There is No Such Thing as Boilerplate in a Cannabis Contract

If you’re still at the point where you are playing lawyer sometimes or all of the time with your cannabis business contracts, then this post is for you.

I grew up in rural Wisconsin with two parents who were raised in the wake of the Great Depression. My parents had a bunch of kids, and we did not have a lot of extra money beyond covering our necessities. I share this because when I talk to prospective cannabis clients who are worried about finances, I understand where they are coming from. They always want to know if we can discount our fees or sign off on a boilerplate contract they bought for $50 online or cobbled together from a few other contracts. Unfortunately for them – but also fortunately for them – we don’t work like that because nothing we do is boilerplate.

Lawyers and businesspeople talk about boilerplate in contracts, but hemp and marijuana business owners throw the term around differently than lawyers do. When business owners talk about boilerplate, they use the term to encompass any contract or contract term they think doesn’t matter very much. Often I hear, “We have already put together the business terms – you just fill in the boilerplate.”

I know that a lot of non-lawyers do not read every word of every contract they sign. When lawyers talk about boilerplate, we’re referring only to those parts of the contract that generally come at the end of the contract. That is the part of the contract that most non-lawyers never read and even some lawyers gloss over.

Good lawyers read every word, and they also know that every word in a contract matters. These traditional boilerplate sections can hide some very important contract terms, especially if you care about where you may end up litigating a business dispute, on what terms you can unwind a bad business deal, and who is going to be responsible for what types of breaches during the relationship:

  • Governing Law
  • Dispute Resolution
  • Attorney’s Fees
  • Representations and Warranties
  • Indemnity
  • Statute of Limitations

Many non-lawyers might not suspect this, but the definitions section of a cannabis contract is often the longest boilerplate section of a contract that can kill your business deal. These definition sections often run 10+ pages in larger deals, and those boring definitions often hide the most material business terms of the contract.

I once participated in a multi-million dollar deal with a post-closing adjustment to the purchase price that was in the definition section. We encouraged our client and the other side several times to ensure someone on their side had translated those words into actual figures on a spreadsheet. Both sides assured us they had done so, but guess what? The other side miscalculated the purchase price adjustment to the tune of over one million dollars. We got a panicked call from the other lawyer after the closing asking if we would agree to insert one more line of text into the final version of the agreement.

Good cannabis lawyers help you both represent your business terms accurately and also help you eliminate ambiguities from your contract (and therefore your business relationships). Ambiguity is bad because that is what people fight about. If the contract terms are clear when one party has beef with the other, then the dispute can often be settled fairly quickly without resorting to formal dispute resolution.

If you happen to be an inveterate DIY’er when it comes to your cannabis business contracts or want to look over your lawyer’s shoulder, then read the business terms and the definitions first. Make sure the definitions match the business terms. Then make sure those definitions are used consistently across the contract.

I have never seen a great cannabis contract that was written by a non-lawyer. I have seen some subpar contracts written by lawyers. Often these less than ideal contracts do not matter because both sides are reasonable and work together through any difficulties. But if you anticipate any friction now or later in your cannabis business relationships, you’re better off having your cannabis lawyer review the business terms and the boilerplate.

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For related posts, check out the following:

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Legal But Immoral? On the Denial of Cannabis Trademark Applications in Brazil

Rafael Arcuri, Henrique Coelho, and Marcelo De Vita Greco just penned a great article in Consultor Jurídico on the denials by the National Institute of Industrial Property (INPI) of applications to register cannabis trademark on the grounds that they offend morality and good customs. The basis for these denials is Article 124(III) of Brazil’s Industrial Property Law (LPI), which prohibits the registration as trademarks of any “expressions, figures, drawings or any other signs that are contrary to morals and standards of respectability or that offend the honor or image of persons or attempt freedom of conscience, belief, religious cult or ideas and feelings worthy of respect and veneration.”

INPI has relied on Article 124(III) to deny the registration of marks such as TheHemp Company. Yet industrial hemp is legal in Brazil, as medical cannabis use is authorized in certain cases. How then, the authors ask, can goods be “at the same time, legal and immoral? What is more, immoral not only in a rhetorical, extralegal way [but] immoral in a way that gives rise to illegality.”

