Cannabis Litigation Webinar
Please join us for our cannabis litigation webinar

On January 11, 2017, Harris Bricken will present a FREE lunch hour webinar on cannabis litigation. Please click here to sign up.

Harris Bricken’s cannabis litigators have been handling cannabis disputes for years. These cases involve business entities including partnerships, corporations, and LLCs; intellectual property; employment; investment and financing; landlord-tenant issues; and administrative actions. As the cannabis industry expands, litigation in these areas, as well as in new areas such as product liability and patents, will increase.

Cannabis cases are different than any other type of business litigation, and nearly every case has a federal law component. State legalization has also led to an enormous statutory and regulatory apparatus that cannabis businesses — and their lawyers — must navigate every day. To meet the needs of the cannabis industry, Harris Bricken has experienced and dedicated civil litigators in its Seattle, Portland, San Francisco, and Los Angeles offices, including Vince Sliwoski, Hilary Bricken, John Mansfield, and Will Patterson. These lawyers will speak on various topics, including:

  1. The state of cannabis litigation and emerging trends
  2. How cannabis disputes are different than disputes in other industries
  3. Disputes involving partnerships and other business entities
  4. Intellectual property disputes
  5. Product liability disputes
  6. Federal law issues
  7. Employment disputes
  8. Remedies in cannabis lawsuits
  9. Ways to avoid cannabis litigation

If you are in the cannabis industry, understanding business disputes and how to avoid them is critical. And if you are unfortunate enough to find yourself in a dispute, you need advisors experienced in handling these issues. We hope you will join us next month for a lively panel discussion on this important topic. Go here to sign up.

In the meantime, here is a healthy list of articles regarding cannabis litigation:

Cannabis legaization and federal law
We are hoping for a good roll from the Christie case

Christie v. NCAA is a U.S. Supreme Court (SCOTUS) challenge to the federal law that bans states from allowing sports gambling. Though nothing in Christie addresses cannabis directly, SCOTUS’s decision, due out next year, could give Congress a tool to ban states from allowing legal marijuana.

In 1992, Congress passed the Professional and Amateur Sports Protection Act (PASPA), which prohibits states (save for some that were grandfathered) to “authorize” gambling on sports. The state of New Jersey, which was not grandfathered, passed laws in 2012 to authorize sports betting. In a federal case, the state admitted that these laws violated PASPA, but argued that PASPA unconstitutionally allowed the federal government to “commandeer” the state to enforce federal law. The Court of Appeals found that the Constitution’s anti-commandeering doctrine (derived from the 10th Amendment) didn’t apply here because PASPA didn’t affirmatively require New Jersey to do anything, but simply prohibited it from enacting laws that allowed betting on sports. The Supreme Court declined to review the Court of Appeals’ decision.

In 2014, New Jersey passed a new law that merely repealed existing its laws prohibiting sports betting. The Court of Appeals was unconvinced that the new law was any different than the 2012 law. According to the Court of Appeals, the difference between “authorizing” sports gambling and “repealing” laws that prohibited sports gambling was insignificant. The result in either case was that New Jersey allowed gamblers in New Jersey to bet on sports, which was banned by PASPA.

This time SCOTUS took notice and agreed to hear the case. New Jersey’s brief before SCOTUS argues that under the anti-commandeering doctrine, it makes no difference whether the federal law prevents a state from repealing a law or affirmatively forces it to pass a new law. Either way, the federal government is forcing New Jersey to regulate conduct that its voters would rather leave unregulated. At least one amicus curiae brief argued that upholding the lower court’s decision would allow Congress to require states to affirmatively ban medicinal or recreational cannabis, denying the states their traditional role as experimenters in parallel legal regimes.

On December 4, 2017, SCOTUS heard oral argument in Christie v. NCAA. While it is difficult to predict the final decision simply from oral arguments, at least one noted commentator opined that “Justices seem to side with the state on sports betting.”

