June McLaughlin – Organic Farmacy Management, LLC. v. Four Green Fields, LLC

(Md. Ct. Spec. App., July 27, 2021, No. 0760, 2021 WL 3173263) Not Reported in Atl. Rptr.

Overview

A contract dispute arose between business partners when anticipated cannabis licensing failed to materialize. Organic Farmacy Management (Organic Farmacy) sued Four Green Fields, LLC (Four Green Fields) for allegedly breaching an Agreement for Dispensary Management Services (ADMS). The party’s business relationship deteriorated after cannabis licensing failed to materialize. The claims and crossclaims centered on break of contract and fraud. The Circuit found in favor of Organic Farmacy in part on three contract claims and awarded judgment. The court also found in favor of Organic Farmacy on multiple Four Green Fields cross claims. A ruling in favor of Four Green Fields centered on damages calculation. The fraud claims failed.

Organic Farmacy appealed asking the court to review the calculation of damages by the circuit court. Four Green Fields raised additional questions for review primarily regarding the circuit court’s interpretation of contract provisions.

Holding

No Circuit Court error was found and all rulings below were affirmed.

Background

In 2014 the state of Maryland legalized medicinal cannabis and established a licensing regime. By 2015 the parties to this action were actively discussing entering a business arrangement to build a medical cannabis business. Organic Farmacy was created as a central management entity by two sisters who previously worked in California in the Cannabis industry and an attorney friend who drafted the ADMS. They also formed Hippocratic Growth which the ADMS outlined would obtain a grower’s license. Four Green Fields was also formed by two sisters, one of whom was married to an attorney who provided legal advice to the company prior to the appeal. They had no cannabis experience but could provide capital. Organic Farmacy applied for grower, processor, and dispensary licenses. The State of Maryland granted only dispensary licenses one to Hippocratic Growth and one to Four Green Fields. Disagreements arose among the parties over contract performance when the grower and processor licenses were not obtained.

Analysis

Yardstick calculation of damages

Organic Farmacy claimed damages for management fees over a purported ten-year contract period of about $1.4 million. It presented an expert CPA who employed the yardstick method to calculate damages. The method determines lost revenues for companies with no track record by comparing them to a closely comparable company. The companies must be nearly identical for the calculation to be meaningful. The circuit court found that the companies compared to one another by the expert were not comparable as required. Hence, Organic Farmacy was only entitled to the contract preparation fee of $150,000.

Failure to obtain the appropriate licenses as a condition precedent

Four Green Fields argued that the entire ADMS was void because a grower’s license was never obtained. The circuit court rejected this argument finding that upholding it would reduce the ADMS to an agreement to agree. Additionally, no condition precedent language such as “provided that,” “as soon as,” or “when” appeared in the contract.

Counterclaim as Notice of Breach

The ADMS required that written notice for breach and along with an opportunity to cure.  Four Green Fields argued that filing of its counterclaim was notice of breach to Organic Farmacy. The circuit court rejected this harmonizing several contract provisions to clearly read that written notice of breach must follow within ten days of the breach and opportunity be given to cure. Also, the alleged breach occurred in 2016 and the counterclaim was not filed until two years later.

Takeaways

• Contract drafting was not to blame for these claims.
• At least no one argued that the contract was void because it concerned cannabis.