Cannabis Trademark Risks: Avoiding Silent Threats

As the cannabis industry continues to blossom across the United States and internationally, businesses are racing to establish recognizable brands to capture market share and build consumer loyalty. From dispensaries and edibles to vape pens and CBD-infused skincare, trademarks have become powerful tools for cannabis companies to stand out in a crowded and highly regulated market. However, amidst this rapid growth, many cannabis businesses may unwittingly engage in a legally risky practice known as naked trademark licensing—a mistake that could ultimately cost them their brand rights.

This article explores the concept of naked trademark licensing, why it’s particularly perilous in the cannabis industry, and how businesses can safeguard their brands through proper licensing and quality control measures.

What Is Naked Trademark Licensing?

In trademark law, licensing refers to the practice where the owner of a trademark (the “licensor”) permits another party (the “licensee”) to use the mark in connection with specific goods or services. This is common in many industries and can be a powerful business strategy, especially in the cannabis sector where direct interstate commerce is often restricted due to federal laws. Licensing allows brands to expand into new territories or product categories through local partnerships while still retaining ownership of their identity.

But there’s a catch.

The whole point of trademark protection from a public policy perspective is consumer protection—so that consumers can rely on trademarks to know who they’re getting the product from and, as such, the quality of those products. Naked trademark licensing occurs when the licensor fails to exercise sufficient control over the nature and quality of the goods or services sold under its trademark. In other words, the mark is used by others without appropriate oversight, potentially misleading consumers about the source and consistency of the product.

This lack of quality control can lead courts to determine that the trademark is no longer functioning as a true indicator of source—resulting in abandonment of the trademark rights. That’s right: If you’re not careful, you could lose your rights to your own brand.

Why It’s a Bigger Problem in Cannabis

Naked licensing is dangerous in any industry, but in the cannabis world, the risks are amplified due to the unique regulatory landscape and the rapid pace of market expansion. Here’s why:

1. Patchwork of State Laws and Federal Prohibition
Cannabis is still classified as a Schedule I drug under federal law, which prohibits interstate commerce of cannabis products. As a result, cannabis brands often operate on a state-by-state basis. A brand in California may want to expand to Colorado, Nevada, or Illinois—but due to federal restrictions, it can’t simply ship products across state lines.

Even for a wholly intrastate business, state regulatory cannabis licensing provisions and practical business considerations may dictate an organizational structure where the state cannabis licensed entity is different from the marketing/business entities. In those situations, the state cannabis licensed entity may need to grant a trademark license to the marketing/business entity.  

This leads to a common business model: licensing the brand, either to a local operator in another state, who manufactures and sells products under the original brand name, or to a related company arm within the state.

If not done carefully, this arrangement can easily slip into naked licensing territory. The trademark owner (licensor) may not have a physical presence in the new state, may lack control over production processes, and may be unable to enforce quality standards due to legal constraints. Even where the trademark owner, in practice, has the necessary control, if the paperwork doesn’t provide for that legal control over items such as quality control and packaging, this can lead to a claim of naked licensing.

2. Lack of Experience With IP Law
Many cannabis entrepreneurs come from non-traditional business backgrounds—activism, legacy markets, agriculture—and may not be familiar with the intricacies of intellectual property law. The concept of trademark licensing, quality control provisions, and the need for legal formalities can be foreign or even seem unnecessary.

This makes it easy to overlook critical licensing provisions or to engage in handshake deals that lack enforceable quality control terms.

3. Brand-Centric Consumer Culture
The cannabis consumer market is increasingly brand driven. Shoppers often make purchasing decisions based on perceived product quality, consistency, and reputation. This means that any decline in product quality or deviation from brand promises can cause real consumer confusion—and erode the value of the brand.

If consumers experience inconsistent quality across state lines, not only could the business lose customers, but a court may also find that the trademark is being used deceptively, undermining its validity.

Legal Consequences of Naked Licensing

So, what happens if a cannabis company is found to be engaging in naked trademark licensing? The consequences can be severe and far-reaching.

1. Trademark Abandonment
The most serious consequence is trademark abandonment. Courts have repeatedly held that if a trademark owner fails to exercise adequate control over its licensees, the trademark may be deemed abandoned. This means the mark becomes part of the public domain—anyone can use it, including your competitors.

In an industry where brand identity is often the most valuable asset, losing a trademark could be catastrophic.

2. Inability to Enforce Trademark Rights
If you’re not properly overseeing how your trademark is being used, you may find that courts are unwilling to enforce your trademark rights against infringers. A judge may rule that because you allowed uncontrolled use of your mark, you’ve essentially waived your right to complain about misuse by others.

3. Regulatory Risk
Because cannabis is so tightly regulated at the state level, quality control isn’t just a branding issue—it can have legal consequences. If your licensed brand is associated with products that fail to meet health and safety standards, both you and your licensee may be subject to regulatory sanctions, lawsuits, or even criminal liability in extreme cases.

