An Arbitration Primer for the Marijuana Industry

In this article:

The Basics of 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.

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

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 practitioner) attorneys or retired judges 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 the 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 the case at hand. There are arbitrators well-versed in every area of the law from employment to partnership disputes to product 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 a 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.

Pros and Cons of a Cannabis Business Settling a Dispute Through Arbitration

Privacy

In the first part we discussed the “private” aspect of arbitration in the sense that parties in arbitration forego the publicly funded court system. But arbitration also offers privacy in the sense that the proceeding is not held in open court, with public access to court records and the possibility of media exposure; the parties can agree to keep the entire process confidential. Businesses and individuals alike appreciate that there will be no airing of dirty laundry in a public court. Moreover, because the arbitrator’s final award can be kept secret, its precedential value is limited. For example, say you arbitrated a dispute with a former employee over the employee’s wages and the employee prevails. If the arbitration award is kept confidential, a second employee would likely not be able to use the award from the prior case in his or her own dispute against your company.

How will you resolve your cannabis business dispute?
How will you resolve your cannabis business dispute?

For those in the cannabis industry, privacy cuts both ways. On the one hand, since the legality of marijuana is still murky, businesses and individuals buying and selling marijuana and ancillary products surely appreciate discretion. On the other hand, since there is so little case law to guide industry participants’ behavior and assist courts with deciding cannabis cases, it does the cannabis industry some disservice when parties choose to keep their proceeding confidential. Keeping marijuana-related litigation out of the courts also arguably contributes to the still-taboo image of legalized marijuana. If the marijuana industry is ever to be viewed as “normal,” having to go to court is just one more “normal” part of doing business it will have to accept.

Speed and Expense

These two considerations go hand-in-hand. In the first installment of this post, we discussed the expense of arbitration as it relates to filing fees and compensating the arbitrator. However, many observers believe that those up-front costs are more than made up when you consider that cases are often more quickly resolved in arbitration as compared to litigation. In most instances a case takes at least one and a half to two years or more to wind its way through the courts. By comparison, the same case in arbitration could be resolved in less than a year. Very simple cases may be wrapped up in three to four months. All those months equal months during which the parties are not incurring legal fees, which can add up to big savings.

Scheduling can often be more accommodating in arbitration as well. In many jurisdictions, the court will issue a standard case schedule that does not take into account the parties’ needs. Whether you like it or not, the main road markers such as the discovery cut-off and deadline to complete mediation will be spelled out for you, whereas in arbitration, the arbitrator often consults with the parties as to the anticipated motions practice, discovery needs, and the length of the hearing and can fast-track the proceeding if they so desire. Legal disputes can often evolve into consuming distractions, even for sophisticated businesspeople; the busy cannabis entrepreneur is often well advised to seek the more efficient path of dispute resolution — arbitration.

Discovery

In litigation, discovery is quite broad, reaching far into areas that might lead to the uncovering of useful, relevant information. Parties in litigation often issue multiple rounds of written interrogatories and document requests, and conduct many depositions. In contrast, the scope of discovery in arbitration is generally understood to be much narrower, and many arbitrators will seek the parties’ agreement as to the number of depositions and the extent of written discovery. This ability to tailor the discovery process can significantly decrease the cost and intrusiveness of the entire proceeding. However, if yours is the kind of case that will require much scrutinizing of documents or deposing many witnesses, you may be better served in litigation.

Binding Award

Most of us have a general belief that there is a “right to appeal” an adverse court ruling. The procedural and substantive strictures of an appeal are more difficult than most people realize, but in most instances if you don’t like the result the judge or jury gave you at trial, there is at least one other court you can complain to about it. The same is not true in arbitration. Unless the arbitrator shows “manifest disregard” for the applicable law, or the losing party can show that that arbitrator or proceeding itself was somehow compromised or unfair, the award will be final and binding.

The fact arbitration usually lacks the second layer of review often initially strikes people as unfair. But in truth, very few cases are overturned on appeal, so the procedural safeguard you give up by opting into arbitration isn’t all that valuable anyway.

