The cannabis industry is booming across state-legal markets, but what happens when a deal goes bad? Breach of contract in cannabis businesses is more complex than most industries due to federal vs. state legal conflicts. Enforcing a contract in the cannabis business isn’t always business-as-usual. Cannabis operators, investors, and entrepreneurs must contend with a legal paradox: your agreement might be perfectly legal in your state, yet still “illegal” in the eyes of federal law. This article explores how courts are really treating cannabis contracts in breach of contract cases, and what you can do to protect your deals in this high-risk, high-reward industry.
The Conflict Between State-Legal Deals and Federal Law
Why Enforceability Is Uncertain in Cannabis Contracts
In most industries, a breach of contract is straightforward legal territory. If one party fails to perform, the other can sue and expect the courts to enforce the deal. But in the cannabis sector, enforceability isn’t guaranteed. The culprit is the ongoing conflict between state and federal law. Under the federal Controlled Substances Act (CSA), marijuana remains illegal – so any contract involving the sale, distribution, or cultivation of cannabis could be deemed an “illegal contract.” Traditionally, courts will not enforce a contract that requires illegal conduct or violates public policy (for instance, a contract to sell illicit drugs is void and unenforceable).
State-legal cannabis businesses find themselves in a unique predicament: they operate legally under state law, but from the federal perspective their activities are unlawful. This duality means a cannabis contract sits in a gray area. If taken to court, one side might argue that the agreement is void because it involves federally illegal activity. This argument is known as the “illegality defense” – essentially saying, “Judge, you can’t enforce this contract because doing so would further an illegal enterprise.” It’s a serious concern for anyone signing a contract in the cannabis trade, because it introduces uncertainty that doesn’t exist for contracts in truly legal industries.
How Courts Are Handling Breach of Contract in Cannabis Cases: State Courts vs. Federal Courts
Whether a cannabis contract is enforced often depends on which court hears the case. State courts in jurisdictions that have legalized cannabis (medicinal or adult use) are generally more willing to treat cannabis contracts like any other business agreement. After all, if a state has gone so far as to legalize and regulate cannabis commerce, its courts have a strong policy reason to uphold contracts between licensed operators. In fact, many legalization statutes explicitly say that cannabis-related contracts are valid and enforceable despite federal law. For example, states like Colorado, Illinois, Michigan, and Ohio have provisions declaring that contracts for lawful cannabis activities are not void as against public policy. This gives state judges cover to enforce these agreements – and most have shown willingness to do so, especially if the parties were complying with state regulations. In state-level litigation, it’s increasingly rare to see a judge throw out a case just because it involves cannabis so long as it’s legal under state law.
Federal courts, however, have been much less predictable and often downright hostile to cannabis contracts. Federal judges are bound to follow federal law (and the CSA considers cannabis a Schedule I substance). Over the past few years, several federal courts have dismissed breach of contract lawsuits by cannabis companies or investors, explicitly citing the illegality of the underlying business. Their reasoning: a federal court cannot be used as an instrument to enforce obligations that facilitate trafficking in a controlled substance. For instance, if a cannabis cultivator sues a retail partner in federal court for failing to pay for a shipment of product, the court might say, “Sorry, we can’t order someone to pay for marijuana, that’s illegal.” This dynamic has played out in cases from Washington to Nevada to California – even when the contracts were valid under state law.
The bottom line is forum matters. A contract that would be honored in a California state courtroom might be refused in a federal courtroom next door. Cannabis businesses typically want to avoid federal jurisdiction for this very reason (more on how to do that below). Understanding this split is crucial for multi-state operators and anyone doing deals across state lines: if your dispute lands in federal court, the rules – and risks – change dramatically.
How Courts Are Treating Cannabis Contract Disputes
State Court Attitudes: Upholding Deals in Legal Markets
In states where cannabis is legal, courts have strong incentives to uphold cannabis contracts. These states have built regulatory frameworks treating cannabis commerce as legitimate business, complete with licensing, taxes, and compliance rules. It follows that state courts see enforcing contracts as part of supporting that legal industry. Often, judges in these jurisdictions will look for ways to enforce an agreement if at all possible. They might sever out any truly problematic (illegal) parts of a contract but still enforce the rest. For example, if a contract term technically involves the transfer of cannabis (a federal no-no), a state judge might award monetary damages instead of directly enforcing that term, reasoning that ordering payment doesn’t require anyone to break the law. Courts can be creative – and generally the trend in state courts is to find a pathway to enforcement so that cannabis businesses aren’t left without any legal recourse.
