Alaska’s first retail marijuana store opened its doors in the fall of 2016. Since then, a few hundred Alaskan businesses have formed to support the industry, and the marijuana legalization movement is expanding nationwide. Currently, 11 states and the District of Columbia have legalized marijuana for general adult use, and a total of 33 states and D.C. have broad medical marijuana programs.
Despite these state-level changes, federal law continues to prohibit the use, possession, or sale of marijuana—a jurisdictional conflict that remains problematic for marijuana businesses. Businesses face challenges along a spectrum of minor inconveniences, such as being unable to alter a facility’s physical layout without regulatory approval, to major frustrations like unfavorable federal tax rules. Some of these challenges are downright dangerous and present public safety concerns, like lack of access to banking services, thereby forcing businesses to manage, store, and move large quantities of cash on and off site.
Indeed, despite an increasing market size and growing mainstream acceptance, marijuana businesses still cannot run like normal businesses; everything they do is a little harder and more complicated. This is true even in the realm of private agreements, where typical contract law proves insufficient. For example, and as discussed below, there are unique lease agreement considerations for all licensed marijuana establishments.
Leases play a critical role in marijuana licensing. Having exclusive legal access to the property where the facility is located is a precursor to licensure and a key component of the state’s regulatory framework. Unlike the alcohol industry, where licenses can be transferred from one operating location to another, marijuana establishment licenses are tied to a specific location. Therefore, if a licensee loses the right of possession, the business will be unable to operate, and the license itself will be jeopardized. Because a lease is such a critical part of a successful marijuana business in Alaska, it is important to understand the characteristics of this industry and pay close attention to them when representing clients in a marijuana-related transaction. When entering into a commercial lease for a licensed marijuana establishment—either as a landlord or tenant—there are a number of unique factors to consider.
Current and Exclusive Possession Required
An applicant for a marijuana establishment license in Alaska must prove: (1) access to the proposed licensed premises at the time of application; and (2) possession of the premises with each annual license renewal application—an ongoing requirement. Thus, it is important to ensure that leases do not lapse, and that the extension and renewal terms or options are clear and exercised as necessary.
A marijuana establishment must also demonstrate the right to possession of the entirety of the licensed premises—no portion of it may be subleased to another party for any reason. Accordingly, no one else can occupy the space and/or be paying rent at the time of license application. This can create unanticipated problems due to the length of the licensing process. In addition to Alaska’s typical weather-related or fishing season and construction delays, it takes a minimum of several months for the state’s Marijuana Control Board (MCB) to review the application, and then additional time before local requirements can bet met. Factoring time for buildout, permitting, and licensing, some licensees can expect to pay rent for almost a year before actually opening for business.
This is obviously a significant expense for a new business, and few can afford to absorb it. But without the ability to sublease while a license application is pending, that’s what marijuana businesses must do. Both landlord and tenant must understand that a gap between signing a lease and beginning operations is inevitable and can factor that into the rent—either through a pre-licensure grace period or with rental payments that escalate over time. “Lost” rental income during this early stage can be ameliorated by requiring a longer lease term, amortizing the “lost” year into the rent payments due following licensing, or negotiating rent that includes payment of a percentage of business revenue.
Clearly Establish and Explain Permitted Uses
The MCB will review the lease as part of each licensee’s application, and will look there for acknowledgement that the property can be used for marijuana establishment purposes. The lease must also clearly establish the type of marijuana establishment activity that will be permitted on the property (e.g., cultivation, product manufacturing, retail sales, or testing). Landlords may also want to require that the permitted use is conditioned upon the tenant remaining in compliance with all applicable laws and regulations.
Marijuana laws and regulations are constantly shifting, so leases may need to be revised, and other related regulatory filings may be required to maintain compliance. For instance, some local jurisdictions will require a supplemental statement from the landlord acknowledging that there will be a marijuana facility on the premises, many months after the lease is drafted. Landlords may also be asked to appear at local community council or planning commission meetings.
