In the four years since marijuana has hit the legal market in California, the legal parameters of the industry have transformed at sometimes breakneck speed. The industry is, in a sense, always looking ahead. But because the laws and regulations have changed so quickly, it’s imperative to consult with your Los Angeles marijuana business attorney to periodically look back at older agreements and contracts – ensuring you aren’t overlooking any previous obligations or restrictions.
This point was underscored recently in the California Appellate Court decision in Metsch v. Heinowitz. In this case, the appellate court refused to enforce a contract to produce and distribute marijuana edibles. The contract had been drafted in 2014 – at a time when cannabis wasn’t legal for recreational use in California. This factored significantly in the court’s ability to enforce it.
Plaintiffs had pursued a case against defendant for breach of contract, breach of fiduciary duty and conversion that arose from this contract. Plaintiffs indicated they were general partners with defendant in a company called Chronic Catering, a business that held intellectual property (recipes) and property. A year after the contract was signed, plaintiffs allege that defendant consigned the assets of the company for his own use and for the benefit of his own company – without plaintiffs’ consent. Plaintiffs sought to make defendant pay general damages as well as a general declaration from the court that the intellectual property defendant was using as his own actually belonged to their joint venture.
The trial court, however, noted that at the time the contract was drafted, both defendant and the plaintiffs were operating unlicensed marijuana businesses that made and sold cannabis edibles. That meant they formed an agreement based on illegal conduct and transactions, and thus plaintiffs had no right to seek recovery or enforcement of said contract.
The appellate court affirmed this ruling. Justices highlighted the fact that in order for a contract to be enforceable, it has to be legal when it is made. That means that courts in California are going to look at what the laws were at the time both sides entered into the contract. If you had a marijuana business contract prior legalization, it may be difficult to enforce. Depending on your position, that might be a good thing. Or it might not, in which case, it’s time to have your cannabis lawyer review your position and help you draft a new one that is both up-to-date and enforceable.
All the defendant in this case had to do was probe that at the time the contract was signed by both parties, cannabis was considered a Schedule I narcotic (under federal laws), prohibited from possession, planting, harvesting, drying, processing, sale, transport, import or gift under marijuana law. Therefore, the contract wasn’t enforceable.
The decision isn’t published, which means it doesn’t set any binding precedent for others who may be embroiled in cannabis business contract disputes. Nonetheless, it can serve as a warning to those in the legal cannabis market that taking the time to review prior contracts and determine whether any should be revised, replaced or discarded is an imperative.
It should be noted that because cannabis is still considered a Schedule I drug under federal law, this argument pertaining to contracts might still crop up in a current dispute. It’s best to have your attorney review your contracts to make sure they are as airtight as possible.
The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.
Metsch v. Heinowitz, April 22, 2020, California Court of Appeals, Fourth District, Division One
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