It’s worth noting that some states have passed laws to reassure participants that their deals are enforceable. Colorado’s law, for instance, declares that cannabis contracts are not void just because of cannabis. Illinois, New York, Michigan, and others have similar provisions in their cannabis statutes. While these laws can’t bind a federal court, they send a clear message within state courts: enforce these contracts, because it’s our state’s public policy to do so. As a result, if you sue in state court over a cannabis venture gone wrong, you stand a decent chance that the court will treat your contract like any standard business agreement – especially if the dispute is between license-holders or ancillary companies operating legally under state law.
Federal Court Crackdowns: Illegality Defense in Action
Federal courts have increasingly taken the opposite stance. There was a period where some federal judges tried to enforce cannabis contracts by sidestepping the illegal aspects (one notable 2016 case, Mann v. Gullickson, allowed a lender to recover a loan made to a cannabis business, reasoning that repaying money doesn’t require anyone to violate the CSA). However, more recent decisions show a harder line from federal benches. In multiple 2020–2025 cases, federal judges dismissed contract claims or denied relief, explicitly because the contracts involved cannabis.
Consider a real example: in 2025, a federal court in Ohio dismissed a $5 million contract lawsuit where an investor sought to enforce the purchase of a licensed cannabis company. Even though the deal was lawful in Michigan (where the business operated), the federal judge invoked the CSA, stating that the court cannot facilitate the transfer of marijuana licenses or assets – effectively leaving the aggrieved party without a remedy. In another case, a cannabis company in Washington state could not enforce an agreement to receive future profits from a partner, because the federal court said paying out cannabis-derived profits would amount to furthering a federal crime. And in a particularly striking 2020 Oregon case, a judge on his own raised the issue that a lawsuit for lost profits (due to a failed facility build-out) was essentially asking for profits from illegal cannabis sales – and refused to award those damages.
These examples show the illegality defense alive and well in federal venues. If one party doesn’t want the contract enforced, and the dispute is in federal court, they can and will argue that the contract is void for illegality. Often, this argument has been successful. The result can feel very unfair to the other party – you did everything right under state law, you upheld your end, and now the breaching party is off the hook because of federal law? Yet, this is a risk every cannabis business must acknowledge.
One more wrinkle: if a case is thrown out of federal court on illegality grounds, you might think “Fine, I’ll just refile in state court.” But it’s not that simple, due to procedural doctrines like res judicata (which prevents re-litigating a claim that was already judged). In short, a dismissal in federal court could potentially bar you from pursuing the claim elsewhere, depending on how it’s worded. That makes the stakes of where you file a cannabis contract lawsuit extremely high.
Common Issues in Cannabis Litigation
Beyond the enforceability tug-of-war, cannabis-related contract disputes bring some unique challenges in court. One is proving damages. Many breach of contract suits involve claiming lost profits or expected revenues that were cut off by the breach. In a young and volatile industry like cannabis, proving those losses with reasonable certainty can be tough. Courts (and juries) may cast a skeptical eye on projected earnings of a cannabis startup, for example, because the market is new, and federal illegality sometimes means companies don’t have traditional records or can’t easily estimate future growth. So even when you win a breach of contract case, you might not get all the damages you hoped for if the court finds them too speculative. This was noted in at least one California case, where a judge pointed out the complexity of proving lost profits in a burgeoning cannabis market.
Another common dispute area is partnership and ownership fights in cannabis ventures. Often these deals involve multiple investors, complex ownership structures, and heavy state oversight (background checks, ownership caps, etc.). If a business partner reneges on an agreement (say, refusing to acknowledge another’s ownership stake or failing to pay out an investor’s share of profits), the ensuing litigation can be entangled with regulatory issues. For instance, one partner might argue the other’s stake was never valid due to state law restrictions – we saw this in a Washington case where a partner’s past criminal record (a disqualifier for ownership under state rules) was used as a sword and shield in a contract dispute. Courts handling these cases have to navigate not just contract law, but also the overlay of cannabis regulations to determine what’s a breach and what’s simply compliance with law.
