Federal court’s rejection of contract remedy because contract involved cannabis business should make you consider forum selection clauses carefully in your cannabis related agreements.
In Polk, the plaintiff sued the defendants to obtain his ownership and profits from a cannabis growing business they had allegedly started together. When they started the business under Washington state’s newly enacted recreational marijuana laws back in 2013, the plaintiff could not disclose his ownership in the business given his criminal history and restrictions on obtaining a license with such a history.
Plaintiff alleges the parties initially agreed to a 30/30% split between plaintiff and defendant founder and that the remaining 40 percent of the cannabis cultivation business would go to investors. Until 2015, plaintiff worked in the business, exploring various ways to try and make his interest in the marijuana grower legal, but ultimately he left. The other founding owner disputed what he owed the plaintiff and plaintiff sued in 2018 alleging he was entitled to ownership and interest in the past a future profits.
Defendant founder moved to dismiss the claims and the federal court hearing the matter ruled that federal law precludes enforcement of their agreement because marijuana is a controlled substance and thus, their business deal involving a business that engages in activity that is illegal under federal law is unenforceable as contracts that violate a federal statute are illegal and unenforceable.
You can read the opinion in Polk v. Gontmakher, No. 2:18-cv-01434 (W.D. Wash. Aug 28, 2019) here.
Notable in the court’s reasoning, and troubling as the point is well taken in other jurisdictions with those looking to federal forums to resolve cannabis industry related matters:
The court stated that “where it is alleged that an agreement violates a federal statute, courts look to federal law.” Continuing, “Contracts that violate a federal statute are illegal and unenforceable.” So because under the Controlled Substances Act “the production, distribution, and sale of marijuana remains illegal[,]” the court found “any agreement giving [the plaintiff] an equity interest [in the cannabis-related business] is illegal under federal law.”
The court went on to find against the plaintiff’s arguments. Rejecting the plaintiff’s claims where plaintiff “argues that the CSA is not an absolute bar to enforcement where the requested remedy does not require a violation of the CSA. The Court agrees. However, [the plaintiff’s] characterization that he is only requesting monetary damages is inconsistent with his Complaint. [The plaintiff] is not requesting monetary damages that can be obtained legally. He is asserting an equity interest in [the cannabis-related business] and a right to past and future profits. [The business] is a company that produces/processes marijuana” … “Thus,” although cannabis might be allowed under Washington’s law, the court found, “awarding [the plaintiff] an ownership interest in, or profits from, [the business] contravenes federal law.”
Interestingly, the court agreed with the premise that we’ve seen in other cases where the claims or agreements would be allowed when the remedy doesn’t violate the CSA. Here, the request for the equity interest – to continue in a business that violated the CSA – was apparently the determining factor. But one wonders if simple money damages – forecasting profits or valuation and asking for dollars and not continued ownership or profits in a cannabis maker would have been ok, or if an argument could have prevailed claiming he still sought money derived from the cannabis business? Arguably, funds already earned would not involve violating the CSA.
So maybe now is the time to begin looking to local arbitration as the better method for dispute resolution of your cannabis related contracts.