Landlords should understand their potential involvement in the licensing process and agree to not unreasonably withhold such assistance. Writing a clause into the lease acknowledging the ever-shifting legal framework can help avoid problems down the road. For example, a clause that provides, “The parties agree to make any amendments to the lease that are reasonably necessary to avoid failing to satisfy the requirements of local, state, or federal guidelines regarding marijuana enforcement, as those laws, regulations, and guidelines may be amended from time to time,” can protect the interests of both parties.
Limited Access to the Premises
A standard lease gives landlords the right to access the property at any time with reasonable notice in order to conduct inspections, perform maintenance/upkeep, and make any needed repairs. Toward the end of a lease term, landlords will require access to show the property to prospective tenants. However, if the leased property is a licensed marijuana establishment, marijuana regulations impact a landlord’s right of access, and both landlord and tenant must agree to comply with certain access conditions in order to successfully obtain a license.
Specifically, the landlord must acknowledge that they cannot enter or remain on the property unescorted, and that a tenant representative must serve as an escort during any entry; the landlord must agree to comply with the tenant’s established and approved visitor policies whenever accessing the premises; and if the landlord must enter the premises and the tenant cannot be reached or does not provide access, the landlord will agree to first contact the State of Alaska Alcohol and Marijuana Control Office (AMCO), or other relevant government authority, prior to accessing the premises. Similarly, in the event of the tenant’s default, the landlord must first contact AMCO prior to any re-entry or re-possession of the premises.
Restricted ability to take possession of property
Because only licensed marijuana establishments are authorized to possess regulated marijuana and marijuana products, the landlord may not take possession of or remove such property to satisfy any outstanding debts. Similarly, if a tenant abandons the property, or if there is any other event that would otherwise permit the landlord to re-possess the premises, or to enter the premises and remove personal property, the landlord must first contact AMCO for guidance and assistance.
The lease should be drafted to include a disclaimer that acknowledges these regulations, and landlords should be aware from the outset that taking possession of marijuana inventory will not be security against a breaching tenant.
While a graduated or percentage rent agreement can be appealing, regulatory considerations extend beyond standard economic questions. The Alaska marijuana regulations are unclear on this topic, providing only that “rental charges on a graduated or percentage-lease rent agreement for real estate leased to a licensee” are not prohibited. This gives landlords and tenants latitude to negotiate a percentage of profits payment in addition to base rent, but regulators will closely scrutinize any lease that appears to use a percent rent payment as a way to circumvent other licensing or ownership requirements. Landlords and tenants should err on the side of reasonableness and negotiate a percent-rent rate that will pass regulatory muster.
If a landlord’s property is financed, a marijuana establishment on the property could jeopardize the landlord’s mortgage. Traditional lenders (i.e., banks) are conservative by nature, and most will not risk association with marijuana businesses. These lenders abide federal law. As far as most mortgagors are concerned, because marijuana is illegal under federal law, it is illegal. Full stop.
Mortgage loan agreements almost always provide for “compliance with all laws,” and make non-compliance grounds for default. Thus, renting mortgaged property to a marijuana business that operates outside federal law could violate the loan agreement. In that case, lenders have various rights and remedies, including declaring a default and calling a loan due in full, or commencing foreclosure proceedings. Some lenders might provide an opportunity to cure by allowing time for the offending tenant’s eviction. That is far from an ideal solution: it leaves the landlord without a tenant and the tenant without a place to operate its business and will likely lead to a messy dispute.
Landlords should know that their lenders could hold them in breach and consider that risk before renting to a marijuana establishment. To protect themselves, landlords may want to include a lease term that allows early termination without penalty in the event of a threatened mortgage default. Of course, that is risky for a tenant, whose business would always operate under a cloud of uncertainty.
Tenants likewise should seek to protect themselves. In the best-case scenario, a marijuana tenant would only lease property owned outright by the landlord or is otherwise not subject to a loan agreement with such compliance requirements. However, with commercial property suitable for marijuana businesses in short supply, that is not always an option. Tenants should therefore similarly be aware of the possibility of these mortgage-related risks and determine the status of a property’s financing before signing a lease. If the property is mortgaged, tenants could try to negotiate a lower rent price that accounts for this risk and seek terms that would otherwise minimize their damages. Tenants could also work with the landlord to provide alternative means for refinancing without a traditional lender.