Labor and supply-chain contracts present issues too. A cultivator might sue a distributor for not paying, or a dispensary might get sued for switching suppliers in violation of an exclusivity clause. These are ordinary business disputes, but in the cannabis context a contract might include regulatory compliance promises, specific licensing requirements, or clauses about product quality/testing (given mandatory state testing regimes). Failure in any of those areas could trigger a breach. Courts treat many of these issues similarly to other industries, but always with an eye on the cannabis-specific context – was the breach perhaps excused due to a regulatory mandate? Is a contract clause unenforceable because it contradicts state cannabis law? Those questions can come up, requiring judges to have a crash course in cannabis regulation.
In summary, state courts are increasingly treating cannabis contract disputes as standard commercial cases with a twist, whereas federal courts might use that twist to toss the case entirely. Knowing these trends sets the stage for how you should structure your contracts and approach any potential litigation.
Real World Cases and Lessons
Let’s look at a couple of real-world scenarios that illustrate how breach of contract battles in the cannabis industry play out:
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Multi-Million Dollar Deal Dismissed: In the Midwest, an investor agreed to purchase a licensed cannabis cultivation business for several million dollars. The contract was signed, and a closing date set, but the buyer got cold feet and backed out. The seller (the cannabis company) sued for breach of contract, seeking to enforce the sale or at least get heavy financial damages. Unfortunately, because the plaintiff filed in federal court (due to diversity of citizenship between the parties across state lines), the case hit a wall. In early 2025, the federal judge dismissed the lawsuit outright, citing the illegality of the object of the contract – the transfer of a cannabis business involving the handover of cannabis inventory and licenses. The lesson? Even a rock-solid deal can vaporize if brought in the wrong forum. Had this dispute been kept in state court, the outcome might have been different. For cannabis entrepreneurs and investors, this case underscored the importance of contractual clauses that keep disputes out of federal court. It also was a wake-up call: performing due diligence on what law and jurisdiction will govern enforcement is as critical as the business terms themselves.
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Investor vs. MSO – The $32 Million Verdict in Jeopardy: Not every case gets dismissed; sometimes the cannabis plaintiff wins big – but the fight still isn’t over. In Michigan, a well-known multi-state operator (MSO) lost a jury trial in 2023 to a smaller partner company, resulting in a hefty $32 million breach of contract verdict against the MSO. However, the MSO didn’t write a check immediately – instead, it went to federal court to argue that the judgment should be thrown out because the contract was federally illegal (the deal involved the sale of a stake in a cannabis venture). This ongoing saga (as of 2025) exemplifies the legal tightrope cannabis businesses walk. You might spend years litigating and even win at trial, only to have the other side try to unwind the outcome on a technical (but serious) legal argument stemming from federal law. The key takeaway: the illegality defense can rear its head even after a verdict, so it should be anticipated from day one. Companies like the MSO in this case now routinely insert provisions in their contracts to try to prevent this scenario, such as waivers of the illegality defense and agreements to arbitrate or stick to state courts.
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Handshake Deal Gone Wrong: In California’s early cannabis days, it wasn’t uncommon for businesses to operate on informal agreements (the “handshake deal”). Fast forward to today, and many are paying the price. Consider a dispute where a cultivator verbally agreed to supply a manufacturer with a certain strain exclusively. The relationship soured, and the supply stopped. The manufacturer sued for breach of contract – but had nothing in writing. In court, this becomes a messy battle of he-said, she-said. Cannabis cases add another layer: without a written contract, it’s harder to prove terms in an industry where trust may have been the only assurance, and ambiguities will be resolved by default rules that might not favor the plaintiff. A judge in one such case essentially told the parties: “Without a contract, there’s not much I can enforce.” The lesson here is simple but vital: get every important deal in writing, especially in cannabis where you may also need to show regulators the agreements (and where a written contract can clarify compliance responsibilities too). Handshake deals might have “suited the industry in its nascent stages,” but as one law firm blogger quipped, the reality today is that not putting it on paper invites litigation – and makes winning in court far less likely.
