Authored By: Anne van Leynseele
NWMJ Law PLLC
Founding Attorney |
119 1st Ave. South, Suite 420 | Seattle, WA 98104 | Office: (206) 355-5527
Contract Law is the Linchpin for a
Safe, Reliable and Profitable Cannabis Industry
By Anne van Leynseele
Make no mistake, the cannabis industry, despite being a nexus of many intersecting areas of law, is itself a specialty—not just anyone can convert their law practice to handle cannabis clients. The practice of cannabis law requires an attorney to be holistic in their skill set, which means that you cannot just send a client from specialist to specialist to address problems individually.
The regulated cannabis market demands that you be able to discuss any issue at any time, and see the intersection of each area of law contemporaneously so that you can make strategic decisions and anticipate the market well in advance of impending changes.
Cannabis is merely the linchpin that holds all of these areas of law together. To be successful as a cannabis firm or individually as a cannabis attorney, it is paramount that you demonstrate a command over each area of law, and understand the current federal limitations that make each abstruse and irregular.
Today’s cannabis industry is in a constant state of flux nationwide; the laws and regulations are ever-changing.
Despite this, the American cannabis industry is projected to become a billion-dollar industry, even in the face of draconian tax regimes and bars to national legalization and federal enforcement.
While in many ways, the federal restriction on growing, selling, or processing cannabis products has opened the door for small-businesses to succeed, as larger industries (such as banks, or even the tobacco industry) are not willing to accept the substantial risks involved, many small-business owners are not nearly as savvy regarding contract law as larger, represented, corporations might be.
As such, many of these small-business owners may not understand the consequences of contract illegality or the consequences of their contracts being adjudicated as void and unenforceable.
Without reliability in contract enforcement, the growth of the cannabis industry will be stifled, and the industry cannot continue to evolve safely.
Contracts: Historically Precluded in Cannabis Law
Historically, Judges can, and have, voided contracts that relate to cannabis or cannabis transactions for violating federal law or policy, under the well-established principle that a contract for an “illegal” purpose is void.
In 2010, the Arizona Superior Court ruled in Summary Judgment against the enforceability of a medical marijuana related loan agreement for $500,000, stating that because the purpose of the agreement (to finance the sale and distribution of marijuana) was illegal under federal law, the contract was “void and unenforceable.”
A California court ruled similarly in 2013, when a medical marijuana business failed to honor a contract calling for investment in exchange for profits, as was subsequently sued, but the court found the contract void under federal law, and thus unenforceable.
Even Colorado, prior to 2012, found that a contract for the sale and delivery of product from a medical marijuana cultivator to a retailer was void as “against public policy.”
In a case in October 2012, however, a Colorado District Court Judge found the defendant’s argument that the contract was unenforceable under federal law “unpersuasive.” The General Assembly later passed a law in Colorado that states that, “a contract is not void or voidable as against public policy if it pertains to lawful activities authorized by” Colorado’s constitutional and statutory marijuana law.
The Colorado District Court case, West v. Green Cross, LLC., could evidence a change in how marijuana contracts are handled nationwide; as Luke Sheuer of Widener University Delaware Law School claims, the shift from viewing these contracts as consistent with or against “public policy,” as opposed to legal or illegal, allows room for the more persuasive argument that the contracts are valid as a result of federal preemption and the supremacy clause.
The Judges in these cases felt bound by the Supremacy Clause of the United States Constitution, which states that constitution, and by extension, federal law, is the supreme law of the land, which supersedes and preempts conflicting state laws. While an argument can (and should) be made that the states are free to adopt their own laws regarding the legalization of cannabis under the 10th Amendment’s anti-commandeering clause, the judges in these cases, because of the argument that the contract was void simply for the reason that it was against federal law, were bound to that decision. Some recent court decisions, particularly in Colorado, have changed the way they view cannabis contracts for the better.
Current State of Contracts in Cannabis Law
One example of the change in how cannabis contracts are handled by some courts is Green Earth Wellness Center, LLC. v. Atain Specialty Ins. Co. (13-CV-03452 2016 WL 632357 (D. Colo. Feb. 17, 2016)), and the order issued by the court in Blue Sky Care Connection, LLC.
In February 2016, the court in Green Earth held that, although marijuana is illegal under the Controlled Substances Act (CSA), the court would uphold the contract anyway, creating a persuasive legal precedent that federal courts should be enforcing cannabis contracts.