But what will happen to state-legalized cannabis if SCOTUS goes the other way and upholds the lower court’s decision? Nothing at first. Christie will only decide the question of whether the lower court properly found that PASPA applies to the New Jersey law. Although Justice Sotomajor mentioned marijuana in passing at oral argument, the issue of state marijuana regulations is not before SCOTUS in Christie. In the future, however, it is at least conceivable that Congress could take its lead from such a ruling and pass a law that requires states to repeal their legal cannabis regulations.

 

cannabis litigation
Cannabis litigation is its own thing

Two previous posts (here and here) discussed the McCart v. Beddow case, in which an attorney who was fed up with cannabis grows next to her rural home filed RICO (Racketeer Influenced and Corrupt Organizations Act) claims against dozens of defendants who allegedly participated in a criminal enterprise that damaged her by diminishing her property value, among other things. The defendants aptly described the lawsuit as an “attempt to put some shiny federal lipstick on an otherwise quite beleaguered pig of a state-law nuisance claim.”

The McCart case appears to be wending its way towards settlement.  Although motions to dismiss the complaint were filed, the plaintiff never responded to them and the court never addressed the merits. We probably won’t get to see the terms on which the parties settled, as settlements are usually kept confidential.

Meanwhile, the same attorney has filed a similar lawsuit on behalf of property owners in the Lebanon/Albany Oregon area, against various grow defendants. Ainsworth v. Owenby, Case 6:17-cv-1935, D. Or. It will be interesting/important to see how the RICO/nuisance claims hold up this time around.

In the meantime, this case nicely highlights how cannabis litigation can be so different from other litigation; who brings a RICO claim against their neighbors? Which is a perfect segue to tell you how I and three of our other Oregon, Washington and California cannabis litigation lawyers will be putting on a FREE webinar on January 11. Go here for full information and to sign up.

Everybody knows that because marijuana is a Schedule 1 drug under the Controlled Substances Act, it is illegal to sell under federal law. Last year, the FDA again reviewed the published scientific literature on medical cannabis and recommended that marijuana stay in Schedule 1. The DEA relied upon this finding in its August 2016 ruling upholding the cannabis ban.

What everybody doesn’t know is that the FDA’s website says that it “actively supports the development of drugs from marijuana.”

Some statements are even more emphatic: “FDA needs to do all it can to support the needed scientific research with marijuana to characterize its therapeutic promise.”  What? Is the FDA suffering from cannabis cognitive dissonance? Not at all. Under the Food, Drug & Cosmetic Act (FDCA), the FDA has the power to approve drugs, based on scientific evidence.

The reason cannabis hasn’t been rescheduled is because, according to the FDA, there is not sufficient evidence to show a currently accepted medical use.

Where does the FDA get off saying there is no medical use? A look at the FDA’s history is instructive. Modern drug regulation started in the beginning of the last century, when the market was filled with unregulated patent medicines claiming to cure everything from constipation to cancer. Many of these medicines, e.g., Johnson’s Mild Combination Treatment for Cancer, were merely worthless.

But some were poison. Elixir Sulfanimide was marketed in the 1930s as a raspberry antibiotic syrup. Unfortunately, this elixir contained diethylene glycol, a known toxin, and killed over 100 people, mostly children. The manufacturer performed no safety testing–because none was required. This and other tragedies in the 1930s led Congress to pass the Food, Drug & Cosmetic Act, the first comprehensive law requiring that medicines be proven safe and effective. This history shows the importance that the FDA places on its core mission of making sure that drugs are safe and effective, relying on scientific evidence including human and animal trials.

As previous readers of this blog might recall, the FDA will usually treat any substance that is “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease,” or that will “affect the structure or any function of the body of man or other animals,” as a drug. The FDA’s key decision in approving new drugs is whether the drug is safe and effective for its proposed uses.

So how do you perform scientific research on an illegal Schedule 1 drug to prove safety and effectiveness?

On its website, the FDA tells you how: “The FDA believes that scientifically valid research conducted under an [Investigational New Drug] application [INDA] is the best way to determine what patients could benefit from the use of drugs derived from marijuana.” The INDA is the method that most proposed new drugs begin the approval process. Once the proposed new drug has undergone the (extensive) testing required by the INDA, the test data can be used to file a New Drug Application (NDA). Virtually all prescription drugs sold in the U.S. are approved under an NDA.