Determining what is, as a legal matter, “contrary to morals and standards of respectability” is bound to be a fraught endeavor. As the authors note, these terms are “vague and have great connotative charge, making it difficult to delimit, a priori, what they describe.” To the extent, however, that we can give some contours to that standard, it is hard to see how “a legal, taxed product that saves lives and is sustainable is immoral.”

Complicating the matter, INPI has not been consistent in its application of Article 124(III). For instance, the agency has approved the registration of the device mark CÂNHAMO CÂNHAMO, which includes a cannabis leaf (cânhamo means “hemp”). INPI has also approved the registration of the word mark PLANET HEMP.

The authors conclude by calling for “predictable and rational” application of the rules, a call that should be heeded by trademark authorities worldwide. While the underlying legal issues are different, we could use more rationality here in the United States when it comes to cannabis trademarks. To deny cannabis businesses that operate legally in highly regulated states the ability to register their trademarks is to place them at the same level as counterfeiters and other criminals. This does not make sense.

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FREE Webinar – Cannabis Litigation: What You Need to Know

Register HERE!

Cannabis disputes are unique. They are typically more complex than disputes involving other industries and they are often “bet the business” affairs. Over the years, we have developed and prosecuted successful litigation strategies for many of our clients across the country and around the world.

Harris Bricken litigators regularly advise cannabis and hemp businesses, investors and third parties at all stages of dispute resolution. Our expertise ranges from pre-filing resolution and mediation through motion practice, arbitration and trial. We regularly defend clients in administrative and license cancellation proceedings as well.

On Tuesday, October 19th at 2pm EDT/ 11am PDT during this FREE webinar, Harris Bricken’s litigators will discuss recent trends in cannabis litigation. We will answer your questions on this complex and evolving area of the law. The panel will consist of attorneys Jihee Ahn (California), John McDonald (Washington), and Jesse Mondry (Oregon).

This presentation is free to attend and we encourage all attendees to submit questions in advance while registering. The attorneys will answer as many as possible during the hour.

Register HERE!

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New York’s Cannabis Control Board: Meeting #2 Scheduled Already

After a quick push to have its first meeting on October 5, 2021, New York’s Cannabis Control Board (CCB) has already scheduled its second meeting for Thursday, October 21, 2021. The meeting will be publicly available via the link embedded in this press release.

As we did with the first meeting, we will be providing a meeting summary of the meeting, along with our thoughts on any public comments and anything else we can glean in terms of timeline for the CCB’s rules and regulations.

Here is the official meeting agenda:

  • Call to Order
  • Welcome & Chair Remarks
  • Approval of meeting minutes from October 5, 2021 Board Meeting
  • OCM Employment Items
  • Consideration of Medical Cannabis Program Regulations
  • Executive Director Report
  • Chief Equity Officer Remarks
  • Adjourn

The meeting agenda is light on details, although it looks as though the CCB will be following up on its announcement that New York’s medical cannabis will be expanded immediately. Again notably absent is any express discussion on the timing of the CCB’s issuance of rules and regulations. The hope here is that the short window between the first meeting and the second meeting is the begin filling the gaps in information provided during the first meeting.

Stay tuned for our summary of the CCB’s second official meeting and all updates on developments in New York’s cannabis industry!

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Does Medical Licensing Make Sense in Recreational Jurisdictions?

Cannabis licensing has a pretty standard trajectory by this point in time. States tend to start out with medical programs and later adopt recreational programs. What usually happens is that the recreational cannabis market swallows up the medical market. The majority of medical operators will seek out and get authorization to sell recreational cannabis, and many if not most customers will be recreational customers.

The reasons for this are pretty obvious but it bears noting. There is a much bigger consumer push towards the recreational market given that it’s a whole lot easier for a customer to just pull out their ID than it is to get a doctor’s recommendation. So even a lot of people who may have been traditional medical customers will end up just going the easy route and buy recreational cannabis.

So with all this in mind, it bears asking, why is medical cannabis licensing even still a thing?