Exclusion of the Federal CSA from “Unlawful Purpose” or “Illegal Use”
Finally, as with any marijuana-related contract, a lease agreement must address the federal-state law conflict. Standard lease agreements typically contain a term providing that the tenant shall comply with all laws, shall not use the property for any unlawful purpose, or that illegal activity is prohibited, and that failure to comply constitutes a breach. Such a broad clause could arguably allow a landlord to evict a marijuana establishment tenant at any time, because marijuana remains illegal under the federal Controlled Substances Act (CSA). It would probably be difficult for a landlord to evict solely on these grounds in a state where commercial marijuana activity is legal and where the lease expressly allows such a use, but this issue could be avoided entirely if the landlord and tenant stipulate that any unlawful purpose or illegal use excludes violation of the marijuana-related sections of the CSA.
Commercial marijuana landlord-tenant relationships can be difficult to navigate and are ripe with potential problems due to strict regulations and a continually shifting legal framework. Every lease will vary depending on the interests of the parties, the location of the property, and the type of activity contemplated. Consequently, marijuana industry leases should be given expert care and attention. If you are a landlord or tenant considering entering into a marijuana industry lease, feel free to contact Birch Horton Bittner & Cherot to set up a consultation.
Note: a version of this article appears in the September 2019 edition of The Alaska Bar Rag
2019-09-16T17:40:34+00:00 September 16th, 2019|
Stanley T. Lewis was hired as an associate attorney at BHBC in June of 1980, immediately upon graduation from Pepperdine University School of Law. Stan was admitted to practice in Alaska and Arizona.
In the 1980s, most attorneys at the firm were general practitioners, not specialists. As a result, Stan’s early experience involved a plethora of civil and criminal litigation. As Stan’s practice evolved, he continued to represent clients in litigation and conducted more than fifty criminal and civil trials. He successfully represented clients before state and federal courts, appellate courts, bankruptcy courts, and administrative agencies. Additionally, he was committed to resolving legal disputes through mediation, arbitration, judicial settlement conferences, and other forms of alternative dispute resolution. Stan enjoyed working with clients directly and, as a result, he loved working in the area of personal injury and with injured maritime workers.
Stan had extensive construction litigation experience on behalf of subcontractors, general contractors, design professionals, owners, and public entities. He litigated claims of changed conditions, design flaw changes, fast track construction project claims, and “Little Miller Act” claims. He also assisted owners/financiers in repossessions and transfers due to the insolvency of the general contractor.
Stan was well known to the other attorneys in his office for his expertise in the area of employment law. He resolved numerous employment and labor claims on behalf of his clients, developing wide expertise in working with private investigators, economists, psychologists, accountants, physicians, claims consultants, business valuation experts, and vocational rehabilitation experts. Stan served as a guest speaker on issues relating to employment claims, employee policy and procedure manuals, alternative dispute resolution agreements, and workplace privacy.
In later years, Stan concentrated his practice in the areas of healthcare, business and corporate law, and complex litigation. He represented healthcare providers in matters involving all aspects of the client’s business, from formation and organization of corporate entities to purchases and sales of healthcare businesses, and everything in between (obtaining certificates of need, recruitment and discipline, contracts, medical device and drug liability, state and federal regulatory matters, covenants not to compete, Medicare and Medicaid compliance and audits, professional liability defense, and ERISA, among others).
Stan understood that the practice of law was primarily about the client. The first question that Stan asked in any matter was: “What does the client want to do?” Stan’s practice was the embodiment of the principal that the client came first, last, and always. The next question was the most effective way to accomplish that end. As a result, Stan’s clients respected him and admired his tenacity on their behalf. Many of Stan’s clients became his life-long friends.
