California Court Upholds Enforceability of Cannabis Contracts

October 25th, 2019, Business & Corporate, Cannabis Law

A federal court issued an Order earlier this week recognizing, in part, that cannabis-related contracts can be upheld under California law. 

The plaintiff, Farrah Williams, filed a class action complaint against San Francisco-based Eaze Solutions in May 2018.  Williams alleged that the delivery business violated the federal Telephone Consumer Protection Act by spamming her and other customers with unsolicited text-message marketing.  Eaze moved to compel arbitration of the plaintiff’s claims in accordance with the platform’s terms of service. 

While Eaze is not a licensed cannabis company in California, it serves as an intermediary in the industry by taking orders online from customers and facilitating deliveries from licensed retail stores.  Given that Eaze is engaged in the federally illegal cannabis industry, there was a question of whether the court might decline to enforce a contract that was premised on unlawful activity.  

The Order noted that although the pleadings raised “interesting issues about ‘ganjapreneurship’ and the budding legal marijuana industry,” there were two narrow issues that were before the Court: (1) whether there was an agreement between the parties to arbitrate; and (2) whether it was for the Court or the arbitrator to decide if the claims were subject to that agreement. 

The U.S. District Court for the Northern District of California found for Eaze on both points, granting the company’s motion to compel arbitration of the plaintiff’s claims.

What This Means for the Industry

The Order is important for the marijuana industry because there is a lingering question about whether contracts entered into by industry participants can actually be enforced through our legal system.  This is because any contract that advances the distribution of marijuana (a controlled substance in the U.S.) necessarily violates federal law.  And as a general rule, contracts that have an unlawful purpose are void and unenforceable.  If a contract cannot be enforced, then it offers little protection for key business interests.

In this case, the court determined that the arbitration provision was severable from the rest of the contract.  This means the arbitration provision could be analyzed and enforced separately, even though the core object of the contract involved violating federal law.   

The Order joins a growing collection of legal opinions involving cannabis-related contracts that have broad implications for the industry.  Courts may not order a party to take action that would directly violate the Controlled Substances Act.  However, courts are finding ways to enforce contractual provisions that are ancillary to the operation of a cannabis business.