On one hand, medical cannabis actually makes a lot of sense from a customer’s point of view. Where I practice in California, there are numerous benefits for medical customers:

  • Recreational cannabis can only be sold to people over age 21. Medical cannabis doesn’t have the same age barriers. So people under 21 with qualifying conditions and a medical rec/card may be able to access cannabis.
  • The daily purchase limits for medical customers is substantially higher than it is for recreational customers.
  • Medical products can have a much higher THC concentration.
  • Medical card-holding customers get a break on certain taxes.

This list isn’t exclusive, but without a doubt, there are still many benefits for medical patients that haven’t been eclipsed by the adult-use market.

So from the customer’s point of view, the answer to my question that is the title of this post is a clear “yes”.

Looking at the business side, we can get a pretty different answer. When California’s state licensing program opened up a few years ago, there was a lot more of a difference between the two programs. But over the years, regulations were adopted that allow people with a medical designation, for example, to do business with a recreational licensee. This translates to, for example, allowing a medical cultivator to sell its cannabis to a recreational distributor.

Things get hairy though when you start to look at how local jurisdictions in California regulate medical and recreational cannabis. There are still a huge number of cities that only allow medical sales in which this isn’t an issue, but problems about in cities that previously allowed medical licensing and pivoted to allowing recreational sales.

What we’ve seen happen numerous times is that cities with legacy medical programs adopt recreational cannabis licensing with very different – and in some cases, very contradictory – rules. This means that a single licensee at a single facility may be subject to different rules at the same facility. I won’t call out any specific cities in this post, but there are a few I can think of right off the bat where this is a huge problem.

On top of this, dual local licensing can also mean double the licensing fees for cannabis businesses. I don’t need to explain why that’s not any good.

So to circle back to my question about whether medical licensing is still worth it, from a licensee’s perspective, the answer is in many cases “no” – at least in cities that allow recreational cannabis. Theoretically, a good solution would be to just merge recreational and medical licensing but to allow medical consumer benefits to stay as they are. The problem is that our state licensing scheme and many local laws are based on voter initiatives which are notoriously difficult to change. For now, we’re stuck with a system that’s difficult to navigate, expensive, and intensely bureaucratic, like so much in California.

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Are More Successful Residency Challenges Coming for Cannabis?

Seen as a protectionist, cottage measure to some stakeholders, residency requirements for cannabis licensure have been a staple in the industry since Washington and Colorado legalized cannabis statewide back in 2012. When I lived in Seattle, the local industry was mostly stoked then that “big money” and out-of-state interests couldn’t easily crash the party that was fledging legalization in the Evergreen State.

Washington is pretty notorious for its 6-month residency requirement for owners of cannabis businesses (although it did away with the same requirement for financiers mostly because cannabis businesses were really struggling to source capital from friends and family and because financial institutions are loathe to participate due to federal illegality). A couple of times now, litigants have sued and lost in Washington over striking down the residency requirement (see here for a recent one)–we’ve even questioned the legality of the requirement before. However, the tide just majorly turned in the State of Missouri, and I have to question if more of these lawsuits are coming, and if the success around them is now turning against the locals.

Cue the federal court case of Mark Toigo v. the Missouri Department of Health and Senior Services (“DHSS”). Toigo is a cannabis business investor and a resident of Pennsylvania who sued DHSS for  declaratory and injunctive relief against the enforcement of the state’s residency requirement. The Missouri Medical Marijuana Program launched in 2018 (via an amendment to the State’s Constitution), and, per the complaint in the case, under Article XIV (and 19 C.S.R. §30-95 , et seq.), “non-residents are prohibited both from receiving medical use marijuana licenses and from owning a majority of any Missouri company that holds a medical marijuana license”. Specifically, the law requires that Missouri cannabis businesses be “. . .  majority owned by natural persons who have been citizens of the state of Missouri for at least one year prior to the application for such license or certification.”  And DHSS’s regulations implement and support the residency restriction. The effect then is that the law openly discriminates against non-residents of Missouri as majority owners of these businesses.