Stan was recognized for his ability to ask probing questions and to map out a strategy for successfully resolving the clients’ needs. Stan was strong and determined, and sometimes a little stubborn, but he got the job done, no matter what it required in terms of time, energy, and talents. He knew the importance of building a team and surrounded himself with attorneys, assistants, and staff who could get the job done and deliver a successful result.
Ultimately, for those who knew him personally, Stan was most respected as a family person. There was never any doubt that his wife, Joan, his two boys, Adam and Alex, their families, and the grandkids were the reason he got up every morning.
Stan passed away on August 30, 2019, after a long and bitter battle with cancer. He was surrounded by his family at home in Arizona. He is greatly missed by all who knew him and his legacy and reputation at the firm will last for a very long time. His most lasting impact was just being who he was.
When I was in college, I spent my summers working with construction crews back home in Alaska. In addition to giving me exposure to the industry, I learned about the importance of workplace safety. During my first day on the job on a project, I got a stern talking-to for coming to work without steel-toed boots. Every project manager and superintendent I worked under was determined to maintain an accident-free jobsite—and for good reason. Injuries can mean delays in work, loss of crew morale, and legal headaches.
Sometimes efforts to keep a project free of injuries can have unintended results. I worked for one supervisor who decided to hold a pizza party every Friday if the crew finished the week without an accident or injury. At one point, a co-worker had his thumb crushed while moving boxes. The other members of the crew urged him not to report the injury or seek first aid, because they wanted to get their free pizza. The poor guy went home nursing an injury that he felt he could not tell anyone about.
The temptation to simply keep quiet about even serious injuries can be strong, but managers must not succumb to it. Alaska law requires that an employer report any in-patient hospitalization resulting from a workplace injury to the Alaska Occupational Safety and Health section of the Department of Labor (“AKOSH”). The employer has eight hours to make the call to the AKOSH toll-free number. Even if the injury is not the result of some failure to follow safety measures, and even if the result is just a few hours in the emergency room, employers have to make the call.
AKOSH is essentially the enforcement arm of the federal Occupational Safety and Health Administration. AKOSH will send an investigator out to the jobsite immediately following an injury. The investigator will interview individuals who witnessed the accident, including the injured person. He or she will also take photographs, ask for a copy of the employer’s safety plan, and look around for any OSHA regulation violations, even if they are unrelated to the injury. The inspector will also be looking for remediation of the conditions that caused the injury. The employer’s attorney may be present for this inspection.
AKOSH inspections do not happen only following an injury. Any employee can individually call the department and report a safety problem, prompting an inspection. AKOSH will conduct the inspection “as soon as practicable.” Alaska law provides stiff penalties for employers who respond with retribution against whistleblowers.
After an injury and an inspection, employers are anxious to know what comes next. AKOSH can wait up to 180 days to decide whether or not to issue a citation. If a citation is issued, the proposed penalty will usually be a monetary fine. However, a fine is not the heaviest burden on the employer. Citations generally describe each of the employer’s violations as “serious” or “other than serious.” The first category of violations can do serious reputational damage to a contractor. Not only is the existence of a serious violation public record on the AKOSH website, it is also something a contractor may have to report to project owners or general contractors when bidding for a job. It is a black mark that could prevent a contractor from getting work.
Why does Alaska and federal law levy such heavy penalties following accidents? Because injuries, especially in construction, are a serious concern. In 2017 Alaska led the country in per-capita workplace deaths, with the construction industry experiencing 9.5 deaths per 100,000 people employed in the industry. Nonfatal injuries are much more common. In 2017, there were 2.4 nonfatal reported injuries for every 100 people employed in construction. The number of unreported injuries was doubtless very high as well.
Finally, employers should know that not every injury automatically means a citation. Sometimes, the best safety practices in the world cannot prevent injury. If an injury is caused by equipment failure due to an equipment manufacturing defect, that is not necessarily an OSHA violation. If an employee is under the influence of drugs or alcohol and gets injured as a result, the employer may not be liable for the employee’s misconduct, provided the employer had no way of knowing or preventing what the employee did. These are some of the defenses an employer can present when fighting back against an unjustified citation. After all, AKOSH can make mistakes too. Strong legal representation can keep employers from being burdened by an incident that was simply not their fault.
