If you are operating a cannabis business, you must consider the possible legal complications that may arise during the ordinary course of operation. For instance, when drafting contracts, you will likely consider the best way to handle disputes between opposing parties.

Disputes can arise between business partners, providers, customers, or employees. You can avoid future complications by providing a means of conflict resolution in your contracts. Many businesses in the cannabis industry should consider Alternative Dispute Resolution Provisions in their contracts. If you own a cannabis business, contact our experienced cannabis attorneys to learn what dispute resolution provisions work best for your company.

Issues That May Arise in the Cannabis Industry

Like any other operation, legal problems may arise while operating a cannabis business. Claims may include breach of contract, product liability, federal statutory actions, insurance coverage, employment & labor disputes, and other general legal issues. Negotiation and resolution may be preferred over litigating in the courtroom for many of these issues.

What is Alternative Dispute Resolution (ADR)?

Alternative dispute resolution (ADR) refers to resolving disputes without formal litigation. The most popular methods of ADR include mediation and arbitration, which each have nuances. ADR methods share the common characteristics of allowing parties to settle disputes outside the traditional courtroom proceedings, but different rules govern each method. Reasons to avoid litigation include legal expenses, unpredictability, time, and negative publicity.

ADR Proceedings in the Cannabis Industry

For the cannabis industry, alternative dispute resolution may be especially beneficial. Primarily because the federal stance on marijuana has been somewhat unfavorable, they have recently leaned towards state deference. The federal courts have sometimes refused to hear cases about the enforcement of cannabis-related contracts based on concerns that doing so would violate the Controlled Substances Act (CSA).

However, the courts have enforced contracts when doing so would not allow the litigant to profit directly from the cultivation, possession, or distribution of marijuana; for example, contract rights about insurance, employment, intellectual property protections, and contracts around ancillary products may be enforceable. The line is drawn when enforcing the agreement would require directly violating the CSA.

Arbitration Proceedings in the Cannabis Industry

The American Arbitration Association (AAA), a non-profit and one of the world's largest providers of ADR services, also supports ADR for cannabis-related disputes because of speed, cost-effectiveness, and confidentiality purposes. Moreover, the AAA has published organizational statistics demonstrating that in 2019 there was a 225% growth in caseloads using ADR for cannabis-related disputes. Therefore, resolving conflicts outside the courtroom is growing in popularity and efficacy, as the median time for an award was 12 months.

Types of Alternative Dispute Resolution

Arbitration

Arbitration is an alternative method of resolving disputes, where an arbitrator or many arbitrators is appointed by the opposing parties to decide their conflict. Arbitrators take the place of a judge in a traditional conflict and likewise have the power to issue binding decisions, which are difficult to challenge. The parties may create their own rules about the conduct of the arbitration, or they can utilize an organization such as the AAA, which already has rules for arbitrating disputes and teams of experienced arbitrators.

Advantages

• The process can have a quick resolution since you are not subject to busy court schedules
• The outcomes of arbitration are binding
• Arbitration is less costly than litigation, where you may need to hire large teams of lawyers to work a case
• The results of arbitration are generally private, as opposed to litigation which may become public record
• You can select an arbitrator with skill and experience in the industry and law governing the dispute

Disadvantages

• If one party refuses to adhere to the arbitrator's decision, litigation may still be necessary
• There are limited rights to appeal in arbitration
• Arbitrators may have an industry bias, whereas judges are more likely to be neutral to both parties
• Arbitration may be too fast to handle complex disputes adequately

Mediation

Mediation is a form of ADR where a neutral third-party mediator helps the parties find a solution to their dispute. The mediator does not issue binding decisions. They help the parties come to a conclusion on their own. Unlike a judge or arbitrator, a mediator can speak ex parte with each party to understand their perspectives and reach a mutually acceptable conclusion. Though the mediator does not have the power to issue a judgment, they can help the parties reach and sign an agreement that results in resolving the conflict.