Each of these scenarios teaches something: Choose your forum wisely, anticipate the federal law issue at every turn, and never rely on informal understandings. The stakes – whether millions of dollars, ownership of a business, or simply the steady supply that keeps your business running – are too high in this industry to leave things to chance.
Protecting Your Cannabis Agreements from Breach Fallout
No one enters a contract expecting it to fall apart, but prudent cannabis businesses plan for that possibility from the outset. Here are key strategies to make your contracts as breach-proof and enforceable as possible given the industry’s legal pitfalls:
Always Get It in Writing
First things first: memorialize every significant agreement in writing. This might seem obvious, but the cannabis sector has a history of informal deals – especially from the pre-legalization era or in fast-moving startup scenarios. Today, with big money on the line and complex regulations, a lack of a written contract can be fatal in court. A written contract forces both parties to spell out their obligations and rights. It becomes concrete evidence if there’s a dispute. It’s also an opportunity to include all the protective clauses we’re about to discuss. Verbal promises and handshake deals are extremely hard to enforce, and judges have little patience for them. Spending the time (and legal fees) to draft a solid contract at the beginning of a deal will pay off immensely if there’s a breach down the road. In short, if it’s not on paper, it might as well not exist when you’re asking a court for help.
Include State-Only Forum Selection
One of the most powerful clauses you can insert is a forum selection clause that dictates any lawsuit must be brought in a specified state court. For example, your contract might say: “Any disputes arising from this agreement shall be resolved exclusively in the state courts of [Your State], and the parties hereby waive any right to federal jurisdiction.” This kind of clause does two things: (1) it shows the clear intent of both parties to stay out of federal court; and (2) it can give a state court judge grounds to keep the case, and a federal judge grounds to dismiss any case filed federally (or not accept it at all). Now, it’s true you cannot outright prevent a federal court from exercising jurisdiction if legal criteria are met (parties can’t just contract away a court’s power). But practically, if both sides agreed on a state forum, a federal court will often respect that via the doctrine of forum non conveniens, pausing or dismissing the federal case so it can be heard in state court. The U.S. Supreme Court has held that valid forum-selection clauses should be honored in all but exceptional cases.
Make sure the clause is unambiguous and mandatory: e.g., “shall be brought only in [state] court,” not just “may be brought.” Also, explicitly waive the right to remove a case to federal court. (Removal is how a defendant shifts a lawsuit from state to federal court. If they’ve contractually waived that right, it’s another point in favor of keeping the dispute where you intended.) The goal is to trap any litigation in a friendly forum – the courts of a state that supports cannabis businesses. If you operate in multiple states, do this for each contract in the state most favorable or most connected to that deal. For instance, if an Illinois cultivator contracts with a New York distributor, and Illinois has more protective cannabis laws, you might choose Illinois law and courts in the contract (plus, that’s where the license is, which makes sense).
Consider Arbitration Clauses
Arbitration is another powerful tool to resolve disputes while sidestepping some of the court system’s risks. In arbitration, a private arbitrator (or panel) acts as the judge and jury. Why is this helpful for cannabis contracts? Two reasons:
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Arbitrators are not bound to enforce federal law in the same way a federal court judge is. They’re generally tasked with honoring the contract and the chosen law in it. They won’t usually throw out a case on a federal illegality technicality – especially if the contract is clear that both parties went in with eyes open about cannabis’s legal status. In fact, there was a notable case where a federal court upheld an arbitration clause in a cannabis context, saying that whether the contract was illegal or not was a question for the arbitrator, not the court. This essentially allowed the dispute to be heard on its merits (in arbitration) instead of being dismissed outright.
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Arbitration awards can be converted to judgments in state court with relative ease. The Federal Arbitration Act does allow federal courts to confirm (approve) arbitration awards, but if you’re worried about federal court, you can agree that any arbitration award will be confirmed in a particular state court. State courts generally will confirm an arbitrator’s decision and turn it into an enforceable judgment, absent some extreme reason not to. And critically, arbitrators can be given instructions via the contract – which leads to the next point.
