This case should serve as a wake-up call for the cannabis industry.
There is a belief in the industry that courts will not treat them fairly. As a result, cannabis companies are often reluctant to use the court system to resolve disputes. The recent case of Metsch v. Heinowitz decided by the California Court of Appeals in April will reinforce this tendency
The case involved a 2014 agreement for the production and distribution of edible cannabis products and partnership arrangements between the partners. Two of the partners (plaintiffs) accused the other two partners of breach of contract, and one partner of breach of fiduciary duty.
Instead of deciding on the facts and the law, the court threw out all of the plaintiffs’ claims. The court reasoned that since the basis of the contract was illegal the court could not help-case dismissed.
The reason that the contract was illegal was that the plaintiffs did not have a license to operate commercial cannabis activities.
While the case may not have universal application, cannabis companies in California should consider the following takeaways.
- Contract must be legal at time of execution
The court focused on the fact that the plaintiffs did not have a license for commercial cannabis operations. The court did not excuse the plaintiffs just because they were focusing on medical cannabis and patients.
The key was the fact that the business itself was not legal under the law in 2014 and the plaintiffs did not have a license.
- Contracts must have enough detail to be enforced
While not a major part of the discussion, the court mentioned that the contract was a template-there was no mention of the plaintiffs or most of the other parties. Many typical terms were not included in the agreement.
- Contract must be signed and dated to be enforced
The court also noted that the agreement is …“an unsigned undated one-page typewritten document…” This fact did not impress the court or help the plaintiffs to convince the court to help right the alleged wrongs.
- The burden is on party seeking relief to prove that the contract subject matter was legal at the time
The court never stated that plaintiffs in cannabis cases have this burden but it is implied. This means that a party looking for help from the court needs to be certain that the agreement satisfies the above requirements before proceeding.
How to avoid having your case thrown out aka best practices
- Make sure that the existing agreement or deal was signed or formed after January 1, 2018
If the agreement was entered into before January 1, 2018, then re-do it with a current effective date.
- Make sure that the subject matter of the agreement was legal at the time
You may need to have a lawyer review the details to determine if the activity was legal at the time. If not, sign a new contract when the subject matter would have been legal.
- Make sure that existing agreement has enough detail to be enforced
The time for handshake deals and unsigned, undated agreements is over. If you want enforcement of a deal, then prepare a written agreement with the plenty of details as to who, what, why, duties and obligations, payment, termination, remedies, and choice of law, etc.
By following these steps you won’t give bad actors a chance to get out of their obligations.