HEADSPACE INTERNATIONAL LLC, а limited liability company formed in the State of California, Appellant, v. PODWORKS CORP., a corporation in the State of Washington; and THOMAS WERTH, an individual residing in the State of Washington, Respondent.
No. 77016-1-I
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE
October 29, 2018
PUBLISHED OPINION
DWYER, J.
FILED: October 29, 2018
I
On January 26, 2017, Headspace filed suit against Podworks alleging trademark infringement, unfair competition, unfair business practices, and violation of the Washington Consumer Protection Act,
[Headspace], is and has been for many years, a well-known seller and licensor of concentrated and refined essential plant oils including cannabis concentrates, vapor related products, educational and other services sold under the trademark THE CLEAR. [Headspace] developed a notoriety in the cannabis industry because their in-house chemist and engineer developed a proprietary chemical process to create highly refined essential plant oils including cannabis concentrates. [Headspace] has, since April 10th 2013, adopted and used the mark THE CLEAR for its products in California and for its services including licensing the mark THE CLEAR in Washington State. . . .
. . . Since the initial use of THE CLEAR, [Headspace] has сontinually used the mark for its products and services. [Headspace]‘s Washington State trademark registration was granted by the Washington State Secretary of State on December 15th, 2014, file number 57531, in class 34 — cannabis concentrates.
. . . .
. . . In 2014 [Headspace] entered into an agreement to license their proprietary chemical process and THE CLEAR mark to X-Tracted Laboratories 502 Inc., a Washington State business that is licensed with [the] Washington Liquor and Cannabis Board. X-Tracted Laboratories 502 Inc. sells and distributes various marijuana related products, including cannabis concentrates, in Wаshington State. X-Tracted Laboratories 502 Inc. licensed [Headspace]‘s
THE CLEAR mark to use on cannabis concentrates and related products sold and/or used in commerce in Washington State. X-Tracted Laboratories 502 Inc. continues to license [Headspace]‘s proprietary chemical process and use [Headspace]‘s THE CLEAR mark in commerce in Washington State according with its Washington Liquor and Cannabis Board license.
Headspace further alleged that Podworks had used and continues to use the mark “THE CLEAR,” or “CLEAR,” for the sale of cannabis concentrates in Washington. Headspace also alleged that it sent Podworks a cease and desist letter, informing Podworks of its trademark for the mark “THE CLEAR,” and demanding that Podworks immediately terminate further use of the mark or confusingly similar marks. Podworks refused, and Headspace filed this lawsuit.
Podworks responded by filing a
Headspace appeals.
II
Headspace asserts that the trial court erred by dismissing its complaint for failure to state a claim. Specifically, Headspace contends that it alleged lawful use of its mark in the ordinary course of trade in Washington and, therefore, had trademark protection for its mark pursuant to Washington‘s trademark stаtute. We agree.
We review dismissals pursuant to
To determine whether Headspace obtained trademark protection for its mark pursuant to Washington law, we must interpret our state‘s trademark statute, codified at
One of the assumed benefits for states that have adopted the MSTB is that it is designed to enable state courts interpreting state trademark statutes to rely on federal court decisions interpreting federal trademark law, as set forth in the Lanham Act,
assumption by explicitly instructing Washington courts to construe the language of our trademark statute in accordance with federal decisions interpreting the Lanham Act.
Our Supreme Court has employed just such an approach. In Seattle Endeavors, Inc. v. Mastro, 123 Wn.2d 339, 345, 868 P.2d 120 (1994), the court explained that trademark infringement claims brought pursuant to Washington‘s trademark statute are evaluated consistently with prevailing federal standards, noting that the analysis employed by federal courts “operates tacitly in Washington trademark cases.” Thus, consistent with the direction provided by both the legislature and our Supreme Court, we turn to federal court interpretations of the Lanham Act to guide our interpretation of the requirements of our state trademark statute.
Both the Lanham Act and Washington‘s trademark statute require that a mark be used before it will receive trademark protection. See
be lawful, such a requirement is clearly implied. As the Ninth Circuit explained when interpreting the federal lawful use requirement:
[A]s a logical matter, to hold otherwise would be to put the government in the “anomalous position” of extending the benefits of trademark protection to a seller based upon actions the seller took in violation of that government‘s own laws. . . [and] as a policy matter, to give trademark priority to a seller who rushes to market without taking care to carefully comply with the relevant regulations would be to reward the hasty at the expense of the diligent.
CreAgri, 474 F.3d at 630. To avoid placing the government in such an “anomalous position,” we interpret Washington‘s statute to rеquire lawful placement of a mark in the ordinary course of trade.