When drafting an arbitration clause for a cannabis deal, you should be specific. Define the rules: for example, agree on the arbitration provider (AAA, JAMS, etc.), the number of arbitrators, and that the arbitrator has full authority to grant any legal or equitable remedy as if they were a court. Also – and this is key – include a provision that the parties waive any defense or argument that the contract is illegal or void due to federal law. Basically, both sides agree not to raise the cannabis illegality issue in any dispute. This can signal to an arbitrator (or a court reviewing later) that both parties assumed the risk and want their contract enforced notwithstanding the federal prohibition. It might not bind a court completely, but it’s better than giving a disgruntled party an open invitation to exploit the illegality defense.
Arbitration isn’t a cure-all. It can be costly and there’s no public record (which is good for privacy, not so good if you want a clear legal precedent). But in a climate where a traditional courtroom is a gamble for cannabis cases, arbitration provides a level of predictability and an enforceable outcome that courts are likely to honor. Many cannabis companies – especially multi-state operators doing deals in new markets – are now defaulting to arbitration clauses in their contracts for this very reason.
Acknowledge and Waive Federal Illegality
Another clause gaining popularity is an acknowledgment and waiver of illegality defense. This means the contract explicitly states that the parties recognize cannabis remains illegal under federal law, but they agree not to use that fact to avoid their obligations. In essence: “We know what we’re doing, we know the legal status, and we promise not to later claim this contract is void because of federal illegality.” While such a waiver might not stop a court from raising the issue on its own, it at least removes the argument between the parties. Some states even allow this by statute or case law – for instance, in a few jurisdictions, courts have said a party can waive an illegality defense (especially when both knew what they were getting into).
By including this clause, you create a contractual estoppel: it becomes a breach of the contract itself for someone to assert “this contract is illegal and unenforceable.” Think of it as belt-and-suspenders along with the forum selection and arbitration provisions. You’re telling any future judge or arbitrator, “Judge, the defendant promised not to pull this maneuver. They should not be allowed to cry foul on legality now.” It may not work 100% of the time (a court always has discretion to consider public policy), but it can be persuasive, especially in state court or arbitration settings where the equities of fairness come into play. At minimum, it shows both parties entered the deal fully informed of the risks, making a judge more comfortable that enforcing the contract isn’t some inadvertent endorsement of criminal activity, but rather an upholding of the parties’ bargained-for expectations.
Choose Favorable Governing Law
When multiple states or jurisdictions are involved in a deal, your contract will have a choice-of-law clause – pick a state’s laws that will govern interpretation and enforcement of the contract. Here, you want to choose a state with cannabis-friendly laws and jurisprudence. For example, if you’re a multi-state operator doing a transaction, and you have a choice between applying say, Colorado law or a law from a state with no cannabis program, you’d likely pick Colorado. Not only does Colorado have a statute explicitly supporting cannabis contracts, it has an established industry and more legal precedent in that area. Conversely, a state that still criminalizes cannabis or only recently legalized might have judges less familiar with these issues or even hostile.
One caveat: you generally need some nexus to the state whose law you choose. You can’t pick a completely unrelated state just because it’s favorable; courts might not honor that. But many cannabis businesses have operations in multiple states, so often you can find a reasonable connection to a friendly jurisdiction. If you’re an investor in multiple markets, you might route your contracts through a particular subsidiary in a state like California, for instance, just to avail yourself of its law.
Also, keep an eye on evolving state laws. States like California attempted a law (Civil Code § 1550.5) that basically said cannabis contracts are valid, but a recent court decision cast doubt by saying federal law trumped that statute in a specific context. This doesn’t mean California courts won’t enforce cannabis contracts (they largely do), but it shows that not all state-level fixes are foolproof. Still, aligning your contract with a state’s supportive policy is far better than leaving it to chance.
Other Protective Terms
Don’t overlook standard contract clauses that can be extra important for cannabis deals:
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Severability: This clause says if one part of the contract is invalid or illegal, the rest of the contract still stands. In a cannabis context, this could save your agreement. For example, if a court refuses to enforce a part of the deal that directly involves handling cannabis, a severability clause might convince the court to cut out that part but enforce other parts (like payment obligations or transfer of a license interest) if possible.
