Last weekend's jarring transition in California's cannabis industry was intended to usher in a fully-regulated market. By all accounts, and confirmed by every “75% ALL INVENTORY IN STOCK!!!” dispensary ad you have seen over the past couple of weeks, the July 1 deadline for coming into compliance with California’s emergency regulations is proving a rude awakening regarding what business in a fully-regulated market is going to look like.
Dispensaries may no longer offer their customers cannabis products that do not meet the state's testing or packaging requirements--and most noncompliant products will have to be destroyed. Estimates are that termination of the transition period will require the destruction of up to hundreds of millions of dollars of cannabis product currently flowing through the state’s nascent regulated market. One likely side-effect of this mass-destruction is a rash of contract disputes.
Indeed, it is possible that the industry is about to see a massive wave of contract litigation. Watching six or seven-figures' worth of product go up in smoke will undoubtedly cause many of those financially harmed to seek out legal remedies. In many cases, suing over the application of their supply contracts will be the only plausible option. Such lawsuits, however, are often far less appealing options once parties have taken all appropriate considerations into account.
No Reprieve from Mass-Destruction
While many in the industry had held their breath for a last-minute reprieve from the July 1 deadline, the clock struck midnight without a stay of execution. And while this metaphor may seem bleak, there are undoubtedly dozens, even hundreds of cannabis licensees whose commercial viability will hinge on whether they must bear the burden of this product destruction. Nonetheless, A recent Bureau of Cannabis Control communique makes clear that the BCC indeed expects non-conforming product that cannot legally be returned to licensed cultivators or manufacturers will be destroyed imminently. Assuming that this destruction of product occurs, which parties suffer the brunt of the financial reckoning that will generally come down to what these licensees’ contracts say.
With some estimating that losses due to termination of the transition period in excess of $300 million, it seems that the extent of its practical implications may have been under-appreciated by many operators. Between a dearth of licensed and operational labs to test product and last-minute changes to packaging requirements, there will be hundreds, if not thousands, of perfectly-responsible licensees impacted by the post-July 1 product destruction. Some licensees may have supply contracts that foresaw these problems and provide clear answers for what happens next. If not, however, the party left holding the bag may be inclined to sue its more fortunate contractual partners.
Is Litigation a Good Option?
As self-defeating as it is for a litigator to say so, however, filing a lawsuit under such circumstances, more often than not will be a mistake. Supply contracts and contract law are often quite clear, if unforgiving, regarding which party shall bear the burden of a loss under given circumstances. Where such clarity exists, pursuing litigation is likely throwing good money after bad.
Even where contracts are more susceptible to alternative interpretations, however, litigation should not be undertaken lightly. Licensees and their attorneys must look at issues including how much product was destroyed, how much money is at issue, and the practical impact of forever losing the contractual partner in question. Each of these factors, and many others, must be weighed alongside the substantial cost of litigation in both money and time. A complex contract dispute can easily cost both sides six figures in legal fees.
It is not guaranteed, though, that each side shall bear these fees equally. Many contracts have attorney’s fees provisions that allow the “prevailing party” to recover its fees from the other party. This means that a lawsuit seeking to recover $200,000 could result not only in no recovery, but also in having to pay your lawyer and your opponent’s lawyer for the trouble. For this reason, as well, the decision to file a lawsuit must be a deliberate one.
Alternative Dispute Resolution Requirements?
If a licensee still feels that litigation is warranted after taking all factors into account, it remains critical to check their contract for alternative dispute resolution provisions. Filing a lawsuit in the courts when a contact requires you to mediate and/or arbitrate the dispute can impact other rights under the contract, including the right to recover attorneys fees from the other side.
So, in sum, cannabis supply contract litigation may be heading towards a courtroom near you soon. Licensees should consider carefully, however, whether such litigation will actually serve their practical goals.
If you have questions regarding whether pursuing legal action is advisable in your situation, or if you have already received notice of threatened or actual legal action against your business, call Horst Legal Counsel at 415-871-6567 or Email to email@example.com to arrange your free consultation.