The FDA has already approved three products based on cannabis compounds.

Marinol was approved in 1985 to treat nausea caused by cancer chemotherapy, and Sydros, a liquid form of dronabinol, the active ingredient in Marinol, was approved earlier this year. Cesamet (nabilone) was approved in 1985 and 2006 for nausea and neuropathic pain. The active ingredients in all of these drugs are synthetic forms of THC. So we know that cannabis can be approved as medicine.

Why there aren’t more FDA-approved cannabis drugs?

To find out, be sure to read our next installment, in which we will examine what you need to get an INDA and an NDA. Bring lots of paper or its equivalent; you will need to take notes.

For more on the FDA and cannabis, check out the following:

Marijuana business valuations
Finally!

In April of 2016, we covered the basics of marijuana business valuation. At that time, we were aware of just one accounting firm — or, more accurately, one accountant at one accounting firm — who claimed to have any interest in marijuana business appraisals. This was likely due to a couple of factors: 1) CPA firms were slower than attorneys to offer services to cannabis businesses, due mostly to complications with CPA ethics rules (there were no CPA firms in Oregon or Washington with cannabis clients when we started in  this  industry seven years ago), and 2) business valuation is a uniquely specialized and accredited field, even among accountants.

But things are changing fast. Recently, we were excited to see Cogence Group PC, one of Oregon’s best financial forensics and valuation firms, publish a no-paywall series of excellent articles on cannabis business valuation. The first article, “How to Perform a Business Valuation of a Marijuana Business,” gives a high-level overview of the three approaches appraisers commonly take: the asset approach, the market approach, and the income approach. Each of those approaches, in turn, comes with a dedicated article of its own. Those links are here, here and here.

In our 2016 blog post, we briefly described each of the three valuation approaches as follows:

  • The asset approach looks at the business as a sum of assets and liabilities used to determine its value. This approach asks, “what would the cost be to create another business that would produce similar economic output?”
  • The market approach looks at similar businesses, and asks “what are other, similar businesses worth?”
  • The income approach considers the expectations of someone participating in the business. This approach asks, “what economic benefit will an investor of time or money receive?

The Cogence series expands on these descriptions with valuable insights and considerations for cannabis industry entrepreneurs and investors, who may take interest in this topic for any number of reasons, including: a pot business is making an allocation of intangible assets; the business is creating an employee stock ownership plan; the business is the subject of an ownership dispute, etc. Throughout the life cycle of a pot venture, as with any business, questions of value are common.

As cannabis business lawyers and litigators, we often work closely with CPAs, alongside our in-house tax attorney. Over the past year or two, we have been encouraged to see an influx of high-level professionals and blue-chip vendors beginning to serve the cannabis industry. These service providers include not just accountants and business appraisers, but also qualified lawyers, realtors, and others. The Cogence valuation series is a good example of the expanding pool of legitimate resources available to the cannabis industry. And it doesn’t hurt that it’s free.

Upcoming Cannabis Events
Upcoming Cannabis Events

Over the next month or so, Harris Bricken will be putting on three lunch-time webinars relevant to starting and operating a cannabis business. All three will be from 12 to 1:15 pm Pacific Time.

The first of our webinars will be with Botec Analysis, a leading drug and crime policy research and consulting firm. This webinar, “Rights, Opportunities, and Responsibilities of California Municipalities Regulating Cannabis,” will be on Thursday, December 14. BOTEC’s Brad Rowe and Harris Bricken’s Hilary Bricken will discuss the legal and policy and regulatory issues California’s local governments need to know about MAUCRSA. To learn more about this webinar and to register for it, please go here.