The main allegation of the complaint is that Missouri law violates the U.S. Constitution where:

The Residency Requirement violates the dormant Commerce Clause of the United States Constitution by explicitly and purposefully favoring Missouri residents over non-residents. As legal sales of medical marijuana are just beginning in Missouri, the Court should enjoin the Defendants from enforcing the Residency Requirement. This is the only way to ensure that residents and non-residents alike, including Plaintiff, are able to participate in Missouri’s medical marijuana industry.

Another key allegation in the complaint is a sentiment that licensees in states with residency requirements have touted for years:

. . . the Residency Requirement will also harm businesses owned by Missouri residents who plan to participate in the program by arbitrarily limiting the universe of available investors and business partners available to these businesses. This impacts larger businesses but also smaller Missouri businesses that are looking for financial assistance from family members and acquaintances residing beyond Missouri’s borders.

Having practiced in a state with a hard and fast residency requirement, I can tell you firsthand that mandating residency absolutely limits the pool of investors, for better or worse, that could otherwise come in and support these businesses that have immensely cost-intensive, constant compliance requirements that are lucrative to the success of these state democratic experiments. At the same time, residency restrictions can keep the industry small and somewhat more manageable (regarding societal harm) from a public policy perspective.

Back in March, Toigo moved for a preliminary injunction to enjoin DHHS from enforcing the residency requirement. In his brief, Toigo immediately noted that “The United States Constitution guarantees citizens’ right to engage in interstate commerce free from discriminatory and protectionist state regulations. This fundamental rule stems from the Framers’ concern that, left unchecked, states would enact commercial regulations favoring their own residents at the expense of non-residents. Indeed, the United States Supreme Court has time and again invalidated state laws that deprive citizens of their right to access the markets of other states on equal terms. In setting aside discriminatory state commercial regulations, the Court primarily relied on the dormant Commerce Clause.”

Toigo argued that the residency requirement was flat-out non-resident discrimination with no tailoring at all to accomplish any kind of legitimate government purpose. DHHS essentially fired back that the residency requirement was narrowly tailored to accomplish its legitimate interest in being able to more aptly background check residents (rather than having to background check non-residents) regarding fitness to run these businesses, and to ensure that there wouldn’t be any diversion of cannabis over state lines due to out of state participation in the program.

The court found Toigo’s arguments to be persuasive and it granted the preliminary injunction in June of this year, finding that:

It is not necessary to look beyond the face of the State’s durational residency requirement to determine whether it is discriminatory. A law that prevents persons from becoming majority shareholders in Missouri businesses that engage in the cultivation, manufacture, and dispensation of medical marijuana products unless they have lived in Missouri for one year and do not reside in any other state is facially discriminatory against out-of-state economic interests. A law that prevents out-of-state persons from applying for medical marijuana licenses or purchasing them from others is also facially discriminatory against out-of-state economic interests.

On the back of the dormant Commerce Clause, the Court ultimately concluded that Missouri’s durational residency requirement was not narrowly tailored to advance its legitimate interest in general crime prevention.

The bench trial on the permanent injunction sought by Toigo was heard by the court on October 7th. It took the federal judge a total of less than 10 minutes to grant the permanent injunction after opening statements. In turn, Missouri’s residency requirement is officially no more.

Stakeholders in states with residency requirements should take serious note of the Toigo case (whether they’re pro or anti residency requirement). It’s fascinating from a legal perspective that a federal court didn’t hesitate (again) to apply the dormant Commerce Clause to cannabis commercial activity despite its federal illegality, and it’s even more interesting to see the dominoes fall around these patently protectionist/discriminatory measures, which means the industry will likely grow at increased leaps and bounds now that capital investment, domestic or foreign, isn’t stymied by state borders (at least in Missouri).

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Canna Law Blog on Social Media

Our cannabis business lawyers frequently receive emails from blog readers asking them where they can be found on social media. Today, we’ll respond to those emails and to let all of our readers know about the full extent of our social media presence. If you can’t get enough of Canna Law Blog, you can find more of us in the following places: 

Facebook. We have an exceedingly popular and perpetually growing Facebook page here. We are nearing 170,000 likes/followers and regularly get more than a million visitors weekly there. Our goal with that page is to widely disseminate and initiate discussion on a wide swath of uber-topical cannabis issues, as well psychedelics as the field emerges. Our Facebook page has links to our blog posts, events, and other cannabis/psychedelic-related news or articles. We allow for a wide range of views on our Facebook page and we delete only those comments hateful of others, but not comments that are anti-cannabis. We also delete comments that involve the selling or marketing a specific company or product. 