Advantages

• Mediation is less expensive than both litigation and arbitration
• Mediation is faster than litigation and arbitration
• The settlements may be confidential since they're agreed to outside of the courtroom
• During mediation, the parties can reach more creative solutions to their problems
• The relationship between the parties is protected and fostered during mediation
• No outside actor imposes a solution on either party

Disadvantages

• Like any negotiation, one party may have more bargaining power than another, which creates an imbalance
• If there is a breach of the agreed-upon agreement, litigation may still be required
• Mediation can fail if tensions get too high or the parties cease trusting each other

Litigation

Litigation is the process of settling a dispute by filing or answering a complaint through the court system. Depending on what type of court hears the case, a judge or jury will be the ultimate decision-maker. Though litigation is not an alternative form of dispute resolution, it may be the best way to resolve the conflict between two parties.

Advantages

• All decisions carry the force of law
• Decisions made during litigation are final, though there may be an opportunity to appeal to a higher court
• Parties may use the rules of discovery to gather information from the other party
• Strict deadlines and scrutiny may incentivize parties to settle

Disadvantages

• Litigation is expensive since you may have to pay for large teams of lawyers and many hours of research and discovery
• The court system is slow
• Litigation will likely harm or end the relationship between both sides
• The results of litigation are public, so negative results can adversely affect the business
• Litigation favors whichever side has more money to pay for lawyers
• A legal resolution by the court may lack a business rationale.

What is a Dispute Resolution Provision?

A business can outline in its contracts the type of dispute resolution they prefer using a dispute resolution clause or provision. Dispute resolution clauses are written understandings that clarify how parties to an agreement must respond to disagreements. There are many benefits of dispute resolution clauses for both parties. These provisions allow parties to decide during their negotiation process how they'd like to resolve disputes.

Therefore, they can decide the rules and format for dispute resolution. Additionally, they can avoid litigating through a formal court proceeding by creating a contractual obligation to resolve disputes privately. A good dispute resolution provision should include the following:

• How the party raising the dispute initiates the conversation and explains the disagreement;
• How the parties begin their dispute resolution; they may set timeframes or have preliminary meetings to resolve disagreements;
• They should clarify the type of ADR they would prefer and outline the rules of their procedures;
• Finally, the contract can stipulate the preferred jurisdiction and rules for recovering reasonable litigation costs if legal proceedings are necessary.

Jurisdiction in your Dispute Resolution Provision

The jurisdiction agreement is a very important part of the resolution provision because there are many benefits to setting a preferred jurisdiction. First, there are practical considerations such as avoiding long traveling distances. Second, there are legal considerations, including how a particular jurisdiction may feel about cannabis.

Some states, like Colorado, have laws that are more favorable toward operating a business in the cannabis industry. Whereas more conservative, "tough-on-drugs" states may be more reluctant to hear or resolve your conflict favorably. Moreover, some jurisdictions may generally have more favorable judges when enforcing contracts. Research and consider which jurisdiction would be best for resolving disputes that may arise in your business.

Enforceability of Dispute Resolution Provision

Another question that often arises is whether dispute resolution provisions are enforceable. Courts will look predominantly to the contract's language to determine the clause's enforceability. The court may look to see if the provision is sufficiently certain, if the language makes ADR mandatory or permissive, or if the provision directly conflicts with a federal or state law.

Additionally, some contract provisions may not end when a contract is terminated if the contract's language provides that a dispute resolution clause survives terminations. When drafting agreements, parties should pay close attention to detail and make sure there is no room for misunderstanding.

What is Injunctive Relief?

Injunctive relief, or an injunction, is a remedy that prevents a party from performing a certain act or requires a party to act in a certain way. The goal of injunctive relief is to prevent future harm. A court may order temporary or permanent injunction while deciding a case. An injunctive relief clause is a part of a contract that requires one or both parties to refrain from performing an act that would cause harm to the other party.

An injunctive relief clause may be intended to prevent an act that may otherwise not create a legal claim of action. Injunctive relief, however, is only sometimes granted by the court. The judge must decide on a case-by-case basis whether the action subject to injunction actually causes a burden or hardship on the party demanding it. Courts may even determine that monetary damages would be a better reward than an injunction. Therefore, these clauses may be beneficial, but they are not guaranteed to provide relief for any given party. 

Conclusion

If you are drafting contracts in the cannabis industry, you should consider how you would like to resolve conflicts. Alternative dispute resolution may provide the best solution to disagreements between parties. Consult with our experienced legal team to determine how to best approach contracts and settle disputes. Contact us today for a free consultation.