A Michigan cultivator is fighting to overturn a landmark court decision which has thrown the enforceability of cannabis industry contracts across the US into question.
Hello Farms has asked the Court of Appeals for the Sixth Circuit to reconsider its September 10 ruling that voided a US$31.8m jury verdict against two Curaleaf subsidiaries and now has the backing of the National Organization for the Reform of Marijuana Laws (NORML).
In a nutshell, the ruling held that federal courts cannot enforce a cannabis supply contract because the conduct it covers remains prohibited under the Controlled Substances Act. In practice, the ruling sets a precedent that could allow companies to avoid cannabis contracts with no recourse in federal court.
“This isn’t just about Hello Farms losing a $31.8 million jury verdict, it’s a devastating blow to every independent operator in the state-legal cannabis industry,” Hello Farms CEO Brian Farah told Business of Cannabis.
Fighting back
Hello Farms has petitioned for panel rehearing and rehearing en banc, asking either the panel that heard the appeal or the full court to reconsider.
According to analysis in the New Jersey Law Journal, the petition was filed on October 08 and argues that the federal-illegality ruling is inconsistent with established contract-law precedent and with Congress’s longstanding protection of state medical cannabis programmes. It goes on to warn of “unimaginable instability” for businesses in states that have legalised cannabis. The Sixth Circuit has not said whether it will grant the request.
Farah told Business of Cannabis the company stands by the jury’s findings. “We fought for what was right and won overwhelmingly on the facts in front of a jury,” he said.
The Sixth Circuit’s opinion records that by January 2021, “the price of marijuana was in freefall,” and that GR Vending “refused to accept any more deliveries from Hello Farms.” The panel ruled that federal courts cannot enforce a contract claim founded on an agreement to buy cannabis, and it acknowledged how the result may look to the cultivator. “Hello Farms may understandably view this outcome as a windfall for Defendants. But our task isn’t to weigh the equities as we might perceive them,” the opinion states.
In a written statement to The Marijuana Herald the day after the ruling, lawyers for the Curaleaf subsidiaries said: “Appellants respect the court of appeals’ careful consideration of this matter and are pleased with the outcome, which is consistent with the position we’ve maintained throughout this case. Nevertheless, Appellants continue to support cannabis reform and the continued progress of legalisation.”
NORML enters the fray
NORML has since stepped in on the cultivator’s side. On October 15, the organisation filed a motion for leave to submit a friend-of-the-court brief supporting the petition, together with the brief itself, signed by Detroit attorney William Swor. The motion records that neither party opposed the filing.
“The interest of NORML here is not in protecting a particular company’s profits. It is in preserving the civil accountability on which consumers in state-regulated cannabis markets depend,” the brief states. It adds: “Accountability matters when a supplier breaches just as it matters when a purchaser does.”
Its legal case is that the panel treated federal illegality as the end of the inquiry, when it says Supreme Court and Sixth Circuit precedent required the court to ask whether denying damages for a completed breach advances the purposes of the Controlled Substances Act.
For Farah, the lesson for other suppliers is to rewrite their contracts now. “First, look at your contracts today,” he said. “Mandate binding arbitration outside the federal court system, and include ironclad state-court forum selection clauses that prevent a corporate buyer from removing the case to federal jurisdiction where they can play the illegality card.”
He added: “Second, do not build your business or fund a season around a big buyer’s promises. Move to nonrefundable deposits and batch by batch payments.”
