The United States is viewed as the land of opportunity, prosperity, and innovation. Americans take pride in the country’s historically progressive policies and contributions to advancements in medicine, technology, and science. However, when it comes to cannabis, the U.S. federal government is lagging behind the international marketplace.
Over the past decade, individual states have made great progress in creating momentum for legalization of cannabis in America. Currently, 29 states and the District of Columbia allow access to medical cannabis, and more will follow suit. Yet, for the next four years (at least), the outlook on federal legalization is extremely bleak, especially given the key players in the Trump administration, specifically, Attorney General Jeff Sessions. On multiple occasions, Sessions has consistently re-affirmed he is not in favor of legalizing cannabis and has stated that he does not want the Department of Justice (DOJ) restricted from enforcing the Controlled Substances Act. But the administration has not explicitly overturned the Cole Memo . . . at least for now.
Bottom line—despite best efforts, federal legalization in America is not likely coming anytime soon.
The inability to transport cannabis across state lines and national borders stifles the development of national cannabis brands, and also puts American cannabis businesses at a significant disadvantage internationally. International medical cannabis trade has already begun, and is expected to expand rapidly.
In 2017, Germany, Greece, and Poland joined Austria, Britain, Croatia, the Czech Republic, Denmark, Finland, France, Ireland, Italy, Macedonia, the Netherlands, Portugal, Romania, Slovenia, Spain, and Sweden on the list of European countries to have legalized medical cannabis in some form. Additionally, the Prime Minister of Luxembourg has announced plans to legalize medical cannabis for select medical conditions.
Medical marijuana is also gaining traction in Latin America, with Peru most recently joining Uruguay, Argentina, Chile, Colombia, Puerto Rico, Mexico, and Brazil in allowing access to medical cannabis.
Significantly, Canada is on track to legalize cannabis for adult use in 2018 and is positioning itself to become a world leader in the medical cannabis trade.
Global Marketplace & Intellectual Property Licensing
Global markets represent important expansion opportunities for cannabis businesses, and federally licensed cannabis companies in Canada, Netherlands, Israel, and Uruguay are taking full advantage.
Canadian cannabis producers such as Peace Naturals, Tilray, Tweed, and Canopy Growth have arrangements for the export of medical cannabis with countries such as Croatia, Germany, Australia, New Zealand, and Brazil. Additionally, Tilray is partnering with the Chilean company Aleph Biotechnology SpA to distribute Tilray medical cannabis products in that country. Canadian investment firm LGC Capital has also partnered with AfriAg, one of the largest agricultural produce growers in southern Africa, to cultivate and distribute medical and recreational cannabis throughout the southern region of Africa. Based in the Netherlands, Bedrocan exports its products to Canada, Australia, Finland, Germany, Croatia, and Italy. Israel’s largest grower Tikun Olam created partnerships in the U.S. and Canada, and plans to export products to Europe and South America. And, Uruguay plans to invest $10 million in cannabis oil production through 2018 to export product to countries such as Canada and Mexico.
Without federal approval, U.S. businesses looking to expand internationally should consider licensing their intellectual property to expand internationally without running afoul federal transport laws. An intellectual property licensing agreement creates an arrangement between an intellectual property rights owner (the “licensor”) and a third party who is authorized to use those rights (the “licensee”) in exchange for some form of consideration—typically a flat monetary fee and/or royalty payments. In practice, the business arrangement plays out as follows:
- Licensor identifies a company with a permit or license from the applicable regulatory authority and has the capacity to grow, process, and/or distribute cannabis products.
- After thorough due diligence, licensor enters into a contractual agreement—an intellectual property license—with the licensee where licensor provides patents, trademarks, trade secrets, and/or copyrights owned by a licensor, and licensee is authorized to cultivate, extract, manufacture, and/or distribute products labeled with licensor’s brand or incorporating licensor’s technology.
American cannabis businesses can and should evaluate whether to form a strategic partnership with a licensed producer in Canada for purposes of entering the global cannabis marketplace.
Import/export deals are complex arrangements requiring the importing nation’s government to issue a permit allowing the import of cannabis goods in accordance with the regulatory structure of its medical laws. The exporting company must get approval from its respective national health department and export authority and these agreements are tightly regulated. The exporting country must have a robust regulatory regime that can adequately assess any risks the transaction may present to public safety and security.
Under the Single Convention on Narcotic Drugs of 1961—an international treaty to prohibit production and supply of certain narcotics except through license for medical and scientific research purposes—cannabis is an internationally controlled substance, and its production is controlled, in part, by the International Narcotics Control Board (INCB). Each month the INCB issues estimates of each country’s yearly narcotic drug requirements, allowing countries to determine the maximum quantity of particular drugs it can import or manufacture. Therefore, a particular country’s cannabis import quantities are (to the extent possible) dictated by its estimated amount of cannabis needed for a given year.
According to the October INCB report, Germany has an estimated need for approximately 23,700 lbs of cannabis for 2017, which means the country should only be manufacturing and/or importing that amount of cannabis for the year. To compare, Canada and the United States estimate a need for approximately 150,500 lbs and 75,000 lbs, respectively.
Newly legalized countries such as Germany and Argentina initially plan to rely on imports of extracts to satisfy the immediate demand for medicinal cannabis while the government formulates its own domestic cultivation program. Inevitably, most countries will satisfy internal demand with domestic production, but in these nascent stages, exporting to countries without domestic cultivation programs can position a brand well from the outset.
First Mover Advantage – Brand Recognition
Establishing brand name recognition is an important first mover advantage that typically results in heightened customer loyalty. Typically, it is easier for early market entrants to leave lasting impressions on consumers due to the relative lack of competition; many consumers will be less likely to switch brands when new competitors enter the market. Later market entrants have a greater challenge in convincing consumers to convert, and typically must offer products that are significantly better than what is currently available, or compete on price, which can result in a spiral of declining profitability.
Building, maintaining, and protecting a strong brand reputation through licensing allows cannabis businesses to initiate strategic relationships to establish an international presence.
U.S. businesses face many challenges in entering the international cannabis market, but it is not impossible. Although cannabis cannot be transported across borders, a strong brand or other intellectual property, such as an extraction technology, is a valuable asset that can be leveraged in markets outside of the U.S. But, before embarking on a licensing venture, it is critical to ensure that you own the intellectual property rights in the new jurisdiction.
Through creativity and overcoming a lot of red tape, U.S. cannabis businesses can, and should, participate in this new global cannabis marketplace.