The U.S. Small Business Administration (SBA) has been busy. SBA has released several rules lately, and more are coming. If you were hoping that SBA would increase the size standards for your receipt-based NAICS code, you are in luck. If you were close to sizing-out and you were hoping for an immediate increase of the higher size standard, then it really is your lucky day.
On July 18, 2019, SBA issued an interim final rule to raise its monetary size standards to adjust for inflation. This rule (including many new size standards) went into effect on August 19, 2019. Please note that SBA is also still accepting comments on this rule. The comment deadline is September 16, 2019, and comments can be submitted online at https://www.regulations.gov/docket?D=SBA-2019-0008.
Why is SBA adjusting is size standards? In order to fulfill both statutory and regulatory requirements to periodically review its size standards for inflation, SBA completed the review and has decided to adjust its monetary-based industry size standards (but not those based on employee numbers) for the inflation that has occurred since the last inflation adjustment, which was published in June 2014.
As result, adjustments were made to 518 industries and 9 subindustries that use receipts-based standards as well as 5 industries that use assets-based size standards. SBA also took this opportunity to adjust two program-specific receipts-based size standards for sales/leases of government property and stockpile purchases. SBA issued this inflation adjustment as an interim final rule, so that small businesses will get the benefit of the higher size standards as soon as possible, even though SBA plans to review (and potentially adjust) its size standards again in the near future based on its 5-year review of industry and Federal market conditions.
How much is the inflation adjustment? SBA found inflation of 8.37% for all receipts-based size standards (except the agricultural standard discussed below), so SBA adjusted those standards by multiplying the current size standards by 1.0837; SBA then rounded the result to the nearest $500,000. SBA found a 40.26% inflation adjustment was warranted for the $750,000 agricultural size standard, so SBA multiplied those 46 agricultural industries with a size standard of $750,000 by 1.4026 and rounded to the nearest $500,000, resulting in a new standard of $1,000,000 for all 46 agricultural industries.
Below is a re-creation of Table 1 from the Interim Final Rule. It demonstrates the specific impact of the inflation adjustment on size standards of varying levels. The third column shows the newly adjusted size standards, including SBA’s adjustments made for rounding.
The Rule at a Glance information below includes a link to the rule, which includes a full copy of the affected size standards. If you have any questions about this rule, how to calculate your business’s size, or how this rule may impact your business, please contact Carissa Siebeneck Anderson or Jon DeVore.
The civil court system acts as a mechanism to resolve disputes. Because of the prevalence of conflicts in the United States, most people will be on the receiving end of a lawsuit at least once in their lives. The most common types of lawsuits are complaints arising out of car accidents, slip and fall lawsuits, the commencement of divorce proceedings, product liability cases, and disagreements over the provisions of a contract. No matter what the reason for the lawsuit, there are a number of things that you should consider. Here are top ten things to do when a lawsuit has been filed against you.
(1) Do not ignore it. Once, when my daughter was driving from Denver to Seattle, her “engine light” came on. Instead of seeking out the assistance of a mechanic, she took a piece of electrical tape and covered up the flashing light. “Out of sight, out of mind.” Needless to say, that strategy didn’t work out, as her car conked out in the middle of the Great Salt Lake. This same strategy is also ineffective when dealing with lawsuits. When someone receives a complaint, there is a natural tendency to want to ignore it. The thought is that if you ignore it, the problem will go away. However, just like my daughter’s engine light, that is not the case. If a complaint is not answered within the timeframe required by the law or civil rules, the party bringing the lawsuit can obtain a default judgment, which basically declares them the prevailing party due to the defendant’s lack of participation. In other words, the plaintiff will be declared the winner by virtue of the defendant’s failure to answer the complaint. While there will be some rare situations where a default judgment makes sense, in general, having a default judgment entered against you results in a negative outcome. Therefore, if you receive a complaint, it is important not to ignore it, but to deal with it head on.