Our second webinar, “What You Need to Know Now to Get Your California Cannabis License on January 1,” will be on Monday, December 18. Featuring two of Harris Bricken’s Los Angeles-based attorneys, Hilary Bricken and Julie Hamill, and two of our San Francisco-based attorneys, Alison Malsbury and Habib Bentaleb, this webinar will give listeners an overview of the recently issued emergency MAUCRSA rules governing medicinal and adult use cannabis licensing and operations in California. It will cover the licensing process for each license type, operational standards for all license types (including renewable energy requirements for cultivators), the 6-month “transitional” period for product and operations, major changes between the MCRSA and MAUCRSA rules, and key unknowns posed by the rules. You can register for this free webinar here.

On January 11, four of our cannabis lawyers from California, Oregon, and Washington will discuss both how to avoid cannabis disputes and how to prevail should you be involved in such a dispute. Will Patterson, John Mansfield, Hilary Bricken, and Vince Sliwoski will lead this webinar and they will cover the following topics:

  • The present state of cannabis litigation
  • Emerging trends in cannabis litigation
  • Disputes involving cannabis partnerships and other business entities
  • Intellectual property disputes involving cannabis
  • Cannabis product liability disputes
  • Federal law issues inherent in every cannabis case
  • Nuisance cases against cannabis businesses
  • Arbitrating and mediating your cannabis disputes
  • How disputes involving cannabis businesses differ from other disputes

To register for this free webinar, please go here.

All webinars will accept audience questions before, during, and after the presentation. For logistical questions or to send questions to presenters in advance of the webinars, please email firm@harrisbricken.com.

We look forward to having these discussions with you.

 

 

 

California cannabis taxes
The rules of the California cannabis taxation road

On November 30, 2018, The California Department of Tax and Fee Administration (“CDTFA”) adopted Emergency Regulation 3700, Cannabis Excise and Cultivation Taxes. Shortly before issuing these emergency regulations, the CDTFA released a Formal Issue Paper with an analysis critical to understanding the regulations. This post provides a high-level overview of these emergency tax regulations and what you need to know now about California’s cannabis tax regime.

Cannabis Cultivation Tax. The cannabis cultivation tax applies to all cannabis that enters California’s commercial market as follows:

  • $9.25 per dry-weight ounce of cannabis flower;
  • $2.75 per dry-weight ounce of cannabis leaves; and
  • $1.29 per ounce of fresh cannabis plant.

Fresh cannabis plant is defined as flowers, leaves, and whole plants, that have been weighed within two hours of harvest without further processing. The emergency regulations address measurement issues in computing the cultivation tax. The CDTFA rejected the current industry standard that an ounce equals to 28.00 grams and instead calculates an ounce at 28.35 grams.

Cannabis distributors are to collect the cultivation tax when the cannabis enters the commercial market, which is when all testing and quality assurance has been performed. Beginning on January 1, 2018, the California Bureau of Cannabis Control will allow the sale of untested cannabis or cannabis product for a limited time. During this transition, the emergency regulations clarify that the distributor collects the cultivation tax when the cultivator sells or transfers cannabis or cannabis product to the distributor. With but a few exceptions, cannabis removed from a cultivator’s site is presumed to have been sold and is taxable.

Plant waste is not subject to the cultivation tax. The emergency regulations define the term “Plant Waste” by referencing  Sections 40141 and 40191 of the California Public Resource Code. In general, plant waste is unusable cannabis mixed with other ground material such that the total mixture is at least fifty percent non-cannabis material by volume.Cannabis Excise Tax

The Cannabis Excise Tax is imposed on the retail purchase of all cannabis and cannabis products at 15% of the Average Market Price, which price is determined by first identifying whether the transaction was at arm’s length or not. An arm’s length transaction is a sale that reflects a fair market price between two informed and willing parties. For arm’s length transactions, the Average Market Price is the wholesale cost plus a markup determined by the CDTFA. The emergency regulations define wholesale cost as the amount paid by a retailer for cannabis and cannabis products including transportation costs. Discounts and trade allowances do not reduce the amount included in the wholesale cost.

