Marijuana Contracts: The Trouble With Forms

Don’t use online legal forms for your cannabis business. Just don’t.

These days, you can find a free legal form or template online for just about any type of contract. It takes discernment, of course, to choose the best template for your purposes: the form should cover the substantive areas, to start, but it should also square with your jurisdiction, track any recent statutory amendments and apply the correct legal concepts to your situation. At the end of the day, though, there is a form for almost everything online. If you subscribe to a legal contracts vendor, like LegalZoom or Rocket Lawyer, the forms may even come with back end support.

Lawyers like to debate whether legal documents sourced online are helpful or dangerous. It is a fun debate and most of us fall on the “buyer beware” side of the spectrum, if only because we have all been called in to clean up messes created by ill-fitting forms. Still, plenty of small businesses get by with generic forms, for better or worse. They work well in some industries, less so in others, and in some, not at all. The cannabis industry fits squarely in the “not at all” category. In fact, if we can give one piece of advice we know to be true, it is this: do not attempt to adapt an online form for a marijuana business. Please.

There are two primary reasons even the most expertly drafted generic form, if tested, will fail in the cannabis context. First, marijuana is a heavily regulated industry at the state and local levels, which implicates ownership and licensing concepts. This must be addressed in every agreement. Second, marijuana is illegal to produce and distribute under federal law. This must also be addressed. These two issues flow through nearly every marijuana contract, whether the contract is an internal company document or an outward facing form.

Using a standard, non-marijuana form for a marijuana business can lead to dire results. Take a limited liability company operating agreement, for example. On the limited topic of state licensure, what happens when an individual does something to jeopardize the license? (Is this a call option triggering event? Is expulsion in play?) What happens if the company fails to acquire or maintain a license? (Does the company dissolve? What happens with its capital?) What if the company wishes to acquire a second license? (Who gets to decide? Can a capital call be made?) Or what if one of the members, listed on the license, wants to transfer her interest to a third party? (Is this allowed? What transfer restrictions does the state impose?) The list goes on and on. With lawyers inexperienced with the cannabis industry consistently getting these sorts of things wrong, forms stand no chance. See The 5 Worst Pieces of Cannabis Legal Advice We’ve Seen in California (From a Much Longer List)

Unfortunately, getting any one of these items wrong can have disastrous consequences for company governance and operations, which we have seen time and again in cannabis litigation. The same pot-centric concept applies to outward facing agreements, as we have noted with cannabis leases, land sale contractscompany acquisition agreements, and other types of cannabis contracts. It is worth noting that even if federal law were to change tomorrow, cannabis industry documents would still require cannabis specific provisions due to heavy local regulation.

As attorneys who work with a great number of pot businesses in California, Washington and Oregon, we are constantly tweaking our cannabis documents to accord with changes in state and local laws and rules, market dynamics, and evolving federal policy. If there is one piece of advice we can give someone thinking of entering the marijuana industry, it is this: do not mess around with ill-fitting forms. It’s not worth it. Not even close.