Here, the allegations in Headspace‘s complaint, when treated as verities, are sufficient to satisfy its obligation to allege a set of facts that could justify recovery. The allegations of the complaint, as well as hypothetical facts consistent with the complaint, set forth the following: (1) that Headspace used its mark “THE CLEAR” in Washington when it licensed the mark to X-Tracted Laboratories 502 Inc. (X-Tracted) and that X-Tracted placed the mark on cannabis concentrates placed in the ordinary course of trade in Washington; and (2) that such use was lawful because such a licensing agreement was and is not prohibited by Washington‘s Uniform Controlled Substances Act, codified at
A
Headspace asserts that it alleged use of its mark in the ordinary course of trade in Washington when it alleged X-Tracted‘s use of the mark on cannabis products X-Tracted produced and sold in Washington. In response, Podworks avers that such indirect placement of the mark in the ordinary course of trаde in Washington does not satisfy the requirements of the statute. We disagree. It does not matter if the use of the mark is direct or indirect. Either can be sufficient to satisfy the requirements of the statute.
While the language of
Similarly, federal courts have opined that the licensing of trademarked marks is permissible under the Lanham Act when the trademark owner has
sufficient control over the quality of goods or services produced by the licensee. Although federal courts have not uniformly applied a single analytical approach to determining the extent of control over quality necessary for a mark‘s owner to retain trademark rights, they have generally focused on three factors when making such a determination: (1) contract language authorizing control over the licensee by the licensor,3 (2) whether the licensor exercised actual control over the licensee,4 or (3) whether the product quality ovеr time was sufficient for the licensor to rely on the licensee to ensure quality control.5 In a recent decision discussing this question, the Ninth Circuit analyzed all three factors when determining whether a licensor maintained sufficient control over the quality of goods or services produced by the licensee. See FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 516-19 (9th Cir. 2010) (finding no evidence to show contractual control, actual control, or control pursuant to sufficient grounds to trust in the quality control procedures of the licensee). Because federal courts have found sufficiеnt control over quality based on any of the three factors, we apply the Ninth Circuit‘s test evaluating all three factors to determine whether any factor supports an assertion that the licensor possesses sufficient control over quality.
Here, Headspace‘s complaint did not specifically allege that it retained control over X-Tracted‘s production of cannabis concentrates. Instead, in its briefing, Headspace proffered hypothetical facts consistent with the allegations in its complaint that could support a claim that it had sufficient сontrol over X-Tracted‘s production of cannabis concentrates to maintain trademark rights. Specifically, Headspace proffered, both in the trial court and in its briefing on appeal, that its license agreement with X-Tracted included terms that provided Headspace sufficient quality assurances. Furthermore, it is not inconsistent with the allegations of the complaint to hypothesize that Headspace could have relied on the quality control measures utilized by X-Tracted. Because either the hypothetical quality control terms in the license agreement or Headspace‘s hypothetical reliance on X-Tracted‘s quality control measures would satisfy the applicable test for quality control, we hold that Headspace has made the necessary showing that it alleged use of its mark “THE CLEAR” in the ordinary course of trade in Washington.
B
Podworks next contends that even if Headspace exercised sufficient control over the quality of the goods produced and sold by X-Tracted, such control necessarily constituted a violation of the CSA and, therefore, cannot satisfy the requirement of lawful placement of the mark in the ordinary course of trade. We disagree.
i
Podworks first asserts that Headspace‘s licensing agreement with X-Tracted
In 2012, Washington voters approved Initiative Measure 502, LAWS OF 2013, ch. 3, codified as part of
Here, Headspace is an out-of-state company that is not permitted to obtain a license to produce, process, or sell marijuana products in Washington. However, Headspace‘s alleged licensing agreement with X-Tracted does not necessarily require that Headspace participate in X-Tracted‘s processing of
marijuana products. While Podworks asserts that the only way that Headspace could have sufficiently controlled the quality of X-Tracted‘s products was to be directly involved in the processing of X-Tracted‘s marijuana products, this is not so. Headspace could have ensured the necessary quality through contractual means or by relying on X-Tracted‘s quality control measures. Headspace‘s alleged licensing agreement arranged for Headspace to provide X-Tracted with the formula or recipe for processing cannabis concentrates and the right to place Headspace‘s mark on those concentrates X-Tracted processed using said formula or recipe. The agreement as alleged did not require Headspace to actually participate in the processing or sale of those products. Because no provision of the CSA prohibited Headspace from reaching such an agreement with X-Tracted, Podworks’ contention that the agreement necessarily violated the CSA fails.
ii
Podworks next asserts that a recently added provision of the CSA stating that trademark and proprietary information licensing agreements are lawful, enacted in 2017 as part of Engrossed Substitute Senate Bill (ESSB) 51316 and codified at
cannabis was lawful, the licensing agreement did not make Headspace an accomplice to any wrongdoing. This leaves Podworks with only the argument that an implied prohibition existed prior to ESSB 5131‘s enactment. We next analyze this claim.
