In our February issue of The Leaflet, we wrote about a
cannabis-related action dismissed by a federal court in Colorado
because it concluded that enforcing the contract at issue would
violate the Controlled Substances
Act. (See full write up here). And while cannabis litigants
are no strangers to the perils of litigating in federal court,
where the Controlled Substances Act can render otherwise valid
commercial agreements unenforceable, a recent decision by a
District Court in Washington State provides a new and interesting
twist on the potential for defendants to assert illegality defenses
to seemingly valid cannabis-related contracts.
In Polk v. Gontmaher, the plaintiff alleged that they
had contributed to the success and profits of the company Northwest
Cannabis Solutions and were entitled to a share of its profits
generated by the company pursuant to a
contract. Polk v. Gontmaher, Case No.
2:18-cv-01434 (RAJ), 2021 WL 1090739 (W.D. Wash. March 22,
2021). The Court in Polkinitially rejected
the defendants' argument that reliance upon an illegal contract
alone (that is, one that violates the CSA) is insufficient to
warrant the granting of a motion to dismiss – an emerging
consensus position among federal district courts throughout the
country. Nevertheless, the Court dismissed the
plaintiff's claims because the agreement in question ran afoul
of Washington State law.
The Court concluded that, because the plaintiff was seeking a share
of the company's profits, the plaintiff was a "true party
of interest" under the Washington's cannabis
statute. Id. at *2. That same
statute requires any such "party of interest" to submit
to a vetting process to be conducted by the Washington Liquor and
Cannabis Board or "LCB". The plaintiff,
however, was never identified as a party of interest in any of the
company's filings with the LCB, and so he was never vetted in
the manner required by Washington law. Thus, the Court
in Polk concluded that it could not enforce the
agreement entitling plaintiff to a share of the company's
profits because to do so would effectively award the plaintiff
"party of interest" status even though he was never
subject to the required vetting process.
The decision in Polk thus highlights a new and
significant wrinkle in a court's willingness to adopt an
illegality defense in a cannabis-related
dispute. Plaintiffs seeking to enforce cannabis-related
contracts need not only contend with the obstacles provided by
federal law but must also establish that the agreement does not run
afoul of applicable state law as well. The decision also
illustrates the importance of understanding and abiding by all the
requirements of the state and local regulatory authorities that
have the greatest control over the legal cannabis
industry.
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