(2) Stay cool. While no one ever wants to get sued, and while it is only natural to feel a sense of anger that you are being hauled into court, it is important to stay cool and not to let your emotions dictate your response. More and more, lawsuits are simply a part of doing business and a reality of our complicated society. The best approach to a lawsuit is to view it as an opportunity to tell your side of the story and to refute what the other side is claiming. The more you can approach the lawsuit with a detached point of view, the better off you will be.
(3) Do not discuss the lawsuit with others. In just about every cop show there is that moment when a police officer reads the accused their Miranda rights, which starts with, “you have the right to remain silent.” While a lawsuit is a civil matter and not a criminal case, this warning applies with equal vigor. When a lawsuit has been filed against you, it is always best not to make any public comments about the matter, as anything you say “can and will be used against you.” This is especially true when it comes to texting or social media. You do not want your posts to come back to haunt you, so it is always best not to say anything at all.
(4) Figure out the deadlines – because deadlines matter. Depending on what court you are in and what rules apply, there will be different deadlines for filing an answer to the complaint. It will be important for you to figure out when the answer is due. By understanding the deadlines involved, you will have a better understanding of the urgency the matter.
(5) Preserve the evidence. One of the lessons routinely revisited by celebrity and political scandals is that it is often the attempt to cover something up that gets you in trouble, as opposed to the original event. After a lawsuit is filed, one of the first things that happens is “discovery,” which is the process of each side disclosing the relevant evidence. If evidence goes missing, the court can enter a number of sanctions against the party that destroyed it. The sanctions can range from a monetary fine to a finding that the party that destroyed evidence is liable. The court can also instruct the jury that when evidence is destroyed, there is a presumption that the evidence would have been detrimental to their case. In extreme cases, a party can actually be held independently liable for the tort of “spoliation of evidence,” which allows for the award of damages against a party that destroyed evidence. With all of this, the court system is well equipped to punish a party that either does not preserve evidence or intentionally destroys evidence. Either way, it is almost always better to just preserve the evidence.
(6) Look for available liability insurance. Most people and businesses have insurance that will cover a wide spectrum of liabilities. For example, in most states, it is mandatory that all drivers purchase automobile liability insurance. When a car accident occurs, the insurer will hire a lawyer for the responsible driver and pay up to a certain amount (policy limit) to resolve the claim. Most businesses have what is called commercial general liability insurance, which will provide coverage for a number of liabilities, including when a person suffers an injury while on the property belonging to the business. Other insurance policies include directors and officer’s coverage, cyber-risk insurance, and professional liability insurance, also known as errors and omissions. The language in each policy will dictate what the insurer will and will not agree to cover, but there is always a chance that you will be covered. Therefore, even if you doubt there is insurance coverage available, it is always a good idea to investigate the issue, particularly as you may have an obligation to notify the insurance company within a specific time frame.
(7) Evaluate whether bankruptcy might be an appropriate option. While many tend to shy away from filing for bankruptcy, there are certainly situations when filing for bankruptcy protection makes the most sense. This would include a situation where a business just needs a “time out” from creditors in order to allow the company to reorganize. If a party is going to consider this option, it is best to make this decision at the beginning of a case. Again, bankruptcy is a tool that is available to businesses and individuals and should be considered when a lawsuit has been filed.
(8) Review any related agreements or documents for an arbitration clause. Since the 1990s, more and more contracts have arbitration clauses. These provisions require that any dispute be resolved not in a court, but before a neutral arbitrator. The idea behind an arbitration clause is that an arbitration is far less costly than a court proceeding and a resolution can be accomplished in a matter of months, as opposed to years. If there is an arbitration clause that applies, it is important to recognize this on the front end of a case, as there are some court decisions that state that if a person does not promptly demand arbitration, but instead, allows the court proceeding to carry on for a period of time, the arbitration clause is waived, meaning that the dispute cannot be arbitrated because of the delay. With this in mind, it is important to identify the existence of an arbitration clause and demand that the dispute be arbitrated promptly.