Twitter/Publications.  Our blog and a number of our cannabis lawyers have the following Twitter accounts, with posting frequencies all over the map: 

  1. @cannalawblog. You’ll find the latest cannabis news and updates about events that Harris Bricken cannabis attorneys partake in, such as Harris Bricken’s free webinars. 
  2. @cannabizlawyer. This is Hilary Bricken’s account. Hilary tweets pretty regularly and as head of our Los Angeles cannabis practice, many of her tweets have a California/Los Angeles flavor. Connect with her on LinkedIn 
  3. @vince_sliwoski. This is Vince Sliwoski’s account. Vince is the head of our Portland cannabis business practice and he tweets pretty regularly on general interest and Oregon cannabis issues. Connect with him on LinkedIn. 
  4.   @SimonMalinowski. This is Simon Malinowski’s account. Simon is the head of Harris Bricken’s New York office and is a great resource to keep up to date on all things about cannabis in New York. Connect with him on LinkedIn. 
  5.  @MasonMarksMD. This is Mason Marks‘ account. Mason is not only involved in the cannabis industry, but he is also an expert on the fast-emerging psychedelics industry. Follow him to keep up with cannabis and psychedelic law news. Connect with him on LinkedIn 
  6. @GriffenThorne1This is Griffen Thorne’s account. Griffen is a transactional business attorney and many of his posts revolve around California cannabis and the legal business aspects of the cannabis business. Connect with him on LinkedIn 
  7.  @RocafortFred. This is Fred Rocafort’s account. Fred is highly involved in international business, and you can find international cannabis news on his account from time to time. Connect with him on LinkedIn. 
  8.  @Jonathan_Bench. This is Jonathan Bench’s account.  Jonathan handles international business matters and is involved in the cannabis and emerging products industries. Connect with him on LinkedIn. 

You can also find us on LinkedIn and YouTube. Like, follow, subscribe, and enjoy!

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Cannabis M&A: Disclosure Schedules

My last post in this series, which ran a few weeks ago, went over some of the more common representations and warranties you’d see in the average cannabis M&A transaction. In that post, I briefly mentioned disclosure schedules, which are an integral part of a purchase agreement and its reps and warranties. Today, I’ll get into the in more detail.

The purpose of a disclosure schedule is – no surprise – to disclose things to the other party to the transaction. Usually, disclosures are made by the seller but sometimes a buyer may make them. These are used in addition to standard due diligence inquiries and basically bridge due diligence disclosures directly into the purchase agreement.

There are a lot of ways disclosure schedules can be used, but I’ll focus on two of the more common ones. First, a disclosure schedule may be used to provide a specific list of something that is referred to in a provision of the purchase agreement (including in a rep and warranty). For example, a purchase agreement may state something like “Company owns the assets identified in Schedule X”. Then, the schedule would list out the assets. This allows parties to keep purchase agreements streamlined without listing all the assets in the body of the agreement.

Second, a disclosure schedule will allow parties to explain situations or provide exemptions from a contractual representation. For example, its common for buyers to require seller to represent that neither it nor the company is in litigation. If the company or seller is in fact being sued, the rep and warranty may say something like “Except in Schedule Y, neither the Seller nor Company is a party to any litigation”. Then, the schedule would list that litigation.

You may be asking why not just eliminate the rep and warranty altogether in that example if the seller or company is in litigation. The point of still having it is so that the seller is promising that apart from that one litigation matter, neither it nor the company is a party to another suit. This is key for buyers, because if it turns out there was other, non-disclosed litigation, they would have recourse against the seller.

Sometimes, you can see hybrid sorts of disclosure schedules. So for example, you may see something like “Company owns the assets identified in Schedule Z, which are free and clear of any and all encumbrances except as disclosed in Schedule Z.” In that case, the schedule would list the assets, and identify which (if any) were encumbered.

