Contracts, Marijuana

Marijuana Contract Enforceability Worries? Don't Forget Arbitration

Until there more clarity related to marijuana contract law, arbitration is a good workaround for cannabis businesses.

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Hilary Bricken

Hilary Bricken

One of the questions that needs to be answered in every state with marijuana legalization is whether marijuana contracts are enforceable in state court. If an activity is legal under state law but illegal under federal law, the state courts need to determine whether contracts involving the activity are for an “illegal” purpose and thus void under standard contract law. Courts in Colorado and California have come down on both sides of the issue. Until there is clarity, arbitration is a good workaround for cannabis businesses.

During the last week of April, the Second Circuit Court of Appeals in New York upheld Tom Brady’s four-game suspension given to him by the NFL commissioner who was acting as an arbitrator. Because the NFL and the NFL Players Association have a collective bargaining agreement, the federal Labor Management Relations Act (“LRMA”) governs arbitration between the two of them. The Second Circuit held that arbitration awards under the LRMA cannot be overturned because the arbitrator made mistakes of fact or even of law. The only basis for overturning arbitration awards is if the arbitrator didn’t act within the scope of the collective bargaining agreement.

Even when you don’t have a collective bargaining agreement, the Federal Arbitration Act gives courts very limited rights to overturn or vacate arbitral awards. In Hall Street Associates v. Mattel, the Supreme Court ruled in 2008 that the only allowable reasons to overturn an arbitration judgment were those listed in the Federal Arbitration Act, 9 U.S.C. §§ 10 and 11. After the Hall Street Associates decision, for example, the Eighth Circuit Court of Appeals held that a lower court could not overturn an arbitration decision that exhibited “manifest disregard for the law.”

So, the question isn’t necessarily whether state law, as determined by the highest court in a state, decides if marijuana contracts should or should not be enforced. The question is whether these contracts are going to be enforced by arbitration, assuming the contracts call for arbitration. Because, in that circumstance, even if state law says otherwise, courts are very likely to uphold and enforce arbitral awards.

Contracts that use arbitration as their dispute resolution mechanism usually will select an arbitration association to administer arbitration or will say that the parties have to agree on one to three arbitrators. The chances that an arbitration association would determine a contract is wholly unenforceable in arbitration because marijuana is federally illegal are much lower than a state court making that call, if only because the arbitration association wants the business.

The cannabis lawyers in my firm have met with many arbitrators and arbitration societies that are looking to market their services as arbitrators for cannabis industry disputes. These individuals and associations are not going to toss out all marijuana contracts — they’d be out of business if they did. So if you’re a cannabis business that wants security in its contractual relationships, you should consider putting arbitration clauses in your contracts to help ensure your contract is enforced. And if you write in your agreement that your arbitration should be kept confidential, it can also be a great way to keep your disputes private. So, when drafting your cannabis contracts, don’t forget to consider arbitration as a venue for enforceability.

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Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.

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