Headspace International, Llc v. Podworks Corp. , 428 P.3d 1260 ( 2018 )

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
HEADSPACE INTERNATIONAL LLC, )
a limited liability company formed in the ) DIVISION ONE
State of California, )
Cf)
) No. 77016-1-1 CP
Appellant, ) rn
C:)
)
•-t
v. )"--
to 0:"17T-
) PUBLISHED OPINION rn
7).
PODWORKS CORP., a corporation in ) r-
the State of Washington; and THOMAS ) s.D. 15(1)
WERTH, an individual residing in the )
State of Washington, )
)
Respondent. ) FILED: October 29, 2018
)
DWYER, J. — Headspace International LLC (Headspace), a California-
based marijuana business, filed this lawsuit alleging infringing use of its mark,
"THE CLEAR," by Podworks Corp., a Washington-based marijuana business,
and Thomas Werth, Podworks Corp.'s chief executive officer (collectively,
Podworks). In response, Podworks filed a CR 12(b)(6) motion to dismiss all
claims. The trial court granted the motion, ruling that Headspace did not allege
any lawful use of its mark in the ordinary course of trade in Washington and
therefore had no trademark rights in "THE CLEAR" in Washington. Holding that
Headspace did allege lawful use of its mark in the ordinary course of trade in
Washington, we reverse.
No. 77016-1-1/2
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, chapter 19.86 RCW.
Headspace made the following factual allegations in its complaint:
[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
continually 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 Washington 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.
2
No. 77016-1-1/3
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 CR 12(b)(6) motion to dismiss all claims
against it for failure to state a claim upon which relief could be granted.
Podworks argued that Headspace failed to allege that it had trademark protection
in Washington for its mark "THE CLEAR," because it did not allege lawful use of
the mark in the ordinary course of trade in Washington. The trial court granted
the motion, reasoning that Headspace failed to allege lawful use of its mark in the
ordinary course of trade in Washington and holding that there "is no claim for
trademark infringement where the plaintiff does not allege that its mark is lawfully
placed in the ordinary course of trade."
Headspace appeals.
11
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 statute.
We agree.
3
No. 77016-1-1/4
We review dismissals pursuant to CR 12(b)(6) de novo. Wash. Trucking
Ass'ns v. Emp't Sec. Dep't, 188 Wash. 2d 198, 207, 393 P.3d 761, cert. denied, 138
S. Ct. 261 (2017). Dismissal is appropriate only when "it appears beyond doubt
that the plaintiff cannot prove any set of facts, consistent with the complaint,
justifying recovery." Hippie v. McFadden, 161 Wash. App. 550, 556, 255 P.3d 730
(2011). When reviewing a CR 12(b)(6) dismissal, we presume all factual
allegations in the complaint to be true and also consider any hypothetical facts,
consistent with the complaint, proffered by the plaintiff. Gorman v. Garlock, Inc.,
155 Wash. 2d 198, 214, 118 P.3d 311 (2005).
To determine whether Headspace obtained trademark protection for its
mark pursuant to Washington law, we must interpret our state's trademark
statute, codified at chapter 19.77 RCW. Washington's trademark statute is
based on the Model State Trademark Bill(MSTB) produced by the International
Trademark Association. In the most recent update to the statute, the Senate and
House Committees on the Judiciary recommended updating Washington's
trademark statutes to more closely conform to federal law and the MSTB. See
FINAL B. REP. on S.B. 5122, 58th Leg., Reg. Sess.(Wash. 2003).
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, 15 U.S.C. § 1051.1 Our state legislature affirmed this
1 See Anne W. Glazer, INTA's Model State Trademark Bill: Modernizing and Harmonizing
U.S. State Trademark Laws,64 INTA BULL.(Oct. 1, 2009),
http://www.inta.orq/INTABulletin/Pages/INTAsModelStateTrademarkBillModernizingandHarmonizi
ngUSStateTrademarkLaws.aspx fhttps://perma.cc/8UWC-RN5P1.
