Dear Californian cannabis entrepreneurs,
As you prepare to open your cannabis businesses under the MAUCRSA, perhaps with a few lifelong friends, you may be tempted to think “we’re friends, we don’t need to get the lawyers involved.” We don’t mean to be blunt, but you need to get it in writing regardless of the current camaraderie.
Failing to properly paper your company or your company’s transactions is a recipe for trouble in any cannabis state. In the rush to license, many Oregon and Washington State entrepreneurs skipped these vital steps. The result is that a few years after Oregon and Washington legalized recreational cannabis, we are seeing a rise in litigation among formerly friendly service contractors and marijuana businesses and especially between partners of marijuana businesses fighting over percentages, control, and responsibilities.
With the classic marijuana business ownership dispute, you have a case that makes attorneys, judges, and litigants pull their hair out. Two people start a business with the basic understanding that they are 50/50 partners. A third partner is introduced and they agree to give that person a stake but they never specify the amount of that stake nor whether the original partner shares will be equally diluted. The parties do not even know if they have entered into a binding contract. Nothing specific is in writing, but various emails and phone calls reference slightly different versions and iterations of the same deal. There is no right answer in a case like this, but everyone knows that if they do not settle, litigation will be expensive and contentious and risky.
Compare this to when a licensed marijuana business orally agrees on the basic terms for a future cannabis product transaction. We have written before about the Uniform Commercial Code (the “UCC”), which applies to transactions for the sale of goods. Though the lack of a written document in the business ownership matter (as discussed above) leads to all sorts of difficulties, in a sale of goods situation, the lack of a written contract can (but does not always) work out just fine. The default provisions in the UCC exist to protect parties with reasonable contract terms where they fail to bargain on those terms, even if there is nothing in writing. In other words, the UCC will fill in with clear-cut default provisions whatever the parties failed to agree upon. Nonetheless, having clearly worded and detailed contracts avoids any need to rely on the default provisions of the UCC, which may not be to your benefit if left ignored.
Without written agreements, these fights devolve into often intractable (and nearly always expensive) court battles over who said what and when. In many cases, these disputes would never occur if the parties could had a clearly worded set of bylaws, an operating agreement or services agreement. And if the dispute must go to litigation, it is often cheaper to argue over the meaning of a written contract, than to argue over what the parties orally agreed to in the first place.
Cannabis businesses need to take the same ordinary business steps as other business do to properly memorialize their business relationships. Please, take it from our lawyers who have operated in other highly regulated cannabis states–just get it in writing. You won’t regret it.
Our Oregon and Washington cannabis lawyers