(9) Try to avoid litigation. One of the things that everyone can agree upon is that litigation is enormously expensive. It is not unprecedented for it to cost in excess of a $1 million to take a case to trial, especially if the trial requires expert testimony. Therefore, both sides will often benefit from an early settlement. In a situation where both sides are well aware of the applicable facts, it is often best to settle even before a lawsuit is answered. Therefore, when a lawsuit is received, consider whether it is possible to settle, including whether the parties would be willing to engage a mediator to assist the parties in coming to a resolution. By doing so, the parties can save time and energy, as well as the cash that will be needed to litigate the matter.
(10) Contact a lawyer. In many respects, this should be number one on this list. No matter what the situation, it is always a good idea to get the advice and recommendations of a person experienced in defending lawsuits. A lawyer will be able to help you navigate the maze of the legal system and provide you with insight that is critical when defending a lawsuit.
If you ever find yourself facing a lawsuit, keep these ten items in mind. Of course, if you want to consult with a lawyer to determine if you would benefit from the services of a lawyer, the dedicated and experienced lawyers at Birch Horton Bittner & Cherot are ready and willing to assist. If we are unable to assist you, we will be able to point you in the direction of someone who can.
A trademark registered with the National Trademark Registry can be an effective way to protect a unique and clever name, slogan, or logo. The Registry, an agency of the federal government, is guided by the Lanham Act, which establishes the rules and regulations for protecting the owner of a federally-registered mark. Once a trademark is issued, no other person can use that same mark and it will grant the holder of the trademark the ability to file a trademark infringement action.
Under the Lanham Act, there are a number of restrictions on what can and cannot be a trademark. For example, a mark cannot contain a flag or insignia of any nation and it cannot be merely a description of goods. Nor is a mark that consists of an “immoral or scandalous matter” permitted. In determining whether a mark is “immoral or scandalous,” the Registry considers whether the general public would see the mark as being “disgraceful, offensive, disreputable, or vulgar.” Recently rejected applications for trademarks have included, “YOU CAN’T SPELL HEALTHCARE WITHOUT THC” and “MARIJUANA COLA,” because the Registry concluded that such marks would be offensive, as they promote drug use. Conversely, marks with an anti-drug stance, including “D.A.R.E. TO RESIST DRUGS” and “SAY NO TO DRUGS,” have been approved.
The subjective nature of such determinations, which appear to have evolved with changing societal norms, is that it can be in conflict with Constitutional protections afforded to free speech under the First Amendment. The United States Supreme Court recently took up this issue in Iancu v. Brunetti. In that case, Erik Brunetti, an artist and entrepreneur, applied for a trademark for the following mark: “FUCT,” which was the name of his clothing line. The Registry denied his request for a trademark on the basis that “FUCT” was “totally vulgar” and had “decidedly negative sexual connotations.” Brunetti challenged the constitutionality of the government’s denial of his trademark on the basis that such a decision violated his right to free speech under the First Amendment.
Finding in favor of Brunetti, and holding that the Lanham Act’s prohibition against the registration of “immoral or scandalous” trademarks infringed the First Amendment, the Court reaffirmed the general notion that the government cannot discriminate based on the content of ideas or opinions. In reaching this 6-3 decision, a number of the Justices recognized that this decision could result in the registration of trademarks that many would deem patently offensive, including racial epithets and sexually explicit terms. Justice Alito, however, reiterated the importance of the First Amendment stating, “it is especially important for this Court to remain firm on the principle that the First Amendment does not tolerate viewpoint discrimination.”
Cases reviewing the First Amendment which repeatedly recognize the protection of “ideas that offend,” acknowledge that it is a cornerstone tenant of our democracy. However, as the Court signaled in its decision that some restrictive legislation regarding the prohibition of obscene or lewd trademarks could be permissible and survive a constitutional review, it is likely that the debate will continue.