-4 -
No. 77016-1-1/5
assumption by explicitly instructing Washington courts to construe the language
of our trademark statute in accordance with federal decisions interpreting the
Lanham Act. RCW 19.77.930.
Our Supreme Court has employed just such an approach. In Seattle
Endeavors, Inc. v. Mastro, 123 Wash. 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 RCW 19.77.030;
CreAciri, Inc. v. USANA Health Scis., Inc., 474 F.3d 626,630(9th Cir. 2007).
Federal law requires lawful use in commerce, CreAgri, 474 F.3d at 630, and
Washington's statute contains an analogous provision requiring that a mark be
placed in the ordinary course of trade in Washington. See RCW 19.77.010(11).2
Although Washington's statute does not explicitly state that such placement must
2 The fulltext of RCW 19.77.010(11) states:
A trademark shall be deemed to be "used" in this state when it is placed in the
ordinary course of trade and not merely to reserve a right in a mark in any
manner on the goods or their containers, or on tabs or labels affixed thereto, or
displayed in connection with such goods, and such goods are sold or otherwise
distributed in this state, or when it is used or displayed in the sale or advertising
of services rendered in this state.
-5-
No. 77016-1-1/6
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 require 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
chapter 69.50 RCW (CSA), when it does not require Headspace to produce,
process, or sell cannabis products in Washington.
6
No. 77016-1-1/7
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 trade 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 RCW 19.77.010(11) does not directly speak to
whether indirect placement by another inures to the benefit of the owner of a
mark, common law principles and federal court interpretations of the Lanham Act
support the view that indirect placement can be sufficient. It is an established
principle of the common law of trademark that indirect use of a protected mark by
a licensee inures to the benefit of the owner of the mark when the owner has
sufficient control over the quality of the goods or services provided to customers
under the licensed mark. See RESTATEMENT(THIRD)OF UNFAIR COMPETITION § 33
cmt. b (Am. LAW INST. 1995)("If the trademark owner exercises reasonable
control over the nature and quality of the licensee's goods or services, the
benefits of the licensee's use accrue to the trademark owner."); 2 J. Thomas
McCarthy, McCarthy on Trademarks and Unfair Competition § 18:52 (4th ed.
1996).
Similarly, federal courts have opined that the licensing of trademarked
marks is permissible under the Lanham Act when the trademark owner has
7
No. 77016-1-1/8
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 over time was sufficient for the
licensor to rely on the licensee to ensure quality contro1.5 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 FreecycleSunnvvale v.
Freecvcle 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 sufficient 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.
3 See, eq., Arthur Murray, Inc. v. Horst, 110 F. Supp. 678,679(D. Mass. 1953)(holding
the license valid and trademark rights maintained because the contract language provided for
licensor's control over the quality of services provided by licensee).
4 See, e.q., Embedded Moments, Inc. v. Intl Silver Co., 648 F. Supp. 187, 194 (E.D.N.Y.
1986)(explaining that it was not necessary for the license agreements to contain explicit
provisions for the exercise of control and that actual control by licensor is sufficient to maintain
trademark rights).
5 See, e.g., Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017-18 (9th
Cir. 1985)(holding that, although licensor did not inspect the products, quality control was
maintained by reliance on the integrity and control procedures of licensee where licensor and
licensee were in a close working relationship).
-8-
No. 77016-1-1/9
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 control 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 GSA and, therefore, cannot
satisfy the requirement of lawful placement of the mark in the ordinary course of
trade. We disagree.
9
No. 77016-1-1/10
i
Podworks first asserts that Headspace's licensing agreement with X-
Tracted directly violated the CSA at the time Headspace filed its lawsuit. This is
so, Podworks avers, because the agreement necessarily required Headspace to
participate in X-Tracted's processing of marijuana products, which it was legally
prohibited from doing.
