      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 Wn.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 Wn. 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 Wn.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 Wn.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 Wn.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 Wn.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 Wn.2d at 751. "One indication a

new enactment is a clarification is that the original statute was ambiguous." Jane

Roe, 171 Wn.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 Wn.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 Wn. App. 2d

712, 723-24,406 P.3d 1199(2017)(internal quotation marks omitted), review

denied, 191 Wn.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-
