Why Most Cannabis Businesses Should Ditch Their SOW Models

24 Jul Why Most Cannabis Businesses Should Ditch Their SOW Models

Lately, in my review of certain cannabis transactional agreements like cannabis intellectual property (IP) licensing agreements, manufacturing agreements, and distribution agreements, I’m seeing a really high number of statements of work (SOWs) attached. I’m not opposed to SOWs when they make sense. In cannabis though, nine times out of ten, a SOW model isn’t necessary, overcomplicates the parties’ performance, and creates conflicts between agreements. I think the reason I’m seeing a lot of SOW models is because licensees tend to rip their agreements from Google or just go with the flow on whatever a legalzoom style outfit tells them regarding the necessity of a SOW system no matter the industry, the regulations, or nature of the work.

You usually see SOWs incorporated with master services agreements (MSAs) or requests for proposals between vendors and their clients (think Microsoft or Apple vendor agreements, see here and here for legit SOW examples). The MSA sets forth the main legal terms and conditions between the parties (like term of the agreement, termination rights, confidentiality, representations and warranties, etc.). The SOW (or SOWs) typically controls and enumerates specific details around a given project or projects that will occur between the parties sometime during the term of the MSA. The SOW, itself, is an enforceable agreement to be interpreted alongside the MSA. Efficiency is really the main goal of the MSA/SOW in that when parties have multiple, different projects together they don’t have to keep coming back to the table to negotiate the main legal terms of their agreement. Instead, those are set for the term of the relationship and the SOWs just reflect particular project-to-project performance obligations and expectations.

When do SOWs work well? When the work to be done by a party is project-to-project and where each project is so different that deliverables, budget, deadlines, and substance dictate having a different set of parameters between each project. What I see most often in cannabis are:

1. SOWs when there’s no specific project or project-to-project concept and the exact details of the parties’ performance are always the same pursuant to the MSA.
2. Global legal terms and conditions in both the SOW and the MSA. Two recent examples of this redundancy that I’ve seen were (i) an IP license agreement where the licensor granted the right to use its IP to a distributor in the definitive agreement but then then the corresponding SOW went into great detail about ownership of the IP, and (ii) a fixed fee schedule for product production in an MSA that was then also packed into a SOW along with other substantially similar terms as the MSA anyway.
3. SOWs that utilize global legal terms that aren’t in the MSA. Another recent example was an agreement I reviewed where the production request process was in the SOW but not in the MSA, but the production request process was supposed to be uniform across all products regardless of type or amount.
4. Conflicts. The worst is when the terms between the MSA and the SOW create conflict between themselves, and many of these arrangements neglect to say whether the SOW or the MSA controls in the event of a conflict. In turn, instead of supplementing the MSA, a given SOW may unfortunately amend the MSA unbeknownst to the parties.
5. The parties neglecting to address termination between the MSA and the SOW or between SOWs.
6. SOWs that aren’t at all detailed and don’t contain any of the standard SOW provisions that assist the parties in their performance, leaving out lucrative details like project description/overview, purpose and scope, resources involved, project approach including phases and milestones, who is answerable for each task, deliverables, payment terms, commencement and completion dates, approvals, costs, etc., which completely defeats the purpose of a SOW.

The overwhelming majority of the time, cannabis licensees are not going to have relationships with each other that dictate needing SOWs. A distributor in California, for example, is going to be very limited in the services it can provide to other licensees and a distribution SOW just makes very little sense as a result. The concept of project-to-project distribution is not a reality, and even a distribution MSA with a single SOW doesn’t make a lot of sense because cannabis regulations dictate that the terms and conditions between the parties will be mostly global legal terms to ensure compliance.

A SOW system might make sense for manufacturing services if the manufacturer, on behalf of the other party, is going to be making a variety of products with wildly different make-ups and specifications while also engaging in a variety of marketing campaigns, customer outreach, etc. around all of those products, but that’s hardly ever the case. However, the typical scenario in cannabis is that one party licenses its IP to a manufacturer to make maybe a handful of products in accordance with limited specifications provided by the IP licensor, and the manufacturer then transfers those products on to a distributor for testing and retail sale. All of that can (and should) be easily and simply set out in a single IP license and manufacturing services agreement.

Cannabis licensees all too often either don’t realize or don’t care that they’re setting themselves up for failure or breach or both when they engage in the MSA/SOW model. While SOWs can be appropriate and amazingly efficient under the right circumstances, the cannabis industry, at this point, when it comes to licensee-to-licensee transactions isn’t really served by them in my experience. Instead, the use of the SOW when incorrectly used or sloppily done can actually throw up all kinds of ambiguities and performance issues, so cannabis licensees would be wise to think twice before implementing them.