Disclosure schedules are extremely important for the buyer for obvious reasons. From the seller’s point of view, they should be taken extremely seriously because they could lead to legal exposure for sellers if they turn out to contain inaccurate information. We’ll plan to keep writing about cannabis M&A topics, but in the meantime, if you are interested in more cannabis M&A posts, check out some of these:

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Cannabis Insurance Litigation: Oregon Federal Court Rules for Hemp CBD Home Processor in Coverage Dispute

Insurance is a key part of any business (or home). That is no less true in cannabis and several insurers—at least on West Coast—provide insurance for marijuana businesses as well as hemp. The barriers to purchasing insurance related to hemp, of course, decreased substantially following the enactment of the 2018 Farm Bill. But purchasing an insurance policy, as most of us know, is not the same as having coverage for certain kinds of losses.

A recent Oregon federal case illustrates the kinds of questions that insureds, insurers, and courts may face in the coming years. Plaintiffs owned a home in Grants Pass, Oregon, (the “Property”) which was insured by homeowner’s policy (the “Policy”). Among the coverages provided were damages for losses caused by fire to the Property. In early January 2019, a fire caused significant damaged to the Property while one of the homeowners was in his garage making a salve from cannabis containing cannabidiol (“CBD”) from hemp.

Plaintiff’s insurance company denied coverage for the loss under a controlled substances exclusion (the “Exclusion”). The Exclusion provided that that the Policy did not cover:

Loss or damage arising out of the use, sale, delivery, transfer, possession, growing, production, processing, warehousing, transportation, or manufacturing, by any “insured” or with any “insured’s” knowledge, of a controlled substance, as defined by the Federal Food and Drug Law at 21 U.S.C.A. Sections 811 and 812 (as amended), regardless of whether the controlled substance is legal under any state law (for example: marijuana).

The cannabis here involved hemp harvested in 2017 and 2018. In November of 2017, the hemp harvested that season was found by an independent lab to have a “total THC” level of .381% by weight. The hemp harvested in 2018 was found by that same lab to have a “total THC” level of .259%. The actual levels of delta-9 THC present in both samples was essentially nil.

As is typical in insurance coverage actions, both sides moved for summary judgment making arguments primarily centered on the policy language. The insurer asserted that the homeowner’s activities constituted the processing of a controlled substance and, therefore, the loss was excluded by the Policy. Specifically, insurance company argued that the 2017 hemp harvest contained a total THC level above .3% by dry weight making it marijuana, not hemp and thus a controlled substance. Plaintiffs naturally disagreed, arguing that “total THC” has nothing to do with the definition of controlled substance in the Policy.

The court agreed with the homeowners. The court expressly noted that an insurer bears the burden of establishing the applicability of an exclusion to coverage. The core of the dispute, said the court, is whether it should consider only the actual level of delta-9 THC in the 2017 hemp, effectively zero, or the “total THC” level of .381%.  The Policy defined “controlled substance” pursuant to 21 U.S.C. §§ 811 and 812. Those statutes, the court explained, are only concerned with the concentration of delta-9 THC and make no reference to the level of THCA, an entirely different cannabinoid that is a precursor to delta-9 THC.  Further, although Oregon law references “total THC” the calculation thereof, the Policy made no reference to Oregon regulatory standards.

At best, said the court, it is ambiguous whether THCA should be considered at all. Even if it were, the statutes provide no standard for converting THCA to delta-9 THC by decarboxylation. And the regulations that do provide such a standard were not in existence at the time of the loss and were not incorporated into the definitions found in the Policy.

The court concluded that the Policy, by its plain terms, uses the unadorned statutory definition of hemp as containing .3% delta-9 THC by weight.  Here, the actual level of delta-9 THC present in the hemp was below that threshold, and increased only by including a conversion of THCA. Since both samples contained less that .3% delta-9 THC, the hemp was not a controlled substance and the exclusion did not apply.

This is a good win for the homeowners and a well-reasoned decision consistent with the principles of insurance coverage law. Unfortunately, insurance companies may respond by amending their policy definitions to make the total THC requirement explicit.

For more on cannabis insurance, check out the following:

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