As I wrote several weeks ago, we are in the midst of representing a number of clients right now that are having serious disagreements with their business partners. These sorts of situations sometimes arise because the parties did not negotiate a strong operating agreement and don’t have a clear picture of their rights and obligations. Other times it is because one of the partners believes he or she got a raw deal and is looking to change it. Regardless of their genesis, these disputes are hard on everyone. Anger, bitterness, and betrayal can cloud judgment and lead to rash decisions. Resentment brews, and businesses crumble. As cannabis attorneys, we are approached at many different phases of these disputes, but it is important to know the best way to use your attorneys as partnership (“partnership” here is broadly defined) struggles unfold. Today, I’ll write about some of the dynamics, both good and bad, that attorneys bring to the table in partnership disputes.
To start, everything is more difficult and more sensitive for marijuana businesses. States tend to have tight regulations that involve approving of and keeping record of business owners and their percentage of ownership for state-licensed marijuana cultivators, retailers, etc. Partnership disputes can throw those numbers into flux, and it can bring regulators sniffing. When regulators discover that a cannabis business wasn’t honest about its ownership roster on its licensing application, the license itself can be in jeopardy. For more on why it is so important to tell the truth to your state cannabis regulators, check out How To Deal With Your State Marijuana Regulators: Fess Up
Though sensitive the early stages of these disputes are usually the best time to head off larger battles. One way to do that is to keep your lawyer on the sideline to start. Of course it is good to meet with your lawyer to understand your duties and rights, but it’s probably not a good idea to start issuing demand letters from counsel as soon as you feel you have been wronged. The longer negotiations stay confined to the parties, the more likely you are to reach a conclusion that keeps the business alive and averts total breakup.
Assuming that doesn’t work, that’s when it’s time to explicitly bring in counsel. Psychologically, introducing attorneys to the mix changes the dynamic — the fight becomes more real, and the partners can become more solidified in their positions. Negotiating through counsel is tedious, but effective. The bad news is that it can take a long time and it costs both sides money in attorneys fees. Party A and attorney agree on a settlement proposal and send it to Party B’s attorney. Party B and attorney spend a couple of days on it and come back with a counter-offer. And on and on and on. When the parties are far apart and don’t move on their proposals, as has been our experience with a number of these matters, this can drag on for months.
The good news, though, is that using legal counsel does tend to make it easier to reach a deal. This is true not only because we lawyers understand how to negotiate and can remain calm and objective, but also because we play a role in helping our clients understand the benefits of striking a deal. A good attorney with a stubborn client knows that part of his or her job is to push back on the client so that a good deal gets reached. It is not uncommon for clients to reluctantly accept a deal, only to realize a few months later how much it benefited them to get their dispute behind them.
And a good deal has to be the goal. The goal is not to punish the other side for being wrong or for taking advantage of you. The urge to punish and take the other side down is what leads to thoughtless actions and bad results. Very few partnership disputes should go to the time and expense and publicity of a trial. Unfortunately, partnership disputes have a lot in common with divorces. The parties’ assets and liabilities are often intertwined and difficult to understand. The fight is personal and the facts are messy and judges/arbitrators/mediators may or may not come to the right conclusions in such he-said/she-said disputes. Plus, the fight is expensive. The legal expenses for going to trial can be ten or more times the costs of negotiating out on a deal. At minimum, litigation usually involves filing a complaint, answering the complaint, going through months and months of written and deposition discovery and motions practice, and then a trial. At the end of that, if the other side does just enough to confuse things for the judge, you may end up with nothing at all. One of the biggest problems with litigation is that it can spin out of control through no fault of yours or your lawyer. If the other side wants to turn it into WWIII, there is little that you can do to stop that.
So, when it seems like things are starting to fall apart with your partner, keep in mind that your goal is to reach the best resolution possible as quickly as possible. If you are at the point where you are engaging attorneys to negotiate or even to sue the other side, at least make sure that there is a plan in place for how the business is going to operate during the fight. You don’t want to destroy the pie while figuring out how to split it up.