Cannabis Contracts: Is Arbitration the Key?


cannabis arbitrationOne of the questions that needs to be answered in every state with marijuana legalization is whether marijuana contracts be enforceable in state court. If an activity is legal under state law but illegal under federal law, 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, and each state’s court system will need to grapple with this issue. Arbitration may be a workaround for cannabis businesses.

Last week the 2nd 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 Union have a collective bargaining agreement, the arbitration is governed by the federal Labor Management Relations Act. In its ruling, the 2nd Circuit held that arbitration awards under the LRMA cannot be overturned because the arbitrator made mistakes of fact or even of law. The only way arbitration awards could be vacated or overturned 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 in overturning or vacating 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 8th Circuit Court of Appeals held that a lower court could not overturn an arbitration decision even where the arbitrator’s decision exhibited “manifest disregard for the law.”

So the question isn’t necessarily whether state law, as determined by the highest court in a state, determines if marijuana contracts should or should not be enforced. The question may be whether the 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 that a contract is wholly unenforceable in arbitration because marijuana is illegal is a lot lower than a state court making that call, if only because the arbitration association wants the business.

Our cannabis business lawyers have met with many arbitrators and at least one arbitration society looking to market their services as arbitrators for cannabis industry disputes. Of course these individuals and associations are not going to toss out all marijuana contracts — they’d be out of business. If you’re a cannabis business representative, you have to strongly consider arbitration — it may be the safest way to 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 as well.