Gene Pool Technologies, Inc. (“Gene Pool”) is a company focused on cannabis and hemp extraction technologies. Coastal Harvest, LLC (“Coastal”) is in the business of manufacturing and selling products extracted from cannabis. On August 6, 2021, Gene Pool sued Coastal for allegedly infringing three of Gene Pool’s patents (US 9,144,751, US 9,145,532, and US 9,587,203) covering certain methods for extracting essential oils from solid materials. Complaint at 3–8, Gene Pool Techs., Inc. v. Coastal Harvest, LLC, No. 21-cv-01328 (C.D. Cal. Aug. 6, 2021). The asserted patents, however, do not disclose or specifically address extraction of cannabis oil or use of marijuana plants and Gene Pool does not practice any of the asserted patents. Gene Pool’s website lists their services as R&D, patent acquisition, and patent licensing. In court briefings, Costal accused Gene Pool of being a non-patent practicing entity whose business model is extorting licenses.
On August 31, 2022, over a year after being sued, Coastal filed a motion to dismiss the suit in which Coastal argued that Gene Pool could not enforce its patents due to illegality. The doctrine of illegality is used to prevent Courts from lending their aid to illegal activity. The doctrine of illegality was made famous with the “Highwayman’s Case” where one member of an armed robbery partnership attempted to use contract law to force his partner to equally split the team’s robbery spoils. The rationale is that enforcing a claim that stems from illegal activity would be contrary to the public interest. The doctrine has been used by other courts dealing with some aspects of the cannabis business, such as by denying bankruptcy protection, but it has not previously been widely addressed in a patent infringement context. In at least two other patent infringement lawsuits involving companies in the cannabis industry (United Cannabis Corp. v. Pure Hemp Collective, Inc., No. 1:18-cv-01922 (D. Colo. July 30, 2018) and Canopy Growth Corp. v. GW Pharms. PLC, No. 6:20-cv-01180 (W.D. Tex. Dec. 22, 2020)), illegality as a defense was not raised by the parties or the court, although United Cannabis Corp. was denied federal bankruptcy protection for its ties to illegal activities. A broad holding that patent infringement lawsuits involving cannabis companies should not be heard by the courts would have major implications. The number of cannabis related patent applications filed with and patents granted by the United States Patent and Trademark Office (USPTO) has skyrocketed in the last several years. Unlike trademarks, where the USPTO still refuses to grant trademarks for cannabis products unless the products are lawful under federal law, the USPTO does not exclude granting patents to cannabis related inventions.
In response to Gene Pool’s demand for royalties, Coastal argued that Gene Pool was seeking to use the power of the Courts to award damages from the federally illegal activity of cannabis oil extraction and that based upon the doctrine of illegality, the Court was prohibited from divvying up revenues derived from such illegal activity. Gene Pool countered with several arguments. First, Gene Pool argued that none of the judicial precedent submitted by Coastal was on point for patent infringement, but instead came from contract and bankruptcy law, and further none supported a broad application of the doctrine of illegality. Gene Pool also argued that because this was a tort action, for the doctrine of illegality to apply, there must be a showing of proximate causation between the Plaintiff’s misconduct and the controversies at issue. Gene Pool denied that there was any nexus connecting misconduct on behalf of Gene Pool and the suit at issue. Gene Pool also raised a public policy argument that immunizing cannabis companies from patent infringement would undermine the objectives of patent law and the Controlled Substances Act (“CSA”). Patent law would be undermined because inventors would be disincentivized from seeking patents if the patents were not enforceable. The CSA would be undermined because a business that is in violation of the CSA would have immunity from patent infringement actions as long as they remain in violation of the CSA.
The Honorable John W. Holcomb denied the motion to dismiss for illegality without writing an opinion, only stating that the denial was “for the reasons stated on the record.” Without a written opinion by the Court discussing the merits of each party’s arguments, one can only speculate on the exact combination of factors that persuaded the court to deny the motion. One factor may be that Coastal filed the motion to dismiss very late into the procedural process and after the claim construction order for the asserted patents was issued by the Court. Thus, substantial substantive work had already occurred by both parties litigating the case up until the motion’s filing. In its briefings, Coastal did not offer support, argument, or rationale as to why the motion to dismiss was filed so late. Coupled with the motion to dismiss standard of construing the complaint in the light most favorable to the plaintiff, it may be understandable that Judge Holcomb wished for the entire legal process to play out and was unpersuaded by Coastal’s dilatory arguments to end the process. A trial to determine patent infringement is now set to begin on October 23, 2023. As for detailed judicial guidance regarding the applicability of the illegality doctrine in patent infringement actions, we will have to wait until a court decides to more fully address the issue.
Steve Garlock, Wil Holtz, Steven Heinrich and Thad Blenke are members of Thompson Coburn’s Intellectual Property practice group.