Mediation of Cannabis Disputes

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Mediation and arbitration are the two major “alternative dispute resolution” (ADR) techniques used in business disputes. We’ve discussed arbitration in cannabis cases in several previous blog posts. Although arbitration gets more attention these days than mediation (see the Supreme Court’s recent arbitration decision), mediation is probably the most commonly used form of ADR in cannabis businesses.

Arbitration is essentially stripped-down litigation, in which a third-party lawyer or judge decides issues of fact and law, in a setting that in some cases is less formal and costly than going to court. Both litigation and arbitration are usually binding. Both result in an order than can be enforced like any other court order, e.g., by garnishing the losing party’s assets.

Mediation differs from arbitration in that the mediator cannot require the parties to resolve the dispute. Her role is to help parties work together to find a solution to their problem, that they both can agree on. If mediation is successful, the parties often enter into a written settlement agreement, resolving the dispute.

How Mediation Works in a Cannabis Dispute

For our discussion, imagine a dispute between co-owners of a marijuana dispensary. Hopefully, the owners have a solid operating or shareholder agreement with a dispute resolution clause requiring mediation before litigation can be filed. Even without such a clause, once a dispute arises, the owners can make an on-the-spot agreement to mediate.

The parties must next choose a mediator. In a business dispute, it is important to choose someone who is not only an experienced mediator but also has experience in the subject matter of the dispute. One of the responsibilities of a mediator is to give each party its real-world options if those parties settle, or fail to settle, the dispute. Particularly in a cannabis case, with overlapping local, state, and federal laws that are changing sometimes every week, a mediator must have knowledge not only of the applicable laws but of the business environment.

It is important that the mediator be completely disinterested in the outcome. The mediator’s primary objective is not in benefitting either side, but in settling the dispute, if possible.

Mediating parties are often represented by counsel, although this is not necessary, especially early on in the process. Each party must present the mediator with its version of the facts and what outcome it is seeking. This can be done in written submissions before the mediation, or in oral discussions at the mediation itself. Each party can choose to share their correspondence with the mediator, or not, depending on that party’s mediation strategy.

The mediation will usually take place in a location where each party can have private discussions with the mediator. Once a party has explained its side, the mediator can ask questions, probing areas of agreement or disagreement. A good mediator will not just ferry offers between the parties, but will privately advise each side about its goals and how they can be achieved. A very good mediator will give each side candid advice about the likelihood of success before an arbitrator or a court and will advise not only on the out-of-pocket costs but the opportunity costs that occur when a party chooses to spend its time litigating rather than running its business.

Mediations are often set for a single day, although multi-day mediations are common in complicated cases. Once the initial information is exchanged, the mediator will work towards a solution that each side can live with, moving back and forth between each party’s rooms. If a solution is reached, the mediator should put at least the most important points of the solution in writing, and have each party sign the agreement.

If the mediator does not believe that the parties will settle now, she may call off the mediation for the day. She may also ask the parties to agree to meet again to continue the mediation, or to take additional steps, such as exchanging information, before reconvening. It is not uncommon to mediate at several points in the dispute resolution process, as each party gets more information about its own and the other party’s position. It may take several mediations to reach a settlement.

Next week, we will examine how a party can increase its likelihood of success at mediation.

How to Increase the Likelihood of Success in Cannabis Mediation

 Know your audience(s)

Unlike in litigation or arbitration, where your audience is a disinterested third-party judge, jury, or arbitrator, your primary audience in mediation is the other side. After all, mediation will not result in a settlement unless both sides agree. But consider the other audiences, i.e., those on your own side. Many cannabis businesses have multiple owners or decision-makers. Mediation can be an excellent way for your management team to fully understand the dispute so that the team itself can decide on a resolution that will best satisfy all the stakeholders.

Look for a resolution, not a victory

The goal in most mediation is for all parties to resolve the dispute, not for one party to emerge victorious at the other’s expense. It is a rare case where a party in mediation will find it in its best interests to completely capitulate. If you expect to get all or most of what you might get at trial, you are unlikely to succeed in mediation.

Don’t just trade offers

Even when the principal issue between parties seems to be how much money will change hands, just exchanging numbers is not always effective in mediation. The concept of “principled negotiation,” developed by Roger Fisher and Bill Ury in the book Getting to Yes, involves considering the parties’ underlying motivations and interests, rather than just their negotiating positions. Seeking to address each party’s interests can change the dispute from a zero-sum game to one where both parties will benefit. For example, if one marijuana business is suing another for intellectual property (IP) infringement, a possible resolution could involve a cross-license agreement where each party agrees to license its IP to the other party.

Mediation is a process

It is not uncommon for parties to engage in two or more rounds of mediation before reaching a settlement. During litigation, there are several critical points at which mediation might take place. Early mediations are attractive because the parties will not have spent time and money litigating. But the parties will be handicapped because they will not have the documents and other information that becomes available during discovery. For this reason, some parties choose to voluntarily exchange critical information, e.g., sales data, very early in a case to enable a more informed mediation. In general, as the parties spend more time and money on litigation they will be less likely to settle. However, certain expensive litigation events, such as expert discovery, summary judgment, and especially trial, may encourage parties to mediate later. Consider your mediation strategy at the beginning of a dispute, and be ready to reconsider your strategy as the case develops.

Get Authority

Each party must bring to the mediation the person or people who have the actual power to decide the case that day, preferably in person. This often includes a representative from any insurer who might contribute to a settlement. Most experienced mediators will insist upon this.

Get It In Writing

If a settlement is reached, even if it is partial, that agreement should be reduced to writing and signed by all parties before they leave the mediation session. It is essential that this writing capture the agreed-upon terms, even if the parties contemplate drafting a more detailed agreement later on. It is also essential that this writing be enforceable. An oral agreement, while potentially enforceable, is likely to lead to more litigation, thereby undermining the objective of settling the case.

The majority of cannabis disputes are likely to go to mediation at some point. Making the most out of your mediation can help you get, at least some, satisfaction.

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