Oregon Hemp Litigation: Bad Contract = Big Federal Court Claims

14 Jun Oregon Hemp Litigation: Bad Contract = Big Federal Court Claims

We frequently write on hemp litigation and the ways farmers and purchasers can mitigate the risks inherent in this new industry. Along with others, we have stressed the importance of strategic and careful thinking before entering before entering into a hemp-related contract.  Our cannabis lawyers frequently write and speak on these and related topics.

A couple of my recent posts have highlighted litigation arising after harvest. This post discusses a federal lawsuit filed last week in the District of Oregon, Jupiter Pharma, LLC et al. v. Lafayette Land Company, LLC, et al. that arises from a pre-harvest dispute between the parties. (Feel free to email me if you’d like a copy of the complaint.)

The lead plaintiff (Jupiter) is a Delaware limited liability company building a “Soil to Oil” industrial hemp/CBD operation in Oregon that includes the cultivation, processing and marketing of industrial hemp. The lead defendant (Lafayette) is a farmer residing in Oregon.

The parties entered into a contract in March 2019 to farm and cultivate industrial hemp for the 2019 season that included, at Jupiter’s option, the 2020 and 2021 seasons. Lafayette agreed to farm and cultivate approximately 950 acres of hemp and agreed to assign to plaintiffs its interests in two specific parcels of land to be used for cultivating industrial hemp. In exchange, Jupiter agreed to pay defendants $7.5 million for delivery of at least 2 million pounds of biomass and to transfer to Lafayette farming equipment purchased by the plaintiffs, which equipment would be credited against the $7.5 million payment obligation. Jupiter also agreed to pay Lafayette certain incentives based on hemp production and a monthly stipend during the growing season.

After entering the contract, Lafayette allegedly failed to provide the required documentation concerning the assignment of interests for the two parcels of land. Jupiter then made several trips to the farm to discuss the project and operations. During these visits, Lafayette allegedly made representations that he would provide the land and farm it for plaintiffs. Meanwhile, Jupiter has allegedly entered into contracts with third parties worth $15 million to build a CBD processing facility and purchase equipment per the contract as well as invested over $1 million into the project.

The gravamen of the complaint is that Lafayette repudiated the alleged hemp production contract in late May 2019 and in early June 2019 began planting hemp seed for a third party in violation of the contract with Jupiter. The complaint is quick to note that the Oregon hemp growing season begins in June and if not planted, Jupiter’s season will be lost. The complaint alleges this will cause Jupiter to lose its significant investments in the project and that Jupiter cannot secure alternative farm lands for the 2019 season.

The complaint seeks declaratory relief (a ruling that the contract is enforceable) as well as injunctive relief and specific performance (forcing Lafeyette to assign the rights in the land). In the alternative, Jupiter alleges Lafayette defrauded it by inducing it to enter a contract for the production of hemp and seeks no less than $1 million in damages.

So is there an enforceable contract? The contract is titled a “Memorandum of Understanding” (MOU).  This could be better for Jupiter—one Oregon appellate decision, citing Farnsworth’s treatise, notes: “On the problem of determining whether contracting parties intend to bind themselves either in the presence or absence of terms such as ‘letter of intent’ and ‘memorandum of understanding,’ it has been said, ‘It would be difficult to find a less predictable area of contract law.’” The title of the document does not control, however, the ultimate question being whether there was a meeting of the minds as to the terms of the deal supported by consideration. In this regard, the MOU seems reasonably definite.  But litigation sure is an expensive way to get an answer to the question of enforceability.

A few other comments on the MOU. It is a short, one-page document for a purported $7.5 million deal with kickers for a biomass harvest exceeding 2 million pounds. (Maybe the defendants believed they found a better deal elsewhere?) The MOU says nothing about THC content or CBD content of the hemp. Nothing about the risk of the USDA deciding not to approve Oregon’s hemp production plan. Nothing about state record-keeping requirements or who is responsible for testing of hemp for human consumption – presumably the goal of this Seed-to-(CBD)Oil business or about the chain-of-custody of documentation to ensure nothing is seized during shipment or what happens if Oregon suspends or revokes Lafayette’s license to grow hemp. Notably, the MOU contains no express deadline by which Lafayette must deliver evidence of the purported assignments of agricultural land. I hate to be too critical of the MOU, but there seems much here that could have been done differently and, perhaps, better.

Stay tuned for updates.