabis business.

In all, the program offers valuable business support from the city to a broad group of applicants.  The expedited process, training and workforce support through the program cannot be understated, especially in a fluctuating industry like cannabis.  However, the program alone will not solve every problem in the industry. Even with these incentives from the DCR, the marijuana black market is thriving.  Counterfeits and knockoffs are not only dangerous but also threatening legitimate businesses, businesses that may be starting through the Social Equity Program.  While some issues may be more suited for the state, the program has not been without criticism. Back in March, a scandal broke when it was revealed that about $10 million that was supposed to go to the Social Equity Program in Los Angeles was allegedly instead given to the LAPD sworn overtime.  Although funding for the program still seems to be in flux, the goal has not changed. This same goal is also being implemented in other states where cannabis has been legalized in some capacity.  Diversity in this growing industry is vital and so, social equity programs like the one in L.A. have the responsibility to facilitate inclusion and right the wrongs of the past.

What the FUCT: Can the USPTO Still Deny Your Vulgar or Offensive Mark?

By: Steve Masur and Cameron Ashby

The Supreme Court recently struck down a federal law that banned trademarking words and logos that are “immoral” or “scandalous”. The court reasoned that this federal requirement for registering marks was a form of viewpoint discrimination against vulgar or offensive marks and thus unconstitutional. As a result, Justice Sotomayor foresees a “coming rush” of trademark applications for vulgar or offensive marks, but that does not mean the U.S. Patent and Trademark Office (USPTO) is powerless to deny these applications on other grounds. Before deciding to register a vulgar or offensive mark for your business, it is important to consider whether the mark is registrable. In other words, the mark must satisfy the function of a trademark and be used lawfully in interstate commerce. 

How to make sure your vulgar or offensive mark is a functional trademark

The recent decision in Iancu v. Brunetti  has delivered a big win to shock-value brands and extended federal protection to a whole new class of trademarks. Under this new precedent, the USPTO cannot reject an application for a vulgar or offensive mark on the grounds that it is “immoral” or “scandalous”.  Although, as multiple Justices in the Brunetti dissent pointed out, this “win” may be short-lived due to new Congressional legislation which could achieve the “immoral” or “scandalous” standard through more precise language.  

In the meantime, when attempting to register a vulgar or offensive trademark, you should consider whether the mark truly functions as a trademark or violates any of the other principles of federal trademark law. The USPTO can reject the application if the mark is simply a random vulgar phrase or word printed on a shirt, merely descriptive, or deceptively misdescriptive.  

It is important to note when the application is based on “use in commerce” or “intent to use” a specimen must be included. The USPTO, therefore, looks closely at specimens of use attached to the application and can reject it if the specimen seems not to be genuine but prepared simply to support the filing of an application. Additionally, it is required that the mark be shown on the specimen attached and also, shown to be used with the goods or services listed in the application. The USPTO offers a list of requirements in order for a specimen to be accepted, therefore it is imperative that those seeking trademarks consult with a private trademark attorney. The USPTO will not protect a mark that is used in the illegal stream of commerce; for example, cannabis. 

How does this affect the industry?

While vulgar and offensive marks are now allowed to be federally registered, not all consumers will be comfortable with shock value branding. If your business does not work in a space where vulgar and offensive marks are considered to be valuable and more “shock” centered, it may be unwise to try and register a vulgar or offensive mark. Simply put, if your business is in the market where vulgar or offensive marks will grow your image, then, by all means, explore as many options as possible. At the end of the day, the market will decide what value vulgar or offensive marks have after Brunetti and consumers will control that value through their patronage.

The CBD’s of Trademarks

By: Jon Avidor and Joshua Weisenfeld

Recent cannabis legalization in 11 states has pushed congress to more formally address the issue of federal regulation and decriminalization. On December 20, 2018, Congress continued this process and moved forward with partial decriminalization of certain types of cannabis and its derivatives by signing the Agriculture Improvement Act of 2018 (“2018 Farm Bill”) into law. The 2018 Farm Bill reclassified cannabis plants, products, and derivatives containing no more than 0.3% THC as “hemp”, and subsequently removed hemp from the list of controlled substances. Passing this bill alleviated some difficulty when protecting cannabis, CBD, and hemp brands. Often when protecting a brand, companies will register their brand as a federal trademark, which was previously unavailable for hemp and CBD products. However, with the removal of hemp from the controlled substance schedule, the United States Patent and Trademark Office (“USPTO”) could no longer deny trademark registrations on hemp products based on their conflict with federal law, therefore legalizing the registration of hemp trademarks. 