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Force Majeure and Compliance: Cannabis companies face the constant risk of changing regulations or government action. A well-drafted contract will address what happens if new laws or enforcements (say, a federal crackdown or a license suspension) impair the contract. Defining these events can prevent disputes about what constitutes a breach versus an excusable event.
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Dispute Resolution Steps: You might require negotiation or mediation before any lawsuit/arbitration. This is common in commercial contracts and can be particularly wise in cannabis – given that public court fights can attract unwanted attention (from regulators or even federal agencies). Many cannabis businesses prefer to resolve things privately if possible.
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Attorney’s Fees: Given the costs of litigation/arbitration, consider an attorney fee provision (loser pays). This can deter frivolous breaches or defenses – if a party knows they’ll pay the other’s legal bills if they lose, they might be less inclined to rely on a shaky illegality defense just to prolong things.
All these measures boil down to a simple principle: plan for enforcement at the drafting stage. Don’t assume a court will automatically back you up later – make it easy for the court to enforce your deal. By doing so, you reduce legal risk and increase the odds that a breach of contract won’t turn into an unrecoverable loss.
Litigation Strategy for Breach of Contract in Cannabis Disputes
Even with the best contracts, disputes can happen. When you find yourself facing a breach of contract in the cannabis space, consider these strategic points:
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Think State, Not Federal: As we’ve stressed, if you have any say in the matter, keep litigation in state court. This might mean suing in the defendant’s home state court (if that state allows cannabis commerce) rather than looking for a federal angle. If you’re the one being sued in state court, resist the temptation to “remove” it to federal court unless you truly want the contract voided – removal could backfire by moving the case to a forum where your contract is DOA. Generally, only go to federal court if there’s no cannabis-related illegality issue at play or if it’s absolutely unavoidable.
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Leverage Alternative Dispute Resolution (ADR): If your contract has an arbitration clause, use it. If not, you can still consider proposing mediation or settlement discussions early. The cannabis industry is relatively small and often relationships matter – a drawn-out public lawsuit might do more harm than good. Mediators with cannabis expertise can sometimes craft creative solutions (like structured buyouts, license transfers with regulatory approval contingencies, etc.) that a court might not be able to order. ADR can save time, money, and keep things more private. However, make sure any settlement or mediation outcome is formalized in writing (and ideally reviewable by regulators if needed) to avoid future enforceability issues.
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Get Specialized Legal Counsel: Not all business attorneys are prepared to navigate the maze of cannabis law. Engage lawyers who have experience with cannabis contracts and litigation. They will know the arguments that work and those that don’t. For example, the attorneys at Collateral Base (a firm known for cannabis business litigation) or other cannabis-focused law practices have likely encountered these scenarios before. A knowledgeable lawyer can help you forum-shop to your advantage, craft strong arguments to counter an illegality defense, and speak the language of both contract law and cannabis regulations. This dual expertise can be the difference between winning or losing a case.
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Maintain Regulatory Compliance During the Dispute: It might sound separate from the contract issue, but if you’re embroiled in a contract fight, ensure your own house is in order with state regulators. If a dispute leads to operational problems (for instance, a distributor stops deliveries and you’re a retailer running out of product), don’t cut corners by sourcing product outside the regulated system or doing anything that breaches state rules. That could not only get you in trouble with regulators but also weaken your position in court. Judges are less sympathetic if the party seeking enforcement has themselves fallen afoul of the law or regulations. On the flip side, if the other party’s breach causes you to violate a regulation (say they were responsible for compliance in some area and failed), document that thoroughly – it can bolster your case and maybe give you independent grounds to claim damages.
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Prepare for the Long Haul (or Not): Litigation can be slow – and in cannabis, delay can be dangerous (licenses can expire or be revoked, businesses can fail, market conditions change). Early on, decide your endgame. Is this a fight worth pursuing to judgment, or is a negotiated solution acceptable? Sometimes the principle and precedent matter (for example, establishing that your contracts are solid), but other times a quiet settlement is more valuable to keep your business going. Evaluate the cost-benefit pragmatically. And if you do proceed, build the time factor into your business planning (don’t stake your company’s survival on a court win that might come two years later).