When construing a law adopted by initiative, “[t]he collective intent of the people becomes the object of the court‘s search for ‘legislative intent.‘” Dep‘t of Revenue v. Hoppe, 82 Wn.2d 549, 552, 512 P.2d 1094 (1973). “If a statute is ambiguous, we may look to the statute‘s subsequent history to clarify the original legislative intent.” Jane Roe v. TeleTech Customer Care Mgmt. (Colorado) LLC, 171 Wn.2d 736, 751, 257 P.3d 586 (2011).7 Upon the adoption
One of the stated purposes of I-502 was to take “marijuana out of the hands of illegal drug organizations and bring[] it under a tightly regulated, state-licensed system similar to that for controlling hard alcohol.” LAWS OF 2013, ch. 3, § 1(3). To achieve this purpose, I-502 requires that the WSLCB strictly monitor and regulate Washington‘s cannabis industry. See
In 2017, our legislature passed ESSB 5131, which added a provision to the CSA entitled “Licensed marijuana businesses may enter into certain licensing agreements or consulting contracts—Disclosure to state liquor and cannabis board.” This provision states:
(1) A licensed marijuana business may enter into a licensing agreement, or consulting contrаct, with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation, for:
(a) Any goods or services that are registered as a trademark under federal law or under chapter 19.77 RCW;
or
(b) Any unregistered trademark, trade name, or trade dress;
(c) Any trade secret, technology, or proprietary information used to manufacture a cannabis product or used to provide a service related to a marijuana business.
(2) All agreements or contracts entered into by a licensed marijuana business, as authorized under this section, must be disclosed to the state liquor аnd cannabis board.
During Senate committee hearings on the bill, Senator Ann Rivers, the bill‘s sponsor, explained that the bill “is just a clean-up bill.” Hr‘g on S.B. 5131
Before the S. Commerce, Labor and Sports Comm., 65th Leg., Reg. Sess., at 59 min., 17 sec. (Jan. 19, 2017) (statement of Senator Ann Rivers, sponsor of SB 5131), video recording by TVW, Washington State‘s Public Affairs Network, https://www.tvw.org/watch/?eventID=2017011226. Similarly, before the House Committee on Commerce and Gaming, Senator Rivers explained that “what we are trying to do with this is continue the regulation of our big experiment [with the marijuana industry].” Hr‘g on S.B. 5131 Before the H. Commerce and Gaming Comm., 65th Leg., Reg. Sess., at 24 min., 41 sec. (Mar. 20, 2017) (statement оf Senator Ann Rivers, sponsor of SB 5131), video recording by TVW, Washington State‘s Public Affairs Network, https://www.tvw.org/watch/?eventID=2017031214. The legislative history of the bill is devoid of any indication that members of the legislature were of the view that, at the time, trademark and proprietary information licensing agreements were illegal or that the bill was designed to authorize their lawful existence.
The intent of the voters who approved I-502 was clear: to legalize the business of producing, processing, and selling marijuana pursuant to a strict regulatory framework. However, the WSLCB did not view I-502 as authorizing or requiring it to monitor all licensing аgreements entered into by licensed
experiment with legal marijuana, the legislature passed a “clean-up bill” that, in part, clarified for the WSLCB its obligation to monitor licensing аgreements entered into by licensed marijuana businesses. ESSB 5131‘s legislative history is devoid of any indication that the legislature sought to make legal any licensing agreements that had been previously illegal. Instead, its purpose was to better regulate that which I-502 had previously legalized.
iii
Podworks next asserts that if Headspace actually possessed the amount of control over the quality of X-Tracted‘s cannabis products necessary to protect its trademark rights, such control would have necessarily made Headspace a “true party of interest” of X-Tracted. Podworks also avers that this would have required disclosure of the agreement (and Headspace‘s status as a “true party of interest“) to the WSLCB. Furthermore, Podworks reasons, because Headspace did not allege that X-Tracted had ever reported that Headspace was a “true party of interest” to the WSLCB, the alleged use of Headspace‘s mark by X-Tracted could not have been lawful. We disagree. Podworks’ argument is unavailing because Headspace could have possessed the required control over quality to maintain its trademark rights without becoming a “true рarty of interest.”
The definition of a “true party of interest” is set forth in
entity or person expecting a percentage of the profits from a marijuana licensed business in exchange for a monetary loan or expertise is also a “true party of interest.”
Podworks’ assertion that Headspace, to protect its trademark, must have exercised sufficient control over X-Tracted so as to become a “true party of interest” misapprehends the meaning of “true party of interest“. That Headspace might have sufficient control over X-Tracted‘s production of cannabis concentrates to protect its trademark rights does not establish that Headspace thereby became either a corporate officer or a stockholder of X-Tracted (nor a spouse of corporate officers or stockholders). Similarly, it does not necessitate that Headspace receives a percentage of X-Tracted‘s profits.9 Hence,
Headspace can have the necessary control over quality of X-Tracted‘s cannabis
Furthermore, even if Podworks had asserted that Headspace was required to submit to an investigation by the WSLCB as an entity that controlled X-Tracted‘s business operations, such an assertion is not supported by the language of the regulation. The regulation stated that the WSLCB would conduct investigations of persons or entities that exercised control over business operations.
Additionally, the recent enactment of
WSLCB, explicitly mandating that it require disclosure of licensing agreements in the future.10
If, indeed, X-Tracted failed to disclose its licensing agreement with Headspace to the WSLCB, such failure was not unlawful because the WSLCB did not previously require the disclosure of such agreements. Following the enactment of
Reversed and remanded.
Dwyer, J.
We concur:
Andrus, J.
Appelwick, CJ