I have a confession that may not make me very popular around these parts: I am a litigator. That means I am cynical, jaded, grumpy, and always see the worst in people and situations. And while that may make me a bad choice for your cocktail party, it allows me to talk about a subject that gets very little attention but promises to be a growing issue in the coming years – cannabis litigation.

Sometimes it seems like owning a cannabis business is like owning a professional sports franchise. For many, it’s a dream job. I get calls from people who seem willing to throw money at accomplishing that dream. And in many ways, that is true. But what happens when things take a turn and something comes along to harsh your mellow? It’s an all too familiar story in the cannabis industry.

At the outset, it’s important to understand that very rarely does either side truly “win” in litigation. Being involved in litigation is a huge time and attention suck, it almost invariably becomes a personal matter for the litigants, and it creates a scenario where all parties end up just wanting it to be over. Oh, and it’s expensive. So expensive.

The Cannabis Industry Is Ripe for Litigation

An unfortunate but all too common problem in the cannabis industry – and one that tugs at whatever heartstrings I, as a litigator, have left – is the absence of legal documents drafted by experienced counsel. I am regularly asked to advise when a cannabis deal has gone bad or when there is a dispute over some aspect of a business arrangement. All too often when I ask to look at the underlying documents at issue in the dispute (the operating agreement, the contract, etc.), I learn that they either (1) do not exist; (2) are poorly written; or (3) are not written in accordance with best practices or market conditions. This is a perfect gumbo for litigation, because each scenario all but guarantees the parties will disagree about what the “deal” was.

Further, even when the documents are drafted, parties often simply ignore their obligations. I get it: People who decide to enter the cannabis industry are wired a little differently than most, and that mentality doesn’t usually lend itself to rigorous scrutiny of contractual provisions and other “legalese.” I frequently learn that parties simply ignored their duties under a contract, if they even read the contract in the first place.

In light of this, it should come as no surprise that the cannabis industry is ripe for litigation. In fact, the real surprise is that there has not been more litigation, which I suspect results from: (1) a hesitance on the part of cannabis businesses (which often run afoul of black letter federal law) to invoke the judicial system and (2) a lack of resources to prosecute or defend a lawsuit.

Tips to Avoid Litigation

If nobody wins in litigation, then avoiding litigation should be a priority. Here are a few best practices for doing just that:

• Get it in writing. Making sure that your business transactions are fully documented in writing is an important first step for avoiding litigation. A contemporaneous writing is far and away the best way to understand what the parties intended to agree to. And the parties typically are happy to memorialize that agreement at the beginning of a relationship, when everyone is thinking positive thoughts about how much money they will make. That will come in handy when the fighting starts.   

• Use experienced counsel to prepare the documents. I get it: Nobody likes to pay lawyers, particularly when you think you can do the job yourself. When it comes to documenting a cannabis deal, however, you can pick your expression: (1) “you get what you pay for;” (2) “one who represents himself has a fool for a client;” or (3) “an ounce of prevention is worth a pound of cure.” Hire a lawyer. It will cost less on the front end than it will on the back end if you don’t.

• Pay attention to your contractual obligations. The most thoughtfully prepared contract is worthless if you put it in a drawer without reading it and ignore your rights and duties under the contract. Take the time to read the contract (before you sign it!) to make sure it accurately reflects your understanding of the deal, and then make sure that you and your team understand the obligations of all parties to the deal.

• Document breaches and provide notice where appropriate. In the event the deal goes south, you’ll want to have a record of why it’s the other side’s fault. Take the time to document in writing any time the other side fails to uphold an obligation under the contract. And pay attention to any provision in the agreement that requires you to provide notice of something to another party, as failure to do so could result in your waiving a claim or a defense. A knowledgeable attorney should be able to assist with this.

What to Do When Involved in Litigation

Sometimes despite best efforts, litigation happens. Here’s what do to first:

• Immediately engage counsel. If you haven’t done so by this point, it’s now past time to engage an attorney. No excuses. Seriously, this is important.

• Collect relevant documents and facts. One of the first things your lawyer will want to do is get a handle on the relevant documents and facts of the case. Go ahead and pull everything together as soon as possible, including communications and notices back and forth with the other party.

• Is there a quick resolution? Don’t forget the first law of holes: If you find yourself in one, stop digging. Take a breath and work with your counsel to see if there is an off-ramp. Is litigation really necessary with all things considered, or did you just end up there at the conclusion of a series of unfortunate events? The sooner you can get out of litigation for a palatable “price” (whatever that may be), the better.

Litigation is no fun, but if you follow these practical tips you will decrease the likelihood that you end up as a litigant or, at worst, minimize the time you’re in litigation.