An Arbitration Primer for the Marijuana Industry, Part One

Our recent post How to Avoid Cannabis Litigation: Five Tips got us thinking it was time for a companion post on arbitration. Arbitration, like litigation, is a process for resolving legal disputes. Despite its increasing use, arbitration remains a bit of a mystery for many people. But the differences between the two can be significant, and it is important to understand the upsides and the downsides of each when ordering your cannabis company’s legal affairs and transacting business. Arbitration is being invoked with ever-increasing frequency, and this is true for cannabis businesses as well. This is a meaty topic, so we will be breaking it up into a three part series of posts. Today we tackle the basics of arbitration.

How about arbitrating your cannabis conflict?
How about arbitrating your cannabis conflict?

But how do you end up in arbitration in the first place? In the majority of cases, it is because a contract signed by the parties contains an arbitration clause — a specific provision stating that if the parties have a dispute relating to the contract or its subject matter, it will be decided in arbitration. These clauses are everywhere from business and employment agreements to consumer contracts to vendor agreements. In a minority of cases the parties decide after the fact to go to arbitration rather than have a court resolve their dispute. Courts generally view arbitration clauses favorably, and will compel arbitration in most cases if the parties appear to have agreed to arbitrate rather than litigate their disputes.

So where do you “go” for arbitration? The options are many and varied. The American Arbitration Association is the largest and best known arbitration body in the U.S., with a huge pool of arbitrators and its own electronic filing system. There are also many local and regional outfits, often comprised of a small group of accomplished (usually) lawyers and/or retired judges acting as arbitrators. Further down the food chain are individual (often solo practioner) attorneys or retired judges or who advertise arbitration services.

Arbitration is often described as a sort of private court system, with the arbitrator as a hired, private judge. There is some merit to this characterization, particularly when “private” is read as “unsubsidized.” Litigation is of course expensive when one considers the cost of hiring an attorney, but, once you get into court and pay a filing fee of a few hundred dollars, the judge, courthouse, and court staff are free. Not so with arbitration. In arbitration, the filing fee alone can range from hundreds to tens of thousands of dollars, depending on the amount of the claim. The parties must also bear the cost of the arbitrator, who will charge for all the time he or she spends on the case, just as your lawyer would.

An arbitration proceeding unfolds in much the same way as litigation, with two major differences. First is the selection of an arbitrator. The ability to choose who will decide your dispute is a major benefit of arbitration over litigation: you can select a decision-maker who is well-suited for case at hand. There are arbitrators well-versed in every area of the law from employment to partnership disputes to products liability. If the parties do not agree to engage a particular arbitrator at the outset, usually the arbitration body will supply a list of potential arbitrators. The parties will review each candidate and submit their respective rankings to a case administrator, who will then appoint the arbitrator most closely agreed to by the parties. At this point, there are few, if any arbitrators particularly well-versed in the cannabis industry.

The arbitrator will hold an initial conference to discuss the parameters of the case and set a few ground rules and deadlines. After that, the arbitrator is generally hands-off until the parties are prepared for the hearing (the arbitration equivalent to trial), though she may sometimes be called upon to resolve a discovery dispute or issue a procedural ruling such as one addressing the substantive law to be applied. The parties are largely left to themselves to conduct discovery. Discovery is the second important point of divergence from litigation, which we will discuss more in the second part of this post. Suffice it to say, discovery in arbitration is generally far less onerous than in litigation.

Once the parties have prepared their case, the parties will gather for an evidentiary hearing (though in short, simple cases a telephonic or video conference may even suffice). The hearing proceeds in similar fashion to litigation, with each side taking turns presenting documentary and testimonial evidence, but with the advantage of being much less formal.  Pre- and post-hearing briefing may or may not be submitted, according to the arbitrator and parties’ preferences. After the hearing and the close of evidence, the arbitrator will issue a decision, in most cases within 30 to 90 days, which again, can be much speedier than a court.

That, in a nutshell, is what to expect in an arbitration proceeding. In the next post we will explore the pros and cons of arbitration in more detail, with special attention paid to the needs of marijuana businesses.

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