Cannabis Arbitration: The Good, The Bad, and The Ugly

25 Jan Cannabis Arbitration: The Good, The Bad, and The Ugly

As each state’s cannabis industry matures past the licensing and permitting phases, expect to see a huge uptick in internal and external issues with cannabis businesses: promising partnerships turn into bitter rivalries, companies go broke, permits and licenses get voided, etc. All of these issues need to be resolved, and many companies or their execs or owners will end up slugging it out in court. However, many, if not most cannabis disputes will be resolved behind closed doors and generally out of the public view, in private arbitration.

If you don’t know what arbitration is, check out my post here from back in 2018. For a cliff notes version, private arbitration is basically a trial before a private arbiter who is usually a former judge or lawyer. Arbitration can only happen if the parties agree to it, and that usually translates to disputes over a contract with an arbitration clause. If your contract doesn’t have one, chances are you’ll be stuck in the courts. In this post, I want to get into some of the pros and cons of arbitration.

The Good

The upside to arbitration, in my opinion, far outweighs the downside. Here are some of the reasons why cannabis arbitration can be such a benefit to the parties:

• The arbitrator can focus on your case. I have appeared in many courtrooms where the judges have hundreds of active cases. I once heard a judge say that she gets more than thirty motions to dismiss A WEEK. The bottom line is that these kinds of judges just cannot devote the same attention to each case that an arbitrator can.
• It is typically much faster than litigation, for the same reason as the last point.
• The rules of procedure and evidence are typically more relaxed than in a state or federal courtroom.
• Proceedings are usually confidential in nature. Even if the parties don’t agree in their arbitration agreement to keep the proceedings confidential, arbitrators don’t typically have publicly viewable dockets like courts do, so the whole proceeding will be much less publicly involved. This can provide obvious benefits to the cannabis industry.
• Arbitration keeps disputes out of the federal courts. One defense that lots of cannabis litigants may want to raise is that the court should not enforce a contract that deals in federally unlawful substances. While many courts have not gone along with this argument,  federal courts have recently indicated that this may be a valid defense in certain cases. While an arbitrator may reach the same conclusion, it is probably less likely to occur than in federal court.

The Bad

Though there are obvious benefits to arbitration, it’s not always good:

• Arbitration can be expensive. Unlike in the court system, the parties pay the costs of the arbitrator, which can be like paying a second lawyer. If multiple arbitrators are involved, or if there are a high amount of proceedings, the cost can be prohibitive for smaller parties.
• Proceedings are usually confidential in nature. While this is a benefit to some parties, one card that litigants often have up their sleeves is the fact that the proceedings shine a light on alleged misconduct. This leverage may not be available in a private arbitration proceeding.
• Arbitration may be final and binding and not allow appeal rights.

The Ugly

There are some aspects of arbitration that can be pretty bad if the parties don’t consider them up front:

• There can be lengthy court disputes over whether arbitration should even occur. Often times, one party to a contract with an arbitration clause may not want to arbitrate and may resist efforts to force them to arbitrate. I’ve personally been stuck in months’-long court battles over the simple issue of whether arbitration can occur. This is why it’s so critical to have strong and clear arbitration clauses in cannabis contracts.
• Arbitration can be expensive. I have seen cannabis contracts that call for panels of three arbitrators. For some larger disputes, this may make sense. But for small companies or small disputes, the arbitration fees can rack up very, very quickly with a panel of arbitrators and even surpass the value of the case.

In conclusion, the benefits of arbitration still outweigh the downsides in many cases. Even though it can be expensive, it may be a worthy cost for many cannabis companies. Stay tuned to the Canna Law Blog for more information on cannabis arbitration.