Green Earth insured its medical marijuana center and grow facility with Atain Speciality Insurance Company, and disclosed that it was a medical marijuana business on its insurance application that was accepted by Atain. In resolving the case, Judge Krieger stated, “the nominal federal prohibition against possession of marijuana conceals a far more nuanced (and perhaps even erratic) expression of federal Policy,” pointing out that Atain offered no other evidence against Green Earth’s claims other than that the contract was void under federal criminal statutes, failing to assert that the claims were in violation of Colorado law. Judge Krieger further stated that Atain was very aware of the fact that Green Earth was operating a cannabis business, and that both parties had a mutual expectation that Atain would insure Green Earth’s inventory, thus dismissing Atain’s “contraband” Policy exclusion, based on the knowing and intelligent entering of the contract by both parties. Interestingly, Judge Krieger also added in a footnote that, even if he had accepted Atain’s claim that enforcing the insurance policy was against public policy, the court “would be inclined to permit Green Earth to amend its pleadings to replace any claim sounding in breach of contract with a claim that Green Earth’s payment of premiums for an illusory promise of insurance operated to unjustly enrich Atain.”
The Green Earth decision is in stark contrast to Colorado’s other holdings on this issue, specifically the decision from Blue Sky, where the court determined that, even though neither party had raised the issue of illegality, it was up to the court to protect both state public policy, and public policy of the “’state’ of the nation.”
However, Colorado (and in many ways, because of the Blue Sky holding from 2012), passed “Colorado Revised Statutes § 13-22-601 Contracts pertaining to marijuana enforceable,” which states that is definitively the public policy of Colorado to enforce marijuana contracts, rendering the argument that enforcing the contract as against public policy nullified.
This shift from the illegal purpose analysis towards a public policy analysis is a positive step for the industry. Attorneys in the industry have certainly facilitated this, however, by adopting new best practices in cannabis contract law.
Best Drafting Practices of Cannabis Contracts
Most states with legalized recreational cannabis industries have begun enforcing cannabis contracts at the state level, recognizing that they are, in fact, legal under state law and not against the public policy of the state. However, some of this change is likely attributable to the way contracts have been drafted by attorneys in the industry. Most contracts drafted in the industry now have most, if not all, of the following provisions:
- Acknowledging that the subject matter of the contract is illegal: This sounds counter intuitive, but stating clearly that the contract is for the growing, selling, processing, testing, transporting, et cetera of cannabis products actually lends some credence to a contract in this industry; obscuring the purpose of the contract actually gives the contract less credibility. Acknowledging the illegality of the contract also gives you a specific clause in the contract to use if the opposing party tries to assert an illegality defense.
- Waiver of illegality: Some contracts in the industry outright waive illegality as a defense in the terms of the contract itself, hoping that it will force the court to use state law to evaluate the terms of the contract, rather than rely on federal law.
- Forum Selection and Choice of Law provisions: For the most part, most cannabis contracts are going to be between businesses located in the same state (though not always, as some ancillary businesses, such as packaging companies, could be out of state). Including forum selection clauses and choice of law provisions can help to assure that the contract dispute is litigated in front of a court that is most favorable to seeing a resolution. Similarly, choosing a state court over a federal court, or even more specifically which state court (say a Western Washington court versus and a less-favorable Eastern Washington court), could have a big effect on how the dispute is resolved.
- Severability: This is a common boilerplate term in most contracts, but it is always important to include as a general rule of thumb, so that if any provision is found lacking, the rest will stand.
- Arbitration Clauses: With the uncertainty in whether or not a court will even enforce cannabis contracts, many contracts have begun to include arbitration clauses as first line of defense to getting their contracts enforced in the event of a dispute. Arbitrators, as a whole, are more favorable to seeing resolutions between parties than courts may be in this arena; arbitrators would be out of business if they refused to settle every cannabis contract they came across. Including an arbitration term has become standard practice in their contracts for most businesses in the industry—at least until courts are more predictable about how they handle cannabis contracts.
Moving to a “public policy” standard is promising for the cannabis industry. A public policy standard offers the industry a sense of reliability that contracts will be enforced by courts as opposed to voided per se, as well as a sense of stability that will help foster growth. In return, that same sense of reliability and stability in the industry will contribute to an industry that has already proven to be a financial success (both Washington State and Colorado saw $70 million dollars of tax revenue generated last year alone), as well as successful in lowering violent crime, ceding profits from drug cartels, reducing the instances of drugged driving, and, paramount, the compassionate care of those that use cannabis medicinally. Reliably enforceable contracts create a safe industry, both for business owners and consumers, and as more states follow Colorado’s lead in ensuring that enforcing cannabis contracts is definitively within the state’s public policy, the industry will find that sense of stability.