Trademark Protection and the Lawful Use Requirement

by James Kachmar
The IP Law Blog

Trademark law was developed to help protect a seller’s “brand” in connection with the marketing and labeling of products for sale to avoid “consumer confusion.” One rarely litigated aspect of trademark law is that the use of the trademark must be for a lawful purpose. The Ninth Circuit recently tackled this issue in AK Futures LLC v. Boyd Street Distro, LLC (decided May 19, 2022), a case that involved e-cigarette and vaping products derived from cannabis.

AK Futures produces and distributes e-cigarette and vaping products, including a brand of delta-8 THC products known by Cake. Delta-8 THC occurs naturally in cannabis and has “psychoactive and intoxicating effects” similar to delta-9 THC, which is the main psychoactive component of marijuana. However, the FDA notes that delta-8 THC does not appear “in significant amounts in cannabis plants so it is often manufactured from hemp-derived cannabidiol.”

In October 2020, AK Futures developed its Cake-brand products and registered its Cake logo. It also filed trademark applications for six marks relating to the Cake brand. AK Futures claims that its Cake-brand products generated approximately $60 million in revenue in less than a year. AK Futures claimed that it learned in 2021 that counterfeit versions of its Cake products were being sold in Los Angeles by Boyd Street, a smoke products wholesaler and store front. Boyd Street was not one of AK Futures’ authorized retailers of its Cake products. Boyd Street claimed that it had only carried Cake-branded products when an unidentified individual supposedly gave them Cake products to sell on consignment, and when another person claimed they were an authorized distributor of Cake products. AK Futures determined that the “Cake” products being sold by Boyd Street were counterfeits made to look like AK Futures Cake-branded products.

AK Futures sued Boyd Street for various unfair competition claims, including a trademark claim.  The district court granted a motion for preliminary injunction in AK Futures’ favor and enjoined Boyd Street from selling goods that bore imitations of AK Futures Cake-brand trademarks. Although Boyd Street did not oppose the motion for preliminary injunction initially, it appealed the district court’s decision to the Ninth Circuit. Boyd Street’s primary argument on appeal was that AK Futures should not be entitled to trademark protection because the use of its products containing delta-8 THC violated federal drug laws.

The first element that any plaintiff moving for an injunction is to establish that it has a likelihood of success on the merits of its claim warranting injunctive relief. The Ninth Circuit held that AK Futures would have to show that it is likely to succeed on its claim by establishing that it held a valid trademark. To establish infringement for unregistered marks such as AK Futures’, it would have to show ownership of “a valid protectable trademark,” in essence, that it was “the first to use the mark in commerce and [that] such use must be lawful.”

The Ninth Circuit recognized that neither party contested that AK Futures was the first to use the Cake-brand in commerce. The evidence submitted to the district court was undisputed that AK Futures first used its Cake brand products in commerce in October 2020, months before they showed up in Boyd Street’s store front. Thus, the main issue facing the Ninth Circuit was whether AK Futures’ use “was lawful.”

The Ninth Circuit noted “only lawful use in commerce can give rise to trademark priority.” It continued by recognizing the purpose of this rule was to avoid “the absurd result of the government `extending the benefits of trademark protection to a seller based upon actions the seller took in violation of that government’s own laws.’” This approach favors those sellers who took “the time to comply with government regulations before bringing products to market.”  (Although neither party addressed it, the Ninth Circuit noted that there was an exception to this rule where the alleged illegal activity was “of insufficient gravity or connection to a mark’s use,” in which a court may still recognize trademark protection.)

Boyd Street argued that the possession and sale of products containing delta-8 THC was illegal under federal law and therefore AK Futures could not receive trademark protection for its Cake-brands. On the other hand, AK Futures argued that delta-8 THC fell within the definition of hemp, which Congress had legalized in its 2018 Farm Act.

The Ninth Circuit addressed the issue of lawfulness by beginning with the text of the 2018 Farm Act.  In that statute, Congress removed hemp from the definition of marijuana in the Controlled Substances Act. Congress defined the term hemp to mean cannabis or any part of that plant, “including … all derivatives, extracts, cannabinoids, isomers, acids, salts and salts of isomers” that had “a delta-9 [THC] concentration of not more than 0.3% on a dry weight basis.”  7 U.S.C. ¶1639o(1). The Ninth Circuit noted that the DEA had incorporated this definition into its own regulations.

AK Futures argued that as long as its delta-8 THC products had a delta-9 THC concentration of no more than 0.3%, its products should be recognized as legal hemp despite the presence of delta-8 THC. The Ninth Circuit agreed with this interpretation, finding that the delta-9 THC concentration was the only limitation Congress had placed within the definition of hemp.

The Ninth Circuit also noted that the evidence submitted to the court below, mainly statements by AK Futures, seemed to show that AK Futures’ products met the statutory requirement and that their delta-9 THC concentrations were below 0.3%. Boyd Street did not offer any evidence to dispute this. (The Ninth Circuit noted, however, that in the course of the lawsuit, “AK Futures may ultimately fail to show that its products stay within acceptable delta-9 THC limitations,” at which time their trademark protection may be at risk.)

To counter the Ninth Circuit’s interpretation of the 2018 Farm Act, Boyd Street advanced two counterarguments: (1) the DEA’s interpretation of the Farm Act; and (2) congressional intent in enacting the Farm Act.  First, Boyd Street argued that the DEA interpreted delta-8 THC as remaining to be a Schedule 1 substance that was unlawful. Although the Ninth Circuit stated that it disagreed with this interpretation, it concluded that it need not reach this issue “because section 1639o [added by the 2018 Farm Act] is unambiguous and precludes a distinction based on manufacturing method.” In short, the Ninth Circuit held that “clear statutory text overrides a contrary agency interpretation.”

Next, Boyd Street argued that Congress only intended its 2018 Farm Act to legalize industrial hemp and not a potentially psychoactive substance like delta-8 THC. In support of this argument, Boyd Street cited statements in the legislative history of the Farm Act referring to industrial hemp. The Ninth Circuit rejected this argument finding that this “industrial hemp” limitation appeared neither in the definition set forth in the 2018 Farm Act nor in the exemption from the Controlled Substances Act. While “industrial hemp” appears in a separate section of the Farm Act modifying research into cannabis, the Ninth Circuit held that it would not allow “ambiguous legislative history nor speculation about congressional intent to `muddy’ clear statutory language.” The Ninth Circuit announced that if Congress disagreed with its finding about delta-8 THC, it could always amend the 2018 Farm Act to make its “intent” clearer.

Given that the Ninth Circuit found that the 2018 Farm Act had made delta-8 THC products such as AK Future’s lawful, AK Futures was entitled to trademark protection and thus, the district court did not error in granting it injunctive relief. It remains to be seen whether additional litigation relating to the IP of cannabis-related products may revisit the issue of lawful use with a different outcome as in the AK Futures case.