Every six months, the CDTFA must determine the markup.  Recently, the CDFTA has determined that the markup from January 1, 2018, to June 30, 2018, is 60%. The computation of the cannabis excise tax is illustrated in the following example:

Assume a retailer purchases cannabis from a Distributor at $200.00 per ounce and incurs $20 of transportation costs. In this case, the Average Market Price of an ounce of cannabis is $352.00 ($220.00 x 1.60) and a consumer who purchases a 1/4 ounce of cannabis will pay $13.20 ($352.00 x 1.15 x 1/4) in cannabis excise tax. The Average Market Price is used to compute the cannabis excise tax and may not be the ultimate retail sales price.

California allows a single business to engage in multiple commercial cannabis activities and a business that engages two or more licensed cannabis activities (e.g., as a distributor and a retailer), will not be deemed to have transferred cannabis at an Average Market Price. Instead, these transfers will be considered not to have been at arm’s length and the Average Market Price will be the retail sales price at which the retailer sells the cannabis. For example, if the retail sales price of cannabis is $200 per ounce a consumer who purchases a quarter ounce of cannabis at  $200 will pay $7.50 in cannabis excise taxes ($200.00 x 15% x 1/4).

The emergency regulations clarify that a distributor must report and remit its tax payments to the CDTFA during the quarterly period in which the cannabis was sold or transferred to a retailer, not during the quarterly period when the retailer pays its taxes to the distributor. This may lead to accounting and cash flow issues since distributors must pay their taxes to the CDTFA before they receive cash reimbursement from their retailer buyers.

The emergency regulations also clarify that the penalty for nonpayment of tax is 50%. Take note that this 50% penalty takes effect if the tax payment is only one day late. The emergency regulations allow for a waiver of this penalty for “reasonable cause,” but never define what constitutes reasonable cause. According to CDTFA commentary, examples of reasonable cause include late payment of tax due to a lack of banking services, a limited number of facilities to accept cash payments, evolving industry regulations and the remoteness of some commercial cannabis operators.

California is clearly very serious about collecting tax revenues from cannabis businesses and the complexity of California’s new cannabis tax laws is going to make tax compliance a challenge for every participant in the California cannabis market.

 

 

Cannabis litigation
How to end your cannabis litigation early

Last week we discussed frustrations that arise from the slow and methodical pace of cannabis litigation and the possibility of shortcutting the process through provisional remedies. Though provisional remedies do not directly bring a case to its conclusion, they can often force a quick settlement. This week I will discuss a litigant’s options to bring a quick end to a case via a motion to dismiss or a motion for summary judgment.

These two sorts of motions share many similarities, but this difference is key: motions to dismiss contend that a party’s allegations in its pleadings (complaint or counterclaims) are deficient. A motion for summary judgment requests the court apply the law to the facts a and determine the case is not even worth sending to a jury.

Motions to Dismiss. You can move to dismiss a claim against you for a variety of reasons including that: 1) the court lacks jurisdiction (legal authority to resolve the present dispute), 2) there is already another action between these parties attempting to resolve the present dispute, 3) the claim was brought outside the statute of limitations, or 4) the claimant failed to state facts sufficient to constitute a claim. Jurisdictional questions focus on whether the claim should have been brought in another state or county, or whether the parties complied with any binding dispute resolution clauses in any relevant contracts, such as mandatory arbitration provisions. A party can also move to dismiss on jurisdictional grounds if service was improper.

On a motion to dismiss for failure to state a claim, the question for the court is not whether the actual facts ultimately support a claim, but whether the pleadings as written support a claim. The party that files the motion to dismiss is asking the court to throw out the case as a whole (or at least certain claims) based solely on the face of the complaint or counterclaims. Essentially, by filing a motion to dismiss you are telling the court, “Even if everything my opponent claims is true, I still win so there is no point in our even continuing with this case.”

On a motion to dismiss the court must assume everything your opponent writes in its claims is true and apply your opponent’s ideal set of facts to the law and decide whether any valid claim exists. Any litigant should be mindful that a successful motion to dismiss for failure to state ultimate facts will not necessarily end the case. The court has broad discretion to allow the non-moving party to amend its pleadings to fix any deficiencies.

