How to Avoid Cannabis Litigation: Five Tips

Here at Canna Law Group, we are never not litigating. The advent of new and untested laws in an industry culture that trends toward risk-tolerant business practices, makes litigation common. Because litigation is unpredictable, time-consuming, distracting, tough, unglamorous and expensive, it is best to avoid when possible. Here are some ways to avoid litigation.

1.  Write it down. Seriously, have a professional write it down. It is very easy (and likely) that expectations will diverge and disputes will occur if your agreement is not memorialized in writing and also signed. Whether it’s an arrangement with a partner, employee, supplier, landlord or other entity, and even if the counter-party is a friend or family member, contracts should always be in writing.

Marijuana LitigationHistorically, the cannabis industry has existed underground and business relationships—even for very large transactions—have been un- or under-documented. That is changing fast and entrepreneurs should be wary of doing business with anyone who resists written contracts. Gross informality in business shows a lack of acumen and may also indicate poor motives.

Having an agreement that clearly sets parameters for when a business relationship fizzles, for example, can minimize the cost of dispute resolution. It can also actually prevent a relationship from breaking down in many ways, as a written contract allows all parties to know with certainty in advance the consequences of various actions or events. Good contracts make business flow and if you cannot agree to written terms with the other side, you should not be doing business together. (For more on intra-company cannabis business disputes, check out yesterday’s post, and How To Avoid Costly Marijuana Business Disputes.)

2.  Do Your Research. Carefully research potential partners, investors, employees, suppliers and even professionals like CPAs, realtors and attorneys. The need to research business partners is pronounced in states like Oregon, Washington, Colorado and Alaska, where markets contain comparatively low barriers to entry yet funding remains competitive. If a potential business partner has a history of failed enterprises or business disputes, or if an investor is unwilling to disclose basic financial information, it’s probably best to steer clear.

3.  Read the Agreement. In the words of the eminent legal scholar Bret Michaels, “Thoroughly read all your contracts. I really mean thoroughly.” The internet is an ocean of documents. You can find any species of agreement easily, in the many hundreds, but an untailored agreement will almost never adequately reflect the expectations of particular parties. For these reasons, it is important that a party read carefully anything they will be signing, even if the document was first prepared by the party’s own attorney. This is because you yourself will have more knowledge of the relevant facts than anyone else and it is crucial to get things right before signing.

4.  Communicate and Stay Flexible. Businesses evolve and outgrow contracts, which may need to be revised or replaced from time to time. This is especially true in the ever-changing marijuana regulatory space. If Party A is unhappy or suffering under a contract term that has become oppressive, Party B will not always achieve the best result by shutting down lines of communication or continuing to enforce the oppressive terms. Sometimes (not always), it is better to accommodate than to try to win at any cost. To that end, professionals may have insights that are not apparent from the inside—especially in the marijuana industry where things are always in flux—and all options should be explored before throwing in the towel.

5.  Think objectively. Like a lot of advice, this is easy to give but often hard to do. If you can put yourself in the other party’s position, and the other party isn’t crazy, you may be able to understand what motivates their decision to press or to obstinately dig in. Bad business judgment can come across as personal animosity, but if you can understand where Party B is coming from, you may be able to resolve a conflict in short order.

Sometimes, even if all of these steps are observed, unforeseeable events make litigation unavoidable. But the chances of becoming embroiled in a costly dispute that draws time and resources away from your cannabis business can be greatly diminished by observing basic formalities. In the cannabis industry, entrepreneurs who insist on good contracts and closely watch the regulatory landscape will help insulate themselves from risk.