Formality

Though an arbitrator is often a well-credentialed lawyer, in most cases you will find he still does not demand the same kind of formal address and decorum as in a courtroom. This is a small point, but litigation is stressful, and the opportunity to resolve your dispute around a conference table in front of an arbitrator can make the whole process a little more tolerable. As compared to a judge, an arbitrator will probably care a little less about how you dress or wear your hair, and may be less concerned with the fact that you are engaged in the business of marijuana.

Arbitration Clauses: What to Watch Out For and How to Protect your Own Interests

Any arbitration clause you encounter may address some or all of the following:

Scope

You can define the scope of arbitrable disputes as narrowly or broadly as you desire, or, more realistically, as the other side will agree to. You might draft a clause to cover only contract disputes, leaving tort cases to the courts, for example. More commonly you see inclusive language embracing any claim “arising out of or relating to” a contract. Judges and arbitrators consistently construe such clauses broadly, as covering just about any kind of controversy that might occur between the parties to the contract. If you want to explicitly exclude any particular type of claim, or a higher-value claim, etc., the best way to accomplish this is to add language specifically excepting the cases you do nor want to arbitrate. Otherwise you may very well find yourself in arbitration anyway.

Arbitral Administration

If you know you want to use the American Arbitration Association or some other dispute resolution body, say so. If you don’t know, it is still probably worth the effort to research your options and include a provision in your agreement. It will be one less thing to argue with your opponent about later on, and get you one step closer to resolution.

Arbitrator Selection

It is rare that an arbitration clause specifically identifies the arbitrator who will handle potential disputes between the contracting parties. Generally a pool of potential arbitrators is proposed by the arbitral body, or, in the case of smaller operators, the parties simply select one from those arbitrators associated with the organization. But the parties may want to stipulate whether a dispute will be decided by a single arbitrator, or a panel of arbitrators (usually three). In most cases one arbitrator will suffice (and the parties will only want to pay for one anyway), but in high-value or very complex cases, a panel of arbitrators can help ensure that mistakes are not made and that the result is fair. One other consideration is whether a dispute that might arise between the parties might benefit from an arbitrator with some degree of expertise. For instance, maybe in your dispensary’s contract with a laboratory, you foresee that an arbitrator with a chemistry background would be helpful. Assuming you are using an arbitration association with a wide range of arbitrators, your agreement could include such a stipulation. Although a more specialized arbitrator might be more expensive, you might also be able to forego hiring an expert witness in such a case.

Location

Arbitrators are not subject to the same jurisdictional limitations as courts, so you definitely want to specify a city where the arbitration will be held to avoid being surprised with a proceeding in Timbuktu. We have arbitrated cases in cities with virtually no tie to the case or parties (which would never go forward in a court in that jurisdiction), so choose carefully. Consider the parties’ location and the location of the arbitrator, but also where most of the “action” that might give rise to the dispute may occur. In some instances the most economical seat of arbitration is where all the witnesses and evidence are. If you are based in Colorado, but contract with an Arizona company to provide consulting services to your new dispensary in Maryland, arbitration in Maryland may make the most sense.

Choice of Law

The law that will apply to your dispute may make a big difference or no difference, depending on the type of claim. Contract law is fairly uniform across the United States, but substantive cannabis law is not. Not only do the laws legalizing marijuana very greatly from state to state, but how those states’ laws intersect with employment law, disability law, and tax law (just to name a few) will vary more greatly still. And the landscape is changing all the time. The choice of law in your arbitration clause is an important one, and may require a few minutes’ consultation with your lawyer.

Entry of Judgment

Your arbitration clause should always contain language empowering the arbitrator to issue a final, binding award and also stating the parties’ agreement that the award may be entered and enforced in any court having jurisdiction. This provision ensures that if you receive an award, you can eventually take it to court and seize assets or whatever you need to do to to collect from the other side.

Other Limitations

As we’ve mentioned throughout this three-part series, arbitration offers the benefit of customization. If the parties wish to limit the scope of permissible discovery in arbitration, they can do that. In some cases, the statute of limitations can be waived, and a requirement included that a claim be filed on a shorter timeline. Within reason, the parties can also set out their expectation as to when a hearing must be set, or the duration of the entire proceeding from date of filing to final award.

We often encourage our cannabis clients and readers of this blog to conduct themselves as “real” businesses, not “just” a cannabis business. The strategic inclusion of arbitration clauses in your contracts is just one more way to prove your savvy.

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