There are various ways to protect trademarks, using both state and federal law. Typically, a company will first attempt to register its mark through the USPTO as a federal trademark, as a federal trademark is enforceable throughout the United States. However, if a federal trademark is unavailable, a company may seek to register their mark within their state of operation, incorporation, or use. A state trademark, however, is only enforceable against infringers within the state of the trademark’s registration; substantially limiting the mark’s protection. 

State registrations have historically been the only option for trademark protection in the hemp and cannabis industries because state trademark offices rely on state law rather than federal law. Subsequently, states that have legalized cannabis tend to have more comprehensive trademark laws that allow for registration of cannabis trademarks.

In practice, the federal trademark registration process requires an applicant to identify the trademark’s use within interstate or international commerce. This is because federal registration is only available for goods or services that are in interstate or international commerce. Meaning if someone were to apply for a federal cannabis trademark, they would have to sign a sworn oath that they are using the mark for goods in interstate commerce, essentially confessing to a violation of federal law. Moreover, the USPTO refuses to register a trademark for any goods or services that violate federal law. So even if someone was willing to admit to the interstate sale of cannabis, the USPTO would refuse to register the mark because cannabis itself violates federal law. Some applicants have attempted to circumvent this rule by showing legal uses of the mark in interstate commerce, but the USPTO has consistently rejected these claims. 

This rigid system, as it relates to hemp, recently changed as a result of the 2018 Farm Bill. The reclassification of certain cannabis plants as legal hemp opened the door for hemp companies to apply for federal trademark registrations, since industrial hemp cultivation, manufacture, and distribution are no longer in violation of federal law. This also means that legal hemp can be placed in interstate commerce, so hemp companies can sign sworn oaths stating that their products, which bear the mark, will be legally sold through interstate commerce. More importantly, this admission would no longer be a confession of a federal crime. 

In May, the USPTO confirmed this approach when it updated its examination guidelines for legal hemp. The examination guidelines offer federal trademark examiners an in-depth review of the USPTO’s practice prior to the 2018 Farm Bill, along with current approval provisions for registering a cannabis trademark in compliance with federal law. The new guidelines no longer permit trademark examiners to reject cannabis trademark applications based on a violation of federal law and lack of lawful use in interstate commerce. The new guidelines will allow for hemp companies to register trademarks on hemp plants, products, and derivatives in the same manner as any other legal mark. USPTO has started to see an influx of CBD-related trademark applications. However, while it typically takes three months for a trademark application to be reviewed by the USPTO, CBD-related trademark applications may take up to a year to be reviewed.

The USPTO doubled down on their previous restrictions for registering cannabis trademarks for products containing more than 0.3% THC, as the 2018 Farm Bill did not change the legality of this variety of cannabis. Meaning cannabis companies will still be forced to register their cannabis trademarks with the state, while hemp companies may begin to avail themselves of the benefits of federal trademark protection.

Comprehensive Drug Abuse Prevention and Control Act & Cannabis

By: Rob Griffitts and Kathryn Jones

The free-spirited attitude of the 1960s counterculture, in part, fueled the crackdown of illicit substances by the following decade’s legislature. The Nixon Administration officially began its “War on Drugs” with the passing of the Comprehensive Drug Abuse Prevention and Control Act of 1970.  While the act was seen by many as a means to stop the flourishing anti-establishment youth culture by outlawing marijuana, this legislation governs much more.  The focus of the act is much broader than regulating marijuana and in fact sought to deal with drug use from a medical perspective, rather than a law enforcement one.  With Titles II and III being added over the following years including the oft-debated Controlled Substances Act (“CSA”) and countless government-sponsored anti-drug campaigns, the Comprehensive Drug Abuse Prevention and Control Act changed America’s attitudes toward not only illicit substances but also legally manufactured drugs.  With cannabis’ legal status within the CSA currently hanging in the balance, it is helpful to understand how this law came to be enacted.

During the 1960s it became clear to the country that drugs, both illicit and legal, were being abused.  With the establishment of the Presidential Commission on Narcotic and Drug Abuse in 1963, work began on an all-encompassing way to tackle drug abuse and consolidate over 50 pieces of drug-related legislation.  The Federal Comprehensive Drug Abuse Prevention and Control Act of 1970 was born with the goal in mind to come at the country’s drug problem from all sides.  Title I focused on rehabilitation, Title II deals with the scheduling and distribution of domestic illicit substances and Title III addresses the import and export of these substances.  The most divisive of the three titles is Title II. 

