The Jan. 4 Department of Justice (DOJ) announcement rescinding the federal policy outlined in the Cole Memo and the DOJ and Financial Crimes Enforcement Network (FinCen) memos that have protected state legal cannabis businesses and banks that do business with them not only increases the possibility of heightened federal law enforcement activity, but could also impact the enforcement of business contracts between private parties such as leases and insurance policies, according to Michael Sampson, partner at Reed Smith.
“I do not think Attorney General [Jeff] Sessions has unilaterally changed the entirety of federal public policy overnight, thereby rendering contracts unenforceable across the country,” Sampson said. “Courts will need to weigh his pronouncement against years of conflicting federal policy, against other federal action, and against a clear nationwide trend in favor of the legalization, or at least decriminalization, of marijuana at a state level. All of this will need to play out over time and could change again in three years after the next presidential election.”
Here, Sampson discusses the impact the DOJ’s stance may have on private contracts and what this means for businesses in the industry.
Cannabis Business Times: What are some examples of private contracts that a cannabis cultivation or dispensary business might hold with another party?
CBT: What are some examples of violations of those contracts?
MS: A breach of contract can take many forms. It could be an insurance company refusing to provide coverage to a policyholder when the policyholder suffers a covered loss. It could be a landlord refusing to honor the terms of a lease. Or, it could be one party’s failure to deliver goods or services for which another party paid. Really, the scenarios are limitless.
When a party breaches a contract, that party may argue that it was not bound by the contract or was somehow excused from performance. For example, an insurer may attempt to avoid, or excuse, its contractual obligation by relying on a public policy-type argument or exclusion in its policy. Insurers have argued that because the subject of the loss—cannabis in other words—is illegal and/or against public policy, they should be excused from providing coverage for cannabis-related losses. That argument has been met with mixed success in the courts. One concern is whether last week’s pronouncement by the DOJ will change the courts’ perception of federal public policy, making it potentially easier for insurers to argue that they do not have to provide coverage for cannabis-related losses.
CBT: How had those contracts typically been enforced before the Obama-era protections were rescinded by the U.S. Attorney General?
MS: The courts were not unanimous, but I would say the more recent and better-reasoned decisions, as exemplified by the U.S. District Court for the District of Colorado’s ruling in The Green Earth Wellness Center v. Atain Specialty Insurance Company, have concluded that contracts, such as insurance policies, are not void on public policy grounds. That court, for example, relied on “a continued erosion of any clear and consistent federal public policy” in the area of marijuana when reaching its conclusion.
CBT: Without those protections, what challenges exist for cannabis businesses to protect their supplier, vendor and other contracts?
MS: The Sessions memorandum certainly creates uncertainty. It not only creates uncertainty about how different U.S. Attorneys may prosecute cannabis-related acts, it creates uncertainty about whether courts will view federal public policy any differently and whether courts will therefore treat cannabis-related contracts or cannabis-related losses under insurance policies differently. In Green Earth Wellness, the court recognized that “the nominal federal prohibition against possession of marijuana conceals a far more nuanced (and perhaps even erratic) expression of federal policy.” It also noted “the conflicting signals that the federal government has given regarding marijuana regulation and enforcement since 2009.” I am not sure the Sessions memorandum makes anything any clearer.
CBT: Given those challenges, what options do cannabis businesses have at this point?
MS: First, cannabis businesses should stay aware. Watch what the Department of Justice does next, if anything. What are individual U.S. Attorneys doing? Pay attention to what other politicians are doing or saying. Keep an eye on the federal budget process. All of that may be relevant to a court’s determination of public policy.
Second, I would say when entering into a contract—like an insurance policy or a lease—a cannabis business in a jurisdiction which has legalized or decriminalized medical or recreational marijuana should be upfront. Make sure the party with whom it is contracting knows the nature of its business. If everyone is on the same page at the time of contracting, it makes it harder for the other side to later feign surprise and argue that it should be excused from its contractual obligations just because the contract involves a cannabis business. More than one court has found a shared intent, or meeting of the minds, to be significant when enforcing a contract involving a cannabis business or an insurance policy involving a cannabis-related loss.
CBT: What are some action items that cannabis businesses can take right now to ensure their best interests are being served as it relates to private contracts?
MS: As I said before, when entering into a private contract, be upfront. Do not hide the nature of your business. So far, courts have appeared more willing to enforce contracts and protect cannabis-related businesses when it was clear that both parties knew what they were contracting for or about.
I would also recommend looking carefully at applicable state regulations and making sure you are fully complying with them. That really is something you should be doing regardless of last week’s DOJ action. Do not cut corners.
Counsel can be helpful in reviewing state marijuana regulations and in drafting and reviewing contracts.
Top image: © zimmytws | Adobe Stock
Michael Sampson headshot courtesy of Reed Smith
