Software, Technology, and Cannabis: Are Your Agreements Compliant?

15 Apr Software, Technology, and Cannabis: Are Your Agreements Compliant?

For our clients in the cannabis space, from licensed operators to ancillary service providers, we’ve found that virtually no area of business (and no contract) is immune from the unique regulatory concerns of the industry. Our firm represents many ancillary companies that do business with cannabis operators, including software companies, delivery platforms, and other online service providers, and we regularly review contracts for these types of arrangements. In this post, we intend to spotlight some of the issues that cannabis businesses and service providers should be aware of when papering these deals, and to flag some of the issues that are often overlooked related to technology platforms and software licensing agreements

As with virtually every deal a cannabis business enters, whether or not that agreement is compliant or not will depend largely on two primary factors: payment structure and control. Every jurisdiction has wildly different regulations concerning ownership, financing, and profit sharing with cannabis licensees. In many jurisdictions, taking a royalty based on sales (i.e. a delivery platform taking a percentage of the sale price from order placed via its platform), or even taking a set “per transaction” fee, could constitute an arrangement that must be disclosed and/or vetted by the applicable state regulatory agency.

As an example, California allows cannabis businesses to contract with technology platforms as follows:

… a licensed retailer or licensed microbusiness may contract with a service that provides a technology platform to facilitate the sale and delivery of cannabis goods, in accordance with all of the following:

• The licensed retailer or licensed microbusiness does not allow for delivery of cannabis goods by the technology platform service provider.

• The licensed retailer or licensed microbusiness does not share in the profits of the sale of cannabis goods with the technology platform service provider, or otherwise provide for a percentage or portion of the cannabis goods sales to the technology platform service provider.

• The licensed retailer or licensed microbusiness shall not advertise or market cannabis goods in conjunction with the technology platform service provider, outside of the technology platform, and shall ensure that the technology platform service provider does not use the licensed retailer’s or licensed microbusiness’s license number or legal business name on any advertisement or marketing that primarily promotes the services of the technology platform.

• The licensed retailer or licensed microbusiness shall ensure the following information is provided to customers:

• Any cannabis goods advertised or offered for sale on or through the technology platform shall disclose, at a minimum, the licensed retailer’s or licensed microbusiness’s legal business name and license number.

• Customers placing an order for cannabis goods through the technology platform shall be able to easily identify the licensed retailer or licensed microbusiness that each cannabis good is being ordered or purchased from. This information shall be available to the customer prior to the customer placing an order or purchasing the cannabis goods.

• All required sales invoices and receipts, including any receipts provided to the customer, shall disclose, at a minimum, the licensed retailer’s or licensed microbusiness’s legal business name and license number.

• All other delivery, marketing, and advertising requirements under this division are complied with.”

Even these regulations have created ambiguity for licensees seeking to engage technology service-providers, because the rules are not clear as to what constitutes, for example, “a percentage or portion of the cannabis goods sales.” These are issues that licensees must carefully consider.

Disclosure is another consideration, given that certain deal structures may be permissible if they are disclosed and/or vetted by the state. Washington, for example, requires disclosure and approval of all licensing deals, and caps the royalty rate that may be paid by a licensee to a non-licensed third-party. In California, any party entitled to any percentage of the revenue or profit from a cannabis operator, no matter how small, must be disclosed as a “financial interest holder,” and the disclosure requirements for larger companies in particular can get complicated.

And many states incorporate those who “exercise control over” a licensed cannabis business into ownership definitions, meaning that even non-equity holders can be deemed “owners” or “beneficial owners” for purposes of a state’s cannabis regulations. Determining what that threshold of “control” is can be difficult, and the determination will certainly vary from state to state.

License holders also need to be very careful about how their use of tech platforms might play with applicable state marketing and advertising requirements. The license holder will be ultimately responsible for making sure that third-party tech platforms do not advertise their products in a way that violates applicable regulations, and that those platforms are properly disclosing any information that must be provided to consumers. Agreements should be very clear on who bears the burden of compliance, and what happens in the event of breach.

Before entering into any software licensing agreement, EULA, technology services agreement, etc., licensees should carefully vet those agreements to ensure that they aren’t signing up for more than bargained for with respect to regulatory compliance issues and disclosures. The devil is in the details, and the stakes are very high.