One caveat: State plain packaging laws, which mandate standardized, non-branded packaging for cannabis products, can significantly impact trademark license agreements. Plain packaging laws restrict how logos, colors, and other brand identifiers can appear on packaging. As such, trademark owners must first ensure their licensees are not violating these laws and placing them in legal peril. At the same time, trademark owners can take steps to mitigate the effect of plain packaging laws by requiring licensees to promote cannabis brands in ways beyond packaging. For example, a trademark license agreement might require the licensee to advertise on the radio (if permitted by state regulations), where the brand can be promoted by name along with slogans or possibly jingles to make the name of the brand more memorable.

Real-World Examples and Precedent

While case law specifically involving cannabis and naked licensing is still emerging, the general principles of trademark law apply. In Freecycle Sunnyvale v. The Freecycle Network (9th Cir. 2010), for example, the court found that the trademark owner had engaged in naked licensing by failing to retain control over the use of its mark by affiliated groups. As a result, the court held that the trademark had been abandoned.

It’s not hard to imagine a similar outcome in the cannabis context, especially as disputes between multistate operators (MSOs), small brands, and licensing partners become more common.

How to Avoid Naked Licensing in the Cannabis Industry

Fortunately, the dangers of naked licensing can be mitigated with proper planning and execution. Here’s how cannabis companies can protect themselves:

1. Draft Strong Licensing Agreements
Every trademark license should be governed by a formal written agreement that includes:

• Clear quality control standards
• Inspection rights
• Reporting requirements
• Termination clauses for failure to comply

Don’t rely on verbal agreements or vague promises—write it down and make it enforceable.

RELATED: 3 Crucial Tips for Drafting Cannabis Contracts 

2. Monitor Licensees Closely
Even if your licensee is operating in another state, you must demonstrate actual oversight. This can include:

• Conducting site visits (physically or virtually)
• Requiring product samples for review
• Auditing facilities or production records
• Reviewing marketing and labeling materials

Document your oversight activities to create a paper trail that can be used in court if necessary.

3. Register Trademarks Carefully
While the U.S. Patent and Trademark Office (USPTO) generally refuses to register trademarks for federally illegal goods like THC-containing cannabis, you can still register marks for ancillary products (e.g., clothing, hemp-derived CBD) and state-level cannabis trademarks in jurisdictions that allow it.

Use federal registrations strategically for legal products, and supplement with state-level protections where applicable. And make sure the Applicant is the actual trademark owner (not the licensee, even if it’s an exclusive licensee).

4. Separate IP Ownership From Operations
Many cannabis companies establish IP holding companies that own the trademarks and license them to separate operational entities. This structure can help isolate risk, streamline enforcement, and facilitate licensing.

Just be sure that the IP company is truly exercising control over the use of the mark, not just collecting royalties. 

A Call to Action for Cannabis Brands

As cannabis matures into a mainstream industry, brand integrity will become increasingly important. Consumers, investors, and regulators will all expect consistency, transparency, and professionalism. That means taking trademark licensing seriously—not just as a legal formality, but as a core component of brand management.

Avoiding the perils of naked trademark licensing isn’t just about protecting your IP—it’s about protecting your business. A cannabis brand that cannot enforce its trademarks, control its quality, or retain its market identity will struggle to compete in the long run.

Now is the time to review your licensing practices, consult with experienced IP counsel, and ensure that every extension of your brand is done with care. Because in cannabis, where reputation can be everything, your trademark might just be your most valuable asset. 

Conclusion

The temptation to scale rapidly through licensing deals is understandable, especially in a fragmented and opportunity-rich market like cannabis. But without proper safeguards, what starts as a growth strategy can quickly become a legal liability.

Naked trademark licensing is a silent threat—one that too many cannabis businesses discover only after it’s too late. By understanding the risks and implementing strong quality control measures, cannabis brands can avoid losing the very thing they worked so hard to build: their identity.

Eric Fingerhut is the Trademark Practice Group Leader and Managing Member of Dykema’s Washington, D.C. office, advising cannabis and other industry clients on trademark, copyright, and brand protection across a wide range of sectors. With more than 25 years of experience, he focuses on litigation, enforcement, and strategic counseling to help businesses develop, secure, and protect their intellectual property assets. Fingerhut works closely with clients to align IP strategy with business goals, offering practical solutions in an evolving legal and regulatory landscape.

Marsha Gentner is senior counsel in Dykema’s Washington, D.C. office and a member of the firm’s Intellectual Property group. She has decades of experience in trademark law, including enforcement, disputes, and counseling clients on a wide range of intellectual property matters. Her work includes advising cannabis businesses on brand protection strategies and helping clients navigate complex legal challenges in competitive markets.