In 2012, Washington voters approved Initiative Measure 502, LAWS OF
2013, ch. 3, codified as part of chapter 69.50 RCW (1-502), setting forth the
circumstances attendant to the legal possession and sale of marijuana. 1-502
modified the GSA by establishing a framework pursuant to which individuals and
businesses could apply to the Washington State Liquor and Cannabis Board
(WSLCB)for licenses to legally produce, process, or sell marijuana products in
Washington. RCW 69.50.325. To avoid conflicting with those federal interstate
commerce laws and regulations prohibiting the possession and sale of marijuana
products, licenses may not be issued to out-of-state companies or individuals.
RCW 69.50.331(1)(b). In addition, businesses that obtain a license to produce,
process, or sell marijuana products must not permit any other person or entity to
use the license or to participate in the production, processing, or sale of
marijuana products. RCW 69.50.325,
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
- 10-
No. 77016-1-1/1 1
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 RCW 69.50.395, necessarily implies that such agreements were
illegal prior to the enactment of ESSB 5131. To be sure, because the alleged
licensing agreement never required Headspace to produce, process, or sell
cannabis in Washington, nothing in the pre-amendment CSA specifically
addressed this matter. Similarly, because X-Tracted's processing and sale of
6 ENGROSSED SUBSTITUTE S.B. 5131, 65th Leg., Reg. Sess.(Wash. 2017).
11-
No. 77016-1-1/12
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 Wash. 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 Wash. 2d 736, 751, 257 P.3d 586 (2011).7 Upon the adoption of an
amendment to a statute, the "new legislative enactment is presumed to be an
amendment that changes a law rather than a clarification of the existing law, but
the presumption may be rebutted by clear evidence that the legislature intended
an interpretive clarification." Jane Roe, 171 Wash. 2d at 751. "One indication a
new enactment is a clarification is that the original statute was ambiguous." Jane
Roe, 171 Wash. 2d at 751. The statements of individual lawmakers, especially bill
sponsors, can also be instructive in discerning the reasons for changes in
legislation. In re Marriage of Kovacs, 121 Wash. 2d 795, 807-08, 854 P.2d 629
(1993).
7 As regards the utility of subsequent history to interpret the pre-amendment version of a
statute, we see no pertinent distinction between the original legislative intent of a law passed by
the legislature and the original legislative intent of a law approved by initiative. Our constitution
permits the legislature to freely amend statutes enacted by initiative measures provided that, for
the first two years subsequent to approval by the voters, amendments to, or repeal of, statutes
enacted by initiative measures obtain the approval of two-thirds of the members of each house of
the legislature. CONST. art. II, § 1(c). Therefore, just as a subsequent legislature may clarify the
laws passed by an earlier legislature through subsequent amendment, so too may the legislature,
via subsequent amendment, clarify the laws passed by an earlier direct vote of the people.
- 12 -
No. 77016-1-1/13
One of the stated purposes of 1-502 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, 1-502 requires that the WSLCB strictly monitor
and regulate Washington's cannabis industry. See RCW 69.50.325.
Subsequent to I-502's passage, the WSLCB developed regulations to comply
with its statutory obligations. However, these regulations did not include a
requirement that all trademark and proprietary information licensing agreements
be disclosed to the agency.
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 contract, 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;
(b) Any unregistered trademark, trade name, or trade dress;
or
(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 and cannabis board.
RCW 69.50.395.
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
- 13-
No. 77016-1-1/14
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/?eventl D=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 of
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 1-502 was clear: to legalize the
business of producing, processing, and selling marijuana pursuant to a strict
regulatory framework. However, the WSLCB did not view 1-502 as authorizing or
requiring it to monitor all licensing agreements entered into by licensed marijuana
businesses for trademarks and proprietary information relating to the processing
of marijuana products. As a result, the WSLCB did not develop the regulations
necessary to monitor the industry's use of such agreements, contravening the
intent of the voters as perceived by the legislature. To correct this misperception
by the executive branch agency and "continue the regulation" of Washington's
- 14 -
No. 77016-1-1/15
experiment with legal marijuana, the legislature passed a "clean-up bill" that, in
part, clarified for the WSLCB its obligation to monitor licensing agreements
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 1-502 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 party of interest."
The definition of a "true party of interest" is set forth in WAC 314-55-035.
The regulation requires that all "true parties of interest" be listed on a marijuana
business's license. WAC 314-55-035(1). Pursuant to the regulation, the "true
parties of interest" for a corporation are all corporate officers and stockholders,
and their spouses. WAC 314-55-035(1). The regulation also provides that any
-15-
No. 77016-1-1/16
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." WAC 314-55-035(1). We have previously explained that a "true party
of interest' is specifically distinguishable from ...'persons who exercise control
of business." Haines-Marchel v. State Liquor & Cannabis Bd., 1 Wash. App. 2d
712, 723-24,406 P.3d 1199(2017)(internal quotation marks omitted), review
denied, 191 Wash. 2d 1001 (2018). The regulation does not require that persons or
entities who exercise control of the business be listed in a marijuana business's
license, but does state that the WSLCB will investigate those persons or entities.
WAC 314-55-035(4).8
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.8 Hence,
8 WAC 314-55-035(4) states in full: "Persons who exercise control of business —The
WSLCB will conduct an investigation of any person or entity who exercises any control over the
applicant's business operations. This may include both a financial investigation and/or a criminal
history background."
9 It is possible that Headspace's license agreement with X-Tracted specified that
Headspace would receive a percentage of X-Tracted's profits, in which case Headspace would
have been a "true party of interest" under the regulation. The exact terms of the license
agreement were not alleged in the complaint. However, it is consistent with the allegations of the
complaint to hypothesize that the license agreement does not create such an arrangement.
Headspace could have the required control to establish trademark rights without being a "true
party of interest."
- 16 -
No. 77016-1-1/17
Headspace can have the necessary control over quality of X-Tracted's cannabis
concentrates to establish trademark rights without becoming a "true party of
interest."
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. WAC 314-55-035(4). It did not require the licensed business to
provide a list of all parties with whom it has licensing agreements or copies of
those agreements.
Additionally, the recent enactment of RCW 69.50.395 supports our
reading of the regulation. The current version of WAC 314-55-035 came into
effect on June 18, 2016, and ESSB 5131, with the pertinent provisions codified at
RCW 69.50.395, was signed into law on May 16, 2017. RCW 69.50.395 clarifies
that marijuana businesses must disclose to the WSLCB all licensing agreements,
and was passed after the enactment of the WAC regulation directing the WSLCB
to investigate persons exercising control over a licensed marijuana business.
RCW 69.50.395(2). It is plain that the legislature collectively thought that the
WSLCB required a clearer statement of its role under I-502's regulatory system,
as regards licensing agreements. The legislature determined that requiring the
disclosure of licensing agreements to the WSLCB would best implement the
policy approved by the voters in 1-502. The legislature clarified this for the
- 17 -
No. 77016-1-1/18
WSLCB, explicitly mandating that it require disclosure of licensing agreements in
the future.1°
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 RCW 69.50.395, however, it is clear that the WSLCB must now
require X-Tracted to disclose the agreement. Podworks' assertion that
Headspace could not have had sufficient control over X-Tracted's production of
cannabis concentrates without violating the CSA is unavailing.
Reversed and remanded.
We concur:
10 The WSLCB, as an executive branch agency, properly confines its rule making to such
authority as is delegated to it by the legislature or the people (through initiative). The best view of
this aspect of the bill is that the agency was unclear as to its responsibilities vis-A-vis licensing
agreements, upon passage of the initiative, and that the legislature properly clarified the issue.
- 18-