In essence, a savvy litigation strategy for cannabis contracts involves choosing the right battlefield, having the right allies, and keeping the broader business implications in mind. By approaching disputes with eyes wide open to the unique challenges of the cannabis industry, you stand the best chance of coming out on top – or minimizing the damage of a breach.
Conclusion
Cannabis may be one of the fastest-growing industries in the country, but it also operates on one of the shakiest legal foundations. This paradox – state legality versus federal illegality – touches every contract a cannabis business signs. Courts are getting more and more cases testing these boundaries, and the outcomes can be dramatically different depending on the circumstances. We’ve seen that many state courts are treating cannabis contracts just like any other contract, enforcing agreements to keep business running smoothly in their regulated markets. At the same time, federal courts have sent a sobering message that some deals will not be honored under federal law.
For cannabis operators, investors, and the attorneys who advise them, the takeaway is clear: don’t assume your “legal” deal is bulletproof. You must actively fortify your agreements to withstand the unique stresses of this industry. That means negotiating smart contract clauses that anticipate the illegality defense, choosing governing law and forums wisely, and perhaps embracing arbitration to dodge unfriendly venues. It also means staying diligent – documenting your deals, monitoring regulatory changes, and enforcing your rights promptly when something goes wrong.
The good news is that with each passing year, we gain more clarity on how courts handle these issues. National trends show a slowly emerging consensus that, ultimately, fairness and the parties’ intent should prevail – courts don’t want to leave people without any remedy, especially when they acted legally under state law. But until federal law unequivocally changes, we have to operate in a cautious, well-planned way. By applying the lessons from recent disputes and heeding the strategies outlined above, cannabis businesses can greatly reduce the legal risks of contract breaches. In an industry built on bold entrepreneurship, consider this the necessary legal armor: plan ahead, stay informed, and contract smarter. Doing so will help ensure that when you make a deal, your partners (and the courts) will actually stick to it when it counts.
Frequently Asked Questions (FAQ)
Q: Are cannabis contracts legally enforceable despite federal marijuana laws?
A: Yes – but with important caveats. Contracts between cannabis businesses can be enforced, especially in state courts within jurisdictions where cannabis is legal. Many state courts uphold these deals as long as they comply with state law. However, because marijuana is illegal under federal law, a federal court may refuse to enforce a cannabis contract on public policy grounds. The enforceability often comes down to the forum: state courts are generally safer for cannabis contracts, whereas federal courts pose a higher risk of the contract being deemed void. To improve enforceability, parties often include clauses choosing state law and state forums (or arbitration) and even explicitly waiving any defense based on federal illegality.
Q: What happens if a partner breaches a cannabis business contract?
A: If a partner or counterparty breaches your cannabis-related contract, you have the right to seek legal remedies – typically, suing for breach of contract to recover damages or enforce the deal. The first step is to review your contract for any dispute resolution clauses (such as arbitration requirements or notice periods to cure a breach). Next, consider the best venue for enforcement (usually a state court where the business operates). In a lawsuit, you’ll need to prove the contract was valid, the other party breached it, and that you suffered losses as a result. One challenge in cannabis cases is demonstrating damages with certainty (e.g. proving lost profits in a new market can be tough). If you win, a court could award monetary damages, or potentially order specific performance (forcing the other party to do what they promised) if appropriate. However, be prepared for the breaching party to possibly raise a federal illegality defense. Having a well-drafted contract that anticipates this (and choosing the right forum) will be crucial to overcoming such tactics. Often, these disputes also go through settlement discussions or mediation, since prolonged litigation can be costly and attract regulatory scrutiny.
Q: How can we make our cannabis contracts more enforceable and breach-resistant?
A: To bolster your contracts, draft them with enforcement in mind. Key steps include: (1) Use clear written contracts – no informal handshakes. (2) Include a forum selection clause mandating that any dispute be heard in a state court (of a state that permits cannabis commerce) and waiving recourse to federal court. (3) Add an arbitration clause – arbitration can keep disputes out of court entirely and avoid a federal judge dismissing your case; specify that an arbitrator can decide all issues, including any illegality questions. (4) Acknowledge federal illegality but waive that defense – have both parties agree that they won’t later claim the contract is void due to cannabis’s status under federal law. (5) Choose a favorable state’s law to govern the contract, ideally one with pro-cannabis contract rules, and ensure the deal has a connection to that state. (6) Incorporate severability so that if one clause is problematic, it can be cut out without voiding the entire agreement. (7) Finally, ensure compliance with all state regulations in the contract’s performance – a contract that requires an illegal act even under state law (like unlicensed sales) is unenforceable everywhere. By taking these measures, you make it far more likely that a court (or arbitrator) will enforce your agreement and provide a remedy if the other side breaches.
