Cannabis legalization comes with trade secret concerns

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Cannabis may be newly legal, but it faces many of the same business and legal issues as any other industry. That makes this an especially dynamic time to practice law in the space.

Austin Spillane, attorney at Nilan Johnson Lewis, is working in the midst of new legal developments in the cannabis industry, including trade secret concerns. Spillane says proactive protection is crucial as courts sort out these issues as they work through the courts.

“It’s a fascinating and exciting time to be practicing in this industry,” Spillane said in an interview.

Recreational cannabis use for Minnesotans 21 and older became legal in 2023. Since then, business has boomed. With that growth, cannabis businesses are grappling with legal questions.

“Arguably, cannabis has been a ‘shadow business’ for so long that people often forget it faces many of the same issues as any other industry,” Spillane explained. “Despite the unique regulatory framework following legalization, the Minnesota cannabis industry is largely similar to other businesses.”

One issue that some cannabis businesses are grappling with is trade secrets. Across all industries, business information qualifies as a trade secret when its secrecy gives it independent economic value and it is not readily accessible to others. Businesses must take reasonable efforts to keep it confidential.

Although Spillane notes that there is an existing framework for many trade secret issues, there are questions about how Minnesota courts will apply it to this young industry. There is very little court guidance for cannabis businesses compared with more established industries, where groups like financial advisers and sales reps have spent years fighting in court over when customer lists count as trade secrets.

“A lot of the initial cannabis trade secret cases are going to require analogizing to cases decided in different contexts,” Spillane noted. No Minnesota court has yet addressed trade secrets and the cannabis industry. Spillane noted that only a few courts across the country have.

“The key takeaways from the cases that have been decided is that there are a lot of potential trade secrets throughout the growing and manufacturing process and that courts to date have consistently found that a trade secret plausibly existed.”

Recent courts have recognized that cannabis-related information can qualify as trade secrets when it requires significant time, expertise, and investment to develop. One court found that cannabis cultivars developed through selective breeding and cloning could be trade secrets because of the resources involved in creating them.

Courts have also held that specific cultivation methods — such as customized nutrient schedules, watering practices, harvesting timing, and trellising techniques — may be protected as trade secrets. This is true even when individual components are publicly known, as long as they are combined or applied in novel ways to gain a competitive advantage.

In another decision, a court concluded that a cannabidiol (CBD) cream formula could qualify as a trade secret where it was plausibly alleged to outperform competing products.

However, the cannabis industry is also distinct from other industries where growers might share tips.

“Fried chicken franchisers famously will not swap recipes, yet the local cannabis industry has been more relaxed in this regard,” Spillane said.

Nevertheless, in an attempt to differentiate themselves in the market, many Minnesota cannabis growers could be engaging in comparable practices or creative formulation approaches. This could lead to them “potentially developing trade secrets without even realizing it.”

Cannabis businesses should engage in best practices to protect those trade secrets.

“Prevention is the best medicine,” Spillane emphasized.

Spillane advised that businesses should clearly identify and label confidential and trade secret information so there is no ambiguity about its status, and that access to these should be on a need-to-know basis, ensuring that only those who require sensitive information to do their jobs can reach it.

Confidentiality policies should be included in employee handbooks and reviewed regularly to keep pace with the business’s growth. Employees should be trained on confidentiality during onboarding and through periodic refreshers.

Additionally, companies should secure both digital systems and physical spaces through passwords, encryption, access controls, and locked storage. Businesses should also use confidentiality provisions in employment and vendor agreements, along with standalone nondisclosure agreements when appropriate.

The businesses can also take action to avoid being on the other side of litigation. Spillane noted that cannabis businesses most likely face trade secret misappropriation claims after hiring a former employee or contractor of a competitor.

“To be proactive, any employment offer should clearly state that the business does not want — and will not accept — any confidential or trade secret information the prospective hire may have learned or obtained through their prior employment relationships,” Spillane said.

Additionally, the business should confirm that the employee has not nonetheless used the confidential or trade secret information. Businesses that face lawsuits should be able to show that there was no misuse of information as it was developed independently or that the claim was mistaken, Spillane said.