Motions for Summary Judgment. Though motions to dismiss are limited to the four corners of the pleadings, a motion for summary judgment digs into the underlying facts that exist outside the complaint and other pleadings. Motions to dismiss are usually filed pre-discovery, but since motions for summary judgment examine the underlying facts, they are typically brought after the parties have incurred significant expenses in discovery disputes and depositions. The party seeking summary judgment essentially asks the court to look at the evidence produced through the discovery process and rule that no reasonable jury (or other fact finder) could rule in the opponent’s favor. Both sides will submit sworn statements, called affidavits or declarations, laying out their side of the case, and will also submit documents obtained from discovery and deposition transcripts.

The court will review all of this evidence in the light most favorable to the non-movant. In other words, the court will draw all reasonable inferences in the non-movant’s favor. If the evidence, when viewed as favorably as possible to the non-movant, reveals the fact finder (usually the jury) would essentially have no choice but to rule in the movant’s favor, the trial is unnecessary and the court will enter a summary judgment in the movant’s favor on one or more of claims and defenses at issue. Even if some claims survive summary judgment, the summary judgment process can help narrow the scope of the dispute at trial and thereby save time and costs.

No cannabis business wants to be in litigation; at best it is an expensive distraction and at worst it can destroy a business. Motions to dismiss and motions for summary judgment can be good tools for trying to end the litigation early. In my next post, I will talk about alternative dispute resolution (“ADR”) and why it so often makes sense for cannabis businesses

Last week we expanded our litigation series to focus more broadly on the different kinds of litigation in which your canna-business is likely to become embroiled. For ease of reference, here is the series so far:

Cannabis litigation
Cannabis Litigation: The waiting is the hardest part.

Today we will talk about one of the most vexing aspects of litigation: timing. According to Above the Law, the longest legal case in US history lasted 57 years! Fortunately, your typical state court case will usually be set for trial within one or two years of filing (with exceptions for expedited cases), though some federal cases can take much longer. For example, federal patent litigation cases can take about three years before trial.

Clients almost always have a justifiable sense of urgency when it comes to litigation. It feels like the other side is trampling on their rights, and each passing day brings more legal fees and more damage to the business. Litigation can often make clients feel helpless in the face of a legal system designed to slowly and methodically ferret out the truth.

This sense of urgency is particularly acute when the opposing party’s conduct is actively and irreparably harming your business interests. In these cases when patience is not a viable option, your lawyer will likely discuss the possibility of seeking provisional remedies, specifically temporary restraining orders (“TRO”) and preliminary injunctions.

A party seeking provisional remedies is asking the court to halt certain conduct prior to a full determination on the merits. Since it comes before you win your case, this is an extraordinary remedy, and the burden on the movant is high. Additionally, the purpose of provisional remedies is typically to preserve the status quo, for example, to prevent a landlord from wrongfully evicting a tenant.

The law varies by jurisdiction, and for purposes of this post, we will focus on Oregon state law. Under Oregon Rule of Civil Procedure 79 (ORCP 79), a party can obtain provisional remedies in a civil action when it appears the movant is entitled to relief demanded in a complaint and the requested relief involves halting the commission of an act that will cause injury to the movant during the course of the litigation. The movant can ask for a preliminary injunction, or, pursue a TRO if the danger is immediate.

Preliminary Injunctions

A preliminary injunction prohibits the non-movant from taking specific actions that will harm the movant, and the scope of the Court’s authority to craft an appropriate remedy is remarkably broad. A preliminary injunction can even bind non-parties, specifically a party’s “officers, agents, servants, employees, and attorneys and … those persons in active concert or participation with any of them that receive actual notice of the order by personal service or otherwise.”

When considering a preliminary injunction you should be aware of the cost. A hearing on a preliminary injunction is a mini-trial, with both sides presenting witnesses and evidence, and all of the attorney fees and costs that entails. Additionally, even if you prevail you will need to post a bond in an amount set by the Court, based on the Court’s estimate of the potential damages that the injunction will cause to the other party. If you ultimately lose at trial, then the other party will get the full amount of the bond.