Q: Should we use arbitration to resolve cannabis contract disputes?
A: Arbitration can be a smart choice for cannabis contracts. By agreeing to arbitrate, you and the other party basically opt out of the court system for resolving disputes. The advantages: an arbitrator is less likely to throw out your case due to federal illegality concerns – their job is to rule on the dispute based on the contract and chosen law. Also, arbitration proceedings are private, potentially keeping sensitive business details or regulatory issues out of the public eye. Another benefit is flexibility: you can select arbitrators with cannabis industry expertise, and set rules to streamline the process. The main downside is cost – arbitration can be as expensive (sometimes more) than court litigation, because you pay the arbitrator and administrative fees. There’s also no automatic right to appeal an arbitrator’s decision if you dislike the outcome. Despite that, many cannabis businesses prefer arbitration because it sidesteps the risk of a federal court judge unexpectedly voiding their contract. If you include an arbitration clause, make sure to spell out that any award can be confirmed in state court (to become an official judgment) and consider including a provision that forbids the arbitrator from considering federal illegality as a defense (and that the parties won’t raise it). In summary, while it’s not mandatory, arbitration is often recommended as a protective measure in cannabis deals.
Q: Can I sue in federal court if my cannabis contract is breached (for example, if it’s a multi-state deal)?
A: Technically, you can attempt to sue in federal court under certain conditions (such as diversity jurisdiction, where the parties are in different states and the amount in controversy exceeds $75,000). However, it’s usually not advisable for cannabis contract disputes. As we’ve discussed, federal courts have dismissed many cannabis-related contract cases on the grounds that the contract is contrary to federal law. If you have a multi-state deal, a better approach is to file in a state court that has a connection to the contract (preferably a state where cannabis is legal and one of the parties or contract performance is located). That state court can apply its own state law which likely is favorable to upholding the contract. The only time you might end up in federal court is if there’s no other jurisdiction or if federal law is directly in play for some ancillary issue. Also, if the dispute involves a question of federal law (outside of cannabis illegality) – which is rare in pure contract cases – federal court could be an appropriate forum. As a rule of thumb, keeping disputes out of federal court is part of risk management in the cannabis industry. If a lawsuit is filed against you in federal court, you may consider consulting an attorney about strategies to dismiss it or move it to state court, citing any forum selection clauses or the interests of justice given the nature of the business.
Q: What special considerations apply to multi-state operators (MSOs) in cannabis contracts?
A: Multi-state operators face extra complexity because they operate in different legal regimes simultaneously. When MSOs draft contracts, they must consider which state’s law and courts are best for each agreement. One size may not fit all – an MSO might prefer Illinois law for one contract but California law for another, depending on where enforcement would likely occur and the relative friendliness of each state’s laws toward cannabis contracts. MSOs also need to be careful about contracts that span states: for example, a supply contract between a cultivator in State A and a retailer in State B cannot actually involve shipping cannabis across state lines (that’s federally illegal and will void the contract outright). So MSOs often structure deals via separate state-specific entities to ensure each agreement stays within the bounds of one state’s laws. Additionally, MSOs should be mindful of license restrictions – many states require regulatory approval before an ownership transfer or large contract is executed (such as management agreements or IP licensing). A breach in those contexts could also mean a regulatory violation. Finally, MSOs should include robust compliance representations in their contracts (each party promises they’ll maintain licenses, follow all state regulations, etc.). If a dispute arises, an MSO wants to be able to show the court that it did everything by the book in each state. Essentially, MSOs have to juggle multiple sets of laws, so they often have more complex contracts with clauses addressing choice of law, jurisdiction, and compliance in a very granular way for each state involved. This extra diligence is necessary to ensure that a breach in one state doesn’t create a domino effect of legal troubles across the enterprise.
