In our February issue of The Leaflet, we wrote about a cannabis-related action dismissed by a federal court in Colorado because it concluded that enforcing the contract at issue would violate the Controlled Substances Act. (See full write up here). And while cannabis litigants are no strangers to the perils of litigating in federal court, where the Controlled Substances Act can render otherwise valid commercial agreements unenforceable, a recent decision by a District Court in Washington State provides a new and interesting twist on the potential for defendants to assert illegality defenses to seemingly valid cannabis-related contracts.
In Polk v. Gontmaher, the plaintiff alleged that they had contributed to the success and profits of the company Northwest Cannabis Solutions and were entitled to a share of its profits generated by the company pursuant to a contract. Polk v. Gontmaher, Case No. 2:18-cv-01434 (RAJ), 2021 WL 1090739 (W.D. Wash. March 22, 2021). The Court in Polkinitially rejected the defendants’ argument that reliance upon an illegal contract alone (that is, one that violates the CSA) is insufficient to warrant the granting of a motion to dismiss – an emerging consensus position among federal district courts throughout the country. Nevertheless, the Court dismissed the plaintiff’s claims because the agreement in question ran afoul of Washington State law.
The Court concluded that, because the plaintiff was seeking a share of the company’s profits, the plaintiff was a “true party of interest” under the Washington’s cannabis statute. Id. at *2. That same statute requires any such “party of interest” to submit to a vetting process to be conducted by the Washington Liquor and Cannabis Board or “LCB”. The plaintiff, however, was never identified as a party of interest in any of the company’s filings with the LCB, and so he was never vetted in the manner required by Washington law. Thus, the Court in Polk concluded that it could not enforce the agreement entitling plaintiff to a share of the company’s profits because to do so would effectively award the plaintiff “party of interest” status even though he was never subject to the required vetting process.
The decision in Polk thus highlights a new and significant wrinkle in a court’s willingness to adopt an illegality defense in a cannabis-related dispute. Plaintiffs seeking to enforce cannabis-related contracts need not only contend with the obstacles provided by federal law but must also establish that the agreement does not run afoul of applicable state law as well. The decision also illustrates the importance of understanding and abiding by all the requirements of the state and local regulatory authorities that have the greatest control over the legal cannabis industry.
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