Washington Bill Proposes to Cap Royalty Fees in Intellectual Property Contracts to 10%

The Washington Legislature introduced bill HB 1794 to expand the ability of cannabis businesses to enter into intellectual property arrangements. Washington state enacted a law in 2017 that directed the Liquor and Cannabis Board (LCB) to adopt regulations that permit cannabis licensees to execute licensing agreements and consulting contracts with other persons and businesses. HB 1794 provides clarity around the law’s original intention by expanding the intellectual property that may be licensed, and restricting the LCB’s oversight of these types of relationships.

At a hearing on February 7, industry representatives indicated that the LCB initially delayed the drafting of rules, and that the rules proposed as of January 25, 2019 are inadequate. Under the proposed rules, cannabis businesses may not enter into an exclusivity agreement, charge a royalty fee (i.e., only fixed or hourly rates allowed), or enforce quality control standards.

The LCB faces the challenge of maintaining oversight of an industry without allowing unlicensed entities to control and direct cannabis businesses through licensing arrangements. The sharing of revenues under a licensing agreement could allow drug cartels or other prohibited entities to receive money from legal cannabis businesses, which is prohibited under the Cole memo. HB 1794 addresses this concern by capping royalty fees to 10%, which is the threshold for control used in HB 1236, a bill to expand access to capital for the cannabis industry. By capping royalty fees, the bill prevents an entity from exerting control over or directing a cannabis business .

Washington’s proposed capping of royalty fee caps is a slippery slope and should be avoided. The government should stay out commercial arrangements or acting as a merit regulator. Instead, the LCB should focus on preventing illegal activity. Washington’s current law prevents non-licensed entities from engaging in regulated cannabis activities through prohibited activities or investment. Washington’s enforcement division should uphold this law by bringing actions against firms using sham licensing agreements to avoid disclosing investments or engaging in unlicensed cannabis activities.

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