Bloomberg Law
June 2, 2020, 8:01 AM

INSIGHT: Contract Considerations for Marijuana Companies During Coronavirus

Barak Cohen
Barak Cohen
Perkins Coie
Danielle Fortier
Danielle Fortier
Perkins Coie
Cheryl Zak Lardieri
Cheryl Zak Lardieri
Perkins Coie
Tommy Tobin
Tommy Tobin
Perkins Coie

The Covid-19 pandemic continues to create economic issues for businesses large and small, and the marijuana industry has not been immune.

Numerous lawsuits have already been filed regarding risk allocation during the Covid-19 pandemic, and many more are sure to follow.

Marijuana companies should re-examine existing contracts and consider how exceptions to contract enforcement, specifically, treatment of contracts as void against public policy and force majeure and material adverse change clauses, apply to the present situation. Interpretation of particular contracts under these principles will largely depend on the actual language used.

While the courts continue to wrestle with these suits, companies should create and detail specific evidence as to how the pandemic is affecting their operations, making their performance under the contract unreasonable or impossible.

Void Against Public Policy

Generally, a court cannot enforce a contract that forwards an illegal purpose on the grounds that such a contract is void against the public policy of the state. Although such a limitation appears at first to be reasonable, it can create headaches for marijuana businesses looking to craft enforceable business arrangements where their business venture is legal under state law but not under federal law.

State and federal courts are increasingly analyzing cannabis contracts in a more nuanced, pragmatic way. See Ginsburg v. ICC Holdings LLC, No. 3:16-cv-2311 (N.D. Tex. Nov. 13, 2017) (recognizing that federal courts do not take a “black-and-white approach” to cannabis contract enforceability.) Many courts assess whether the enforcement of such contracts mandate illegal conduct or upset parties’ justified expectations. See Restatement (Second) of Contracts § 178.

Some jurisdictions, including Colorado, Oregon, and California, have enacted statewide legislation declaring that cannabis contracts are not void against the public policy of these states. California explicitly identifies adult-use cannabis as a “lawful object of contract.” Under Oregon law, “[n]o contract shall be unenforceable on the basis that manufacturing, distributing, dispensing, possessing, or using marijuana is prohibited by federal law.”

As marijuana companies continue to grow and formalize their operations, they should consider approaches that mitigate the risk of having a contractual provision voided for contravening public policy. These include:

  • Favorable forum selection and choice of law clauses specifying a jurisdiction that has upheld similar contracts.
  • Specific reference to the applicable state enforceability statute, if one exists under the chosen forum or governing law.
  • Express acknowledgment by the parties of the legality of the contemplated activities under state law, but that these activities may be illegal under federal law.
  • A properly-drafted severability clause.
  • Using separate contracts for products and services that are federally prohibited and those that are not.

The growth in commercial availability of marijuana comes amidst legal and regulatory ambiguity. Although the steps outlined above, among others, cannot guarantee that a court will find a marijuana contract enforceable, they represent prudent steps toward mitigating risks of another party asserting the illegality of contract as an affirmative defense.

Force Majeure and Material Adverse Changes

Covid-19 has been such a disruptive force and caused many companies to be unable to satisfy their contractual commitments. Two types of provisions may protect companies facing situations where this occurs because of the pandemic.

In commercial contracts, force majeure clauses may excuse performance where certain “act of God” type events, such as natural disasters, make it impossible. In mergers, acquisitions, and other significant corporate transactions, material adverse change (MAC), or alternatively material adverse effect (MAE), clauses may permit an acquiror or investor to walk away from the transaction if the value of the company they are acquiring or investing in declines dramatically.

Force majeure provisions are generally read narrowly, so it is important to examine the exact contractual language and determine whether it covers the events for which the party seeks protection. In the present case, language referring to a “pandemic,” “disease” or “virus” would provide the clearest protection.

When force majeure clauses use broad or catch-all language, such as “any unforeseen events not within the reasonable control of the parties,” it may be more difficult to invoke the protection. Put differently, a force majeure provision that excuses performance “in the event of a declared pandemic” is more specific (and likely more enforceable) than “in the event of an act of God.”

Furthermore, as our colleagues have noted, the “the force majeure event must be the cause of the party’s inability to perform.” Likewise, MAC clauses are typically difficult to invoke. As the name suggests, the triggering event must not only be “material” and “adverse,” it generally also must be unforeseen. MAC clauses frequently exclude circumstances that do not affect the company disproportionately to peers in its industry, so such clauses may not provide relief where Covid-19 has had a similar adverse impact across an entire industry

Along with this renewed attention to contract clauses and provisions, marijuana companies may also wish to assemble evidence of their efforts to perform under alternative means, especially as they may need to show what steps they took to mitigate the impact of their non-performance. Consulting with trusted counsel could allow companies seeking to avail themselves of these provisions to better understand how courts in their jurisdiction will analyze them.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Barak Cohen is a partner in Perkins Coie’s Washington, D.C., office, where he chairs the firm’s Cannabis Industry Group. His practice focuses on government and internal investigations, and providing compliance advice in highly regulated industries, particularly the cannabis industry. He is the editor of the ABA’s forthcoming cannabis law treatise, and a member of the National Cannabis Industry Association’s policy council.

Danielle Fortier is a partner in Perkins Coie’s Denver office, where she represents strategic and financial buyers in structuring, negotiating and documenting a wide range of public and private company transactions, including mergers, acquisitions, divestitures, financings and restructurings. She is a member of the firm’s Cannabis Industry Group and has significant experience with transactions in the cannabis industry.

Cheryl Zak Lardieri is a senior counsel in Perkins Coie’s Washington, D.C. office, where her practice focuses on complex commercial disputes, consumer class action litigation, and intellectual property. Her experience includes matters involving unfair business practices, misappropriation of trade secrets, breach of contract, false advertising, and consumer fraud. She also is a member of the firm’s Cannabis Industry Group.

Tommy Tobin is an associate in Perkins Coie’s Seattle office, where he focuses on complex commercial litigation and class action matters involving statutory, constitutional and regulatory issues in a range of industries, including food and beverage, healthcare, and pharmaceuticals. He regularly writes articles on food law and policy issues and is co-chair of the American Bar Association’s Food, Cosmetics, and Nutraceuticals Committee.