Title II of the Federal Comprehensive Drug Abuse Prevention and Control Act of 1970, more commonly referred to as the CSA, became effective on May 1, 1971. The purpose of the CSA is to regulate and facilitate the manufacture, distribution, and use of controlled substances for legitimate purposes, and to prevent these substances from being diverted for illegal purposes.  The CSA places various plants, drugs, and chemicals into one of five schedules based on the substance’s medical use, potential for abuse, and safety or dependence liability.  These Schedules mimic those created by the Single Convention on Narcotic Drugs (Single Convention), an international treaty created shortly before the CSA. The CSA also provides a mechanism for substances to be controlled (added to or transferred between schedules) or decontrolled (removed from control).  Importantly, the CSA is the guiding document giving authority to the Drug Enforcement Administration (“DEA”).

In 1973, President Nixon sought to create the DEA in order to combat drug abuse both at home and abroad.  Like with the CSA, the goal was to consolidate the work that was previously being done by several competing agencies, making the DEA the ultimate “superagency” to enforce drug laws. Every pharmacist, manufacturer and drug company must first register with the DEA in order to legally produce and distribute drugs.  The creation of the DEA brought back the law enforcement element of the “War on Drugs”.  The focus once again shifted from a medical approach to a criminal justice one. The mission statement of the DEA even states first that its mission is to “bring to the criminal and civil justice system of the United States… those organizations… involved in the growing, manufacture, or distribution of controlled substances appearing in or destined for illicit traffic in the United States.”  The growing heroin problem in the 1980s saw a greater need for the DEA and eventually, Congress passed the Comprehensive Crime Control Act of 1984 which enhanced penalties for CSA violations, thus making the DEA even more important in drug control.

However, as time moved on and attitudes shifted once again about drug use prevention, certain aspects of the CSA are being scrutinized, particularly the scheduling of cannabis in Schedule I.  Currently, the Trump Administration is in the process of notice and comment on a proposed change that would re-schedule marijuana from the schedule containing drugs with the highest probability of misuse to a schedule in which cannabis could be researched, regulated and ultimately put in consumer products.  It is clear that from the creation of the CSA in the early 1970s that it is a document which is often amended to deal with the issues surrounding drug use. One of the most glaring issues today is the competing federal and state legal statuses of cannabis. In order to do its job effectively as the guiding legislation of drug production and distribution, the CSA may have to change again.

The Implications Behind New York’s Decriminalization of Marijuana

By: Steve Masur and Armando E. Martinez

On June 19, 2019, the New York State Legislature in Albany rejected a cannabis legalization bill, which had enjoyed wide-ranging popular support, leaving many to wonder why. New York is the second state in the tri-state area to reject the legalization of marijuana in the last few months, as New Jersey, its neighbor, narrowly rejected a legalization bill in March. When asked to comment on the results, lawmakers stated that the opposition in legalizing marijuana in New York mainly stemmed from uncertainty as to how to allocate tax revenue. The New York State Legislature, however, made advances towards legalization by passing a marijuana decriminalization bill.

Under New York’s marijuana decriminalization bill, possession of up two ounces of marijuana will now carry a fine between $50 and $200, with the specter of jail time significantly reduced. Further, the bill will establish a process to expunge the marijuana-related convictions for those who have been previously convicted of possession. In effect, the bill will not only limit the amount of marijuana-related convictions we see in the future, but it will also provide 600,000 ex-convicts with a thinner criminal record. This means that ex-convicts who were previously precluded from entering the workforce will now be able to enter it, which could drive economic and entrepreneurial growth in New York.

The legal distinction between decriminalization and legalization is thin, but it merits scrutiny. Decriminalization means that a fine is attached to the possession of marijuana in small amounts, yet jail time is not. Depending on the state, further, possession of a larger amount of marijuana, as well as sales or trafficking of the drug, could result in harsher sentences, such as jail time. By contrast, fines and jail time are completely eliminated under legalization, which may also allow sales. Decriminalization is a step towards legalization, and although this was the last legislative session for the first half of 2019, it most certainly will not be the last time lawmakers revisit this topic in Albany. This is because the economic, social, and political implications of legalizing marijuana could likely have a marked impact on the American macroeconomy.

In 2018, the legal cannabis industry generated approximately $10 billion in revenue. Cannabis-related financial services have surged due to many firms taking advantage of the legalized markets to create and scale cannabis supply chain operations. If cannabis were legalized in New York, jobs would be created on both wholesale and retail front, which would effectively allow the state to enjoy a higher tax revenue. The push for legalization probably failed due to questions about how to allocate this revenue.

When Illinois Gov. J.B. Pritzker signed Illinois’ legalization bill, he stated that legalization would provide opportunities to those in communities who have been direly in need of a second chance. By decriminalizing marijuana in New York, the legislature is close to fully afford the same benefit to its constituents, as this bill is focused on creating on opportunities, not limiting them.  However, decriminalization is still only a half measure. In addition to broadening the tax base, full legalization would provide New York with a new industry and a new basis for entrepreneurial growth, which could make it a leader in terms of growth, especially upstate, where it is needed most.