The District Court’s Sua Sponte Issue-Spotting
While the court did analyze these two theories, it then did something else. Noting that neither the plaintiff nor the defendants raised the obvious issue of illegality of contractual subject matter, the court ordered all parties to brief the issue of whether a federal court sitting in diversity can award a party lost profits generated from the sale of marijuana.
Relying on both the Controlled Substance Act (CSA) and the Supremacy Clause of the U.S. Constitution, the court found that, under current federal law, it cannot.
Inconsistent State and Federal Policies
The court based its decision on several grounds. First, it reasoned that the CSA designates cannabinoids as a “Schedule 1” substance, and criminalizes its sale and surrounding activities in support of sale, such as those contemplated in the contracts at issue. Second, the court reasoned that the Supremacy Clause supports a finding that the CSA applies to, and is superior to, state law which may permit the sale and distribution of cannabis. Based on this reasoning, the court declined to enforce the cannabis-related contracts, holding that the CSA precluded any further enforcement of the contract at hand.
Remedies in Cannabis Contracts: What Now?
ABA leaders and industry attorneys agree that this ruling highlights an oft-overlooked issue in cannabis-industry contracts: legality of enforcement and availability of remedies upon breach. “I think this case will result in careful drafting,” opines Lisa J. Dickinson, Spokane, WA, cochair of the ABA’s TIPS Cannabis Law and Policy Task Force.
“This ruling is a perfect example of why special drafting considerations need to be taken into account when cannabis-industry contracts are being negotiated and entered into,” adds Jacqueline Z. Fox, Denver, CO, an ABA member who practices cannabis law. Rather, Fox opines, “the industry takeaway from this ruling should be to increase each respective party’s attention towards general cannabis contract-drafting strategies and to further push marijuana-related litigation towards state courts. Given the underlying nuances involved in various aspects of everyday matters within the cannabis industry, traditional boilerplate contracts are inherently susceptible to error.”
Will the court’s ruling in J. Lilly send a chilling effect through the cannabis industry? Industry attorneys are not convinced that it will, but remind those who are involved in drafting and litigating these contracts to review all potential risks with their clients before execution. Fox believes there are a number of drafting strategies that can minimize contract enforceability risks.
“First,” Fox opines, “you’ll want to include forum-selection and choice-of-law clauses for your respective state court. This ensures that litigation stays in marijuana-friendly state court, thus reducing the possibility of federal courts sua sponte raising unclean hands or other federal illegality issues.” Second, Fox continues, “include a severability clause. Even if a court finds your provision compels violation of the CSA, the remainder of the contract will still remain in effect, thus providing the opportunity for other means of recovery.” As a third and final reminder, Fox encourages attorneys to “engage in creative drafting. This can include practices such as piecemeal drafting that clearly delineates each service with separate consideration for each service.”
“There are always intricacies with contract drafting,” Dickinson adds. “The arena for litigating these clauses is wide open right now, and I look forward to seeing the law evolve accordingly.”