Hemp Litigation: Colorado Federal Court Stays Hemp Partnership Dispute Under Colorado River Abstention Doctrine

02 Jul Hemp Litigation: Colorado Federal Court Stays Hemp Partnership Dispute Under Colorado River Abstention Doctrine

Earlier this week, the U.S. District Court of Colorado decided to stay (i.e. pause) a hemp lawsuit (Leago v. Ricks, No. 20-CV-03297) concerning a dispute between partners in a hemp business because of similar pending litigation in state court.  The legal basis for the court’s ruling is the Colorado River abstention doctrine. We have written about how federal courts make use of various doctrines of abstention on a few occasions:

Abstention doctrines provide federal courts guidance on whether to stay or dismiss a federal lawsuit for a variety of reasons unrelated to the merits of the claims. As we wrote in discussing the Ninth Circuit’s decision to abstain from deciding a case involving the transportation of hemp through Idaho, on the basis of Younger abstention:

“abstention doctrines include Colorado River abstention – which is concerned with avoiding duplicative litigation; the Rooker-Feldman doctrine – which concerns federal court review of state court decisions; Pullman abstention – which concerns refraining from deciding questions based on unclear state law; and Burford abstention – which concerns deferring review of complex state administrative procedures.”

My colleague, Jihee Ahn, described how Colorado River abstention may apply in the context of international cannabis litigation. The ruling in Leago shows how federal courts apply the doctrine when a pending state court lawsuit is substantially similar to a federal court action.

The facts of Leago describe something all too common these days: a hemp partnership gone wrong. Plaintiffs allege that Leago and Ricks entered into an oral partnership agreement to buy hemp seeds, grow clones, and then sell the hemp clones to farmers. (Note: oral partnership agreements, as we’ve mentioned here and here, are probably the most litigated form of business relationship). Leago alleged that Ricks breached their oral agreement by not contributing $400,000 toward hemp seeds and not paying approximately $4.5 million for hemp clones that were sold and distributed to Ricks and his other ventures.

Meanwhile litigation concerning some of the same entities and same underlying circumstances was pending in Colorado state court. So in the federal lawsuit, Ricks moved to stay or dismiss the case under the Colorado River abstention doctrine.

The federal court began it analysis by noting its “unflagging” obligation to exercise the jurisdiction given to it, though abdicating that duty may be proper in certain circumstances. One of those is the principle of avoiding duplicative litigation, which is at the core of Colorado River abstention. Assessing whether Colorado River abstention is appropriate requires considering eight non-exclusive factors. No single factor is dispositive, rather courts apply a balancing test that should be applied in a pragmatic, flexible manner with a view to the realities of the case.

I won’t bore you with a review of each factor and a technical legal analysis of how the court applied those factors. This is not, after all, a cannabis blog meant for lawyer, but a cannabis blog meant for businesses.

The court duly reviewed each factor and found the factors weighed in favor of abstention. But rather than dismiss the case from federal court, the court stayed its proceedings pending resolution of the state-court proceedings. So if the state court proceedings do not fully and finally resolve all of the issues between the parties (and various third parties), the federal court may re-open its case.

Neither party in the federal lawsuit recovered its attorneys’ fees as a result of the court’s ruling. So the money spent on pleadings, others motions, and so forth is all sunk cost. So when a state court lawsuit is already in process, talk to your legal counsel before you rush off to federal court thinking you’ll outsmart your opponent. And please, don’t get involved in oral partnership agreements (or agreements of any kind!) where millions of dollars are potentially on the line.