Tag Archives: lawyers

Marijuana Matters

Time to Litigate: The Defense That Helps the Client but Hurts the Industry

By David C. Kotler, Esq.
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From time to time, lawyers that service the cannabis industry find themselves representing a client with a litigation matter. By anecdotal evidence, it appears that there is an up-tick in cannabis related litigation over the past year and a half, mostly in circumstances where respective promises made have not been lived up to or those who have invested money are seeking its return. Perhaps a partnership formed within the last few years is simply becoming unraveled.

In the world of litigation, we see defenses, or what are known as affirmative defenses, may be filed in response to a particular lawsuit or claim. One such affirmative defense often utilized in litigation is that a particular contract or agreement may be void based on illegality or void as against public policy.

In fact, this particular grounds for dismissal was at issue in a case in Maricopa County, Arizona wherein a judge in April of 2011 dismissed a lawsuit seeking enforcement of a loan agreement where two Arizona business people loaned $250,000.00 each to a Colorado-based medical marijuana dispensary. The agreement in that case specifically stated that the loan was for “a retail medical marijuana sales and growth center.” Colorado had the foresight in 2013 to legislate against this type of defense when their general assembly passed a law indicating “a contract is not void or voidable as against public policy if it pertains to lawful activities authorized by” Colorado’s constitutional and statutory cannabis law.

The issue becomes germane in emerging states wherein the legislatures and courts have not been dealing with cannabis related matters for any length of time. This is particularly true and ripe for problems in states such as Illinois and Massachusetts that have recently moved forward with cannabis programs and experienced an influx of out of state consultants and companies looking to partner with and work with local residents for licensure purposes. In Florida alone, there have been at least three lawsuits in the past year dealing with cannabis related civil disputes.

To my knowledge, none of those disputes were defended upon, nor did the court address, the legality of the underlying subject matter. However, the question arises whether the lawyer’s obligation to their client necessitates raising this as a defense, for instance, to an action for non-payment of a promissory note for a loan to fund cannabis related business. If the lawyer practices and seeks clients in the industry and hopes to move the industry forward in a positive manner, is it incumbent upon the lawyer to assist the client by making the best legal argument or protect the industry and greater good? As an aside, the answer is to zealously represent the client. Potentially, an adverse ruling in a particular jurisdiction could ultimately affect enforceability of cannabis related agreements in that jurisdiction. It is possible that having a court ruling, even if it is a trial level court within the jurisdiction, at least provides some precedent and a basis for the industry moving forward in that particular jurisdiction. If the ruling is unfavorable like the Arizona precedent mentioned earlier, perhaps planning for jurisdiction and venue to be in more favorable environs is key to document drafting on the front end. For investors, knowing the enforceability of their agreements in a particular jurisdiction could mean the difference between investing in a venture in a particular state or not.

Ultimately, I believe that as advocates, we must do whatever is in our power to protect the client even if it means testing the legal bounds by making an argument that at first blush may hurt the industry. However, having courts develop precedent by which the industry can govern itself in business dealings is important and takes away uncertainty, which in turn allows for good decision-making on the front end. Hopefully, in the near future this will be moot as the federal government moves forward to take actions that provide more certainty and uniformity in dealings within the cannabis space.

Marijuana Matters

What Happens When the Attorney-Client Relationship Goes South

By David C. Kotler, Esq.
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Today I get to take a break from talking about what some lawyers, where ethically permissible, generally deal with in the cannabis space in terms of drafting leases, distribution agreements, licensing agreements, and/or application assistance. Within the cannabis industry, I personally serve as outside general counsel to entities to which I provide legal guidance and advice under retainer agreements, which comply, with my ethical obligations as a member of the Florida Bar. Over the last two years, I have spoken with individuals in other states and lawyers who practice in other states. As the cannabis industry has evolved, we continue to witness start-ups that need legal help and often take the most cost-effective route. In certain jurisdictions, I have heard of attorneys, particularly attorneys in Colorado, who have expanded into those jurisdictions and taken an equity stake of the start-up for their legal services. Whether or not this is true, and furthermore permissible, remains to be determined or even addressed by me, as this is a topic for another day.

But what happens when the lawyer-client relationship goes south?

It just so happens that in Florida a lawsuit is taking place between a well-known industry participant and its former lawyer. The names of the parties are omitted to protect them; however, perhaps more importantly, not to put myself in anyone’s cross hairs. This dispute was first reported in a reputable industry publication. Having had experience in media-worthy cases in the past, I am assuming that one party or the other reached out to self report the lawsuit for whatever advantage they thought they would garner. Upon review of the docket in preparation for writing this piece, I noted the docket’s length. For those who are unaware, a docket is essentially a listing of the dates and matters that have been filed during the pendency of a lawsuit.

The docket for the case begins between our anonymous parties, on October 26, 2015 with the filing of a complaint. Since October 26, 2015, there have been approximately 59 docket entries. In some cases, that number could encompass all of the docket entries over the life of a full litigation, short of trying a case, and probably gives the reader some idea as to the litigiousness between the parties. In part, this could be due to the personalities of both former counsel and new counsel representing the company in defense, but probably is not indicative of what would happen in every dispute between former counsel and a company. It is certainly a scary proposition considering the fees that may be incurred in defense of the action, aside from the sum that is allegedly owed to the plaintiff. Without getting into the minutia of the complaint, of note was a portion of the retainer agreement that served as the basis of the breach of contract claim, which granted the law firm incentive stock options pursuant to the company’s incentive stock program. It is imaginable that at the time of signing the retainer agreement, the company probably did not think too much about signing such an agreement; however, as time went on, this may have become problematic on a number of levels. Further review shows the parties airing out their dirty laundry in a public forum.

What example has this lawsuit shown us, and what can one take from it?

Well, this lawsuit is illustrative of what can go wrong for start-ups and newer companies in hiring counsel, either on a one-time basis or as outside general counsel. Giving stock options may not always be advisable as a means of deferring payment on the front end. Also realize that counsel who you hire will be privy to some very important and intimate details of how your company operates. In the cannabis industry, one might wish to be especially guarded, as the industry still has considerable exposure federally. The attorney-client privilege, which some readers may have heard about, can cover communications and work done on behalf of the company during the relationship and survive termination; however, that privilege may very well be waived if the services/fees of the attorney are being attacked or defended. Overall, like anything else, it is important to understand who you may be working with on the front end and memorialize any relationship properly and clearly in writing. Go into the professional lawyer-client relationship with reasonable expectations, reasonable demands, and pay reasonable compensation for the work being performed. As a business, don’t try to get something for nothing. And as an attorney, don’t expect the company to be your golden ticket.