A potentially explosive landmark case about a pending federal court ruling on cannabis intellectual property is now in the works, with implications to the entire industry about the enforcement of trade secrets rights in the cannabis industry. The outcome of the case may serve to empower cannabis businesses seeking federal patent protections, among other things.
It all started in October, 2015, where so many good things start in this industry, at an industry trade show. In this case, it was the annual consumer goods trade show, Supply Side West Conference, held at Mandalay Bay in Las Vegas.
There, representatives from Folium Biosciences talked to Dr. Asha Oroskar, president and CEO of Orochem Technologies who co-founded the company in 1996 working out of her home. The Naperville, Illinois-based bioscience lab company conceives, develops, and installs solutions for highest purities for industrial-scale purification for nutritional supplements, fatty acids, and specialty sugars.
Folium, headquartered in Colorado Springs, and currently priming 500 acres for cultivation of hemp, has been on a fast growth track for the last few years. Earlier this year, High Times wrote that they were the largest vertically integrated producer of CBD-rich hemp oil in the world.
Folium in 2015 wanted to develop an extraction technology for getting commercial quantities of CBD from industrial hemp. Oroskar was intrigued. She told them that the chromatography and Simulated Moving Bed (SMB) technology that Orochem created could do the job.
The extraction technology that the Folium people had hoped to use would not work for the commercial quantities of CBD that they wanted, Oroskar advised Folium executives.
Oroskar then went back to the Orochem lab, and the company began working on a practical approach of getting CBD from industrial hemp in large quantities using their SMB and chromatography to separate out the THC from the CBD in the hemp.
They discovered that their process worked, and wanted to do more development on it. They shared their process discovery with Folium, with the specific understanding that their intellectual property was not to be stolen or otherwise appropriated by Folium.
Folium management said OK great, but added that they didn’t have any specialists who knew how to use the Orochem technology. But if the company could demonstrate how it works, and if all goes well, Folium would make Orochem the exclusive supplier of the quantity of CBD that Folium wanted to sell.
Orochem then went about the business of developing their process, working with scientists and chemical engineers to create standard operating procedures, and even discovering new and original purity standards for THC-free CBD.
Folium jumped on this new purity standard and began a marketing relationship with Orochem that positioned Folium as a market leader in CBD sales. Folium decided that, because of the demand for the product, it needed to add their employees to the Orochem production process – in the time-intensive drying process where any remaining solvent is removed from the CBD product. Orochem agreed, but made those Folium employees sign a non-disclosure agreement.
And here’s where the unicorns-and-daisy win-win moment all unravels, according to court documents filed on September 27, 2017: the real reason for Folium’s proposal to send its employees to Orochem was to “glean information related to Orochem’s proprietary technology” so that Folium could “use such information to design, procure and construct a copycat production line.”
Orochem limited where Folium employees could go inside the production facility in an effort to protect the proprietary secrets of their process. But the Folium employees began asking Orochem employees specific questions about the process anyway, and Orochem employees got nervous. In March, 2016, one of the Orochem employees complained to management about the questions from the Folium workers, and, in April, Folium’s chief scientist sent their employees working at Orochem a memo telling them in essence to cut it out.
Production continued at Orochem to the point where, around the end of the summer of 2016, they needed a bigger facility. So, in October, 2016, Orochem set out to formalize their relationship with Folium by sending them a long-term supply agreement. Orochem expected Folium to help share in the expenses of their new building.
But instead, Folium went dark on the deal. It was at this point, according to court documents, that the worm really turned on the relationship
Orochem found out that it was Folium’s intention to “steal and unlawfully replicate the Orochem proprietary technology for the extraction and purification of CBD at its own facilities”, and that Folium had secretly recruited one of Orochem’s process engineers, Pravin Ninawe, to provide the details of Orochem’s proprietary technology.
That engineer had, in fact, been secretly living with some of the Folium employees beginning in the summer of 2016, lying to Orochem management that he was living in an extended stay hotel. He quit Orochem in March, 2017, before any of this was discovered, and said he was going to work at a battery plant. Instead, he went to work for Folium.
The engineer was intimately involved in Orochem’s CBD production efforts and, as such, was given access to Orochem’s know-how, methods, designs and technology for the production of CBD from industrial hemp, according to court documents.
The engineer now working at Folium began contacting some of the contractors and vendors who had helped set up Orochem’s production process as he went about the attempts to completely replicate it, and they alerted Orochem about what he was up to. “In sum, Folium is engaged in a wholesale effort aided by Ninawe and information they gleaned pursuant to an NDA to steal Orochem’s proprietary methods, designs, processes and equipment to produce THC-free CBD in commercial quantities,” court documents reported.
In the seven-count complaint – five of which concern trade secret misappropriation, and two against Ninawe only – Orochem has demanded seizure of equipment from Folium; asked the court to stop them from using that equipment to continue production now; said that Ninawe should not work or consult with Folium; ask for payment of damages; and requested a jury trial.
Meanwhile, Folium recently opened a new 50,000 square foot extraction and purification facility to produce phytocannabinoid-rich zero THC oil on a large scale – from 1200 kilos per month to over 10,000 kilos – using what they identify as their patent-pending extraction process.
It remains to be seen if the court will enforce federal intellectual property rights for a cannabis-related invention. This case will result in a closely watched court decision, and could open the floodgates for intellectual property issues that are becoming more and more pressing as the cannabis industry matures and other bigger markets – such as Pennsylvania and California – begin operations in earnest. Will the court enforce federal intellectual property rights for a cannabis-related invention?