A fight brewing in Nevada highlights certain challenges trademark licensors face when relying on licensees to manufacture and distribute their products. The issue is particularly acute for brand owners in the cannabis industry, where relying on local operators with requisite government licenses for marijuana operations is often the only profitable way to tap those local markets.
Wana Brands’ licensing entity, The CIMA Group, LLC, has filed a lawsuit against its Nevada licensee, CWNevada, LLC, alleging that the company misappropriated Wana’s recipes for certain flavors of infused gummies, and used them to create a competing brand of gummies, in violation of their licensing agreement.*
Nonetheless, Wana’s complaint highlights some things that trademark and brand licensors do to put themselves in the best possible position, should the worst-case scenario arise.
If You Want Exclusivity, Negotiate Exclusivity
To Wana’s credit, they appear to have negotiated exclusivity:
Licensee will not at any time develop or sell, without Licensor’s prior written consent, any recipe or product that is similar to or directly competitive with, the Licensed Recipes and the Licensed Products. . . .
It seems that Wana negotiated exclusivity with CWNevada, and now CWNevada is in the difficult position of explaining why it’s sales rep, Matthew Bliven, apparently registered the domain for Scarlet Oilworks.
Prohibit “Irregulars” by Contract
One of the things that Wana accuses CWNevada of doing is selling an inflated number of “irregulars” - defective gummies that do not conform to Wana’s standards, thereby damaging the Wana brand.
It looks like this was not dealt with directly in the licensing agreement, or was addressed only with the usual agreement, that the licensee would distribute only products that were manufactured to Wana’s standards.
While “lean” contracts are always preferable to “flabby” contracts, adding a provision prohibiting any sale of “irregulars” is probably worthwhile.
When the Bleeding Starts, Stop It Early
The licensor-licensee relationship is meant to be a long-term affair. This particular agreement was a five year deal, and it started in June 2016. According to the lawsuit, CW stopped paying “license fees” to Wana as of August 2017.
More than a year has elapsed since CW stopped paying the licensing fees, if Wana’s allegations are true.
It’s crucial for licensors to maintain strong credit management with licensees. With enough licensees, these issues are bound to recur. Some licensees will not survive, leaving licensors to fight for their rights as creditors in bankruptcy court.
This does not necessarily mean filing a lawsuit the day after the first payment is missed, but it does mean having an understanding of the cost-benefit analysis of filing suit, and being ready and willing to file suit when the time is right.
Keep the Implied Covenant of Good Faith and Fair Dealing in Mind
While the details vary from state to state, the law generally recognized the “implied covenant of good faith and fair dealing” in contracts. This is one that courts are reluctant to apply in the context of contracts - the parties have the ability to explicitly address a wide range of conduct before entering into the agreement, the judicial reasoning goes, and courts should not interfere - but they will when the circumstances are right.
One of the first things courts consider is whether a “special” relationship exists, with the quintessential relationship being that between insured and insurer. Other “special” relationships exist, however, and the licensor-licensee relationship almost certainly qualifies for the protection.
For licensors whose licensees are not living up to expectations - frustrating the purpose of the licensing agreement, failing to move product, failing to use commercially reasonable efforts - this particular implied covenant can be a devastating hammer to swing, particularly when the licensor-licensee relationship turns from bad to ugly.
The complaint filed by The CIMA Group, LLC against CWNevada LLC is here.
*The CIMA Group, LLC is the party to the lawsuit; for ease of reading, the company is referred to here as Wana.