Cannabis Business Disputes: Options for Staying Out of the Courtroom

As more states continue to legalize cannabis, disputes between parties in the industry inevitably increase. The federal court system may not be a viable forum to litigate these disputes because of continued federal prohibition, so parties are often left with state court systems for judicial resolution. However, various alternatives exist to avoid formal litigation in court. This article outlines the advantages and disadvantages of arbitration but also touches on mediation as an alternative and more collaborative dispute resolution approach.

Arbitration and mediation both involve a neutral third-party resolving differences between parties. Arbitration involves a neutral arbitrator resolving the dispute with authority to provide a formal binding decision over the parties. Mediation is a guided negotiation.

What Is Arbitration and What Does It Entail?

Arbitration is generally a streamlined, paid, private trial, i.e., resolving disputes without resigning to a court’s assistance. Often, contracts will include arbitration clauses requiring that all disputes arising under the contract will be resolved by binding arbitration. Arbitration clauses are protected by federal law. Under the Federal Arbitration Act, arbitration agreements involving interstate or foreign commerce are valid, irrevocable, and enforceable (except on legal or equitable grounds for contract revocation). While federal courts may not be a perfect forum for cannabis disputes, courts have upheld the validity of arbitration clauses in contracts involving the cannabis industry. In the case Williams v. Eaze Solutions, Inc., 417 F. Supp. 3d 1233 (N.D. Cal. 2019), the Northern District of California Court held that a cannabis delivery company’s terms of service containing an arbitration clause is enforceable and whether the clause itself is unconscionable was a decision delegated to the arbitrator. Under the Act, an arbitrator’s decision will bind the parties unless the arbitrator’s decision, or the arbitration itself, is fundamentally unfair.

All fifty U.S. states and the District of Columbia have enacted similar legislation to enforce the legality of arbitration agreements. In Ohio, for example, Ohio Rev. Code § 2711.01 provides that arbitration agreements “shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract.” Washington also provides (under RCW 7.04A.060) that agreements to submit to arbitration are “valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for revocation of contract.” These are