Temporary Restraining Orders

In Oregon, you must give the other party at least five days notice of the preliminary injunction hearing, so that the parties can prepare their evidence. If you absolutely cannot wait five days, then you can file a motion for TRO and order to show cause why a preliminary injunction should not enter. Given the emergency nature of this type of pleading, it is typically submitted ex parte: the movant will personally appear at the court and hand deliver the pleading and supporting documents to the clerks and will likely speak directly to a judge on the same day. The Court will typically decide whether to issue the TRO based on the affidavits and evidence submitted by the movant on the same day. The non-movant may appear but likely won’t have much of an opportunity to submit contradictory evidence.

The TRO can only last about ten days, so if the TRO is granted, then the Court will quickly set an evidentiary hearing to determine if the TRO should be converted to a preliminary injunction, as described above. As with the preliminary injunction, you will need to enter a bond with the court before the TRO will go into effect.

Seeking provisional remedies is an extraordinary and expensive step, but may prove vital towards protecting your cannabis businesses. We have seen it be particularly effective in stopping wayward business managers from stealing company assets and other misconduct. The preliminary injunction procedure can prove to be dispositive, as the result will often drive the parties to settle in one or the other party’s favor.

Next week we will continue this series by discussing another method of quickly resolving litigation disputes: dispositive motions.

Cannabis co-packing
(Your cannabis here)

Recently, we covered the basics of cannabis supply contracts here on this blog. Supply contracts are used when Party A is selling pot to Party B in a responsible way. Today’s post looks at another form of cannabis contract: the contract packager (“co-packer”) agreement. Co-packer agreements are used when Party A is working with Party B to produce a saleable cannabis product (also responsibly). Like supply contracts, we have seen a marked increase in co-packer agreements over the past year or so, and we expect that trend to continue.

Co-packers offer packaging equipment and expertise for hire, and may also provide services related to design, labeling, purchasing, and shipping logistics. Large numbers of companies exist solely to co-pack all around the world. In state-legal cannabis, co-packers tend to pack for themselves, as well: this probably stems from the value associated with holding a state marijuana license. In addition, most marijuana co-packer agreements are limited to packaging, labeling, and sometimes, sourcing of product. These services will likely expand as states refine their program rules and the industry continues to scale.

Co-packer agreements conform with the rules of most state cannabis programs when both parties have a marijuana license. When the non-packer party does not, however, the legitimacy of a co-packer agreement may be a much closer call– depending on the way the contract is written. In any case, when the non-packer lacks a license, that party will not be allowed to handle cannabis. At that point, the question becomes whether the state will allow the non-packer to delegate all cannabis purchasing, labeling, shipping and even sales of pot to the co-packer. If this is allowed, the non-packer can legitimately profit in a state-legal cannabis program, by virtue of its relationship with the licensed co-packer.

When the non-packer is allowed to profit without a license, a co-packer agreement can be a great fit. The model is attractive for start-ups that lack the interest or wherewithal to lock down their own premises and cannabis license. The model also works nicely for large, established cannabis companies looking to leverage a brand from one state to the next, without having to wade through a foreign licensure process. We have seen co-packer agreements deployed successfully in both scenarios.

Cannabis co-packer agreements tend to be accompanied by, or heavily weighted with, nondisclosure agreements and provisions. In the case of cannabis processing, the non-packer will provide its co-packer with recipes and formulas related to the final product. In the case of a grower or producer, the non-packer may not have these concerns but may bring other trade secrets to the table. In almost every arrangement, the non-packer will have a brand to protect, which means the agreement will carefully lay out control and licensing issues.

In most other respects, co-packer agreements cover many of the same topics as cannabis supply agreements, including terms like scope, title and tracking, invoicing, indemnity, representations and product recall. Co-packer agreements can be built off standard forms, but final documents will be unique to the parties at issue, and highly negotiable. If it is unclear whether a co-packer agreement or its terms will jibe with state program rules, our practice as cannabis business lawyers is to bring the issue to program administrators for review and consideration. Ultimately, if the parties are able to strike a deal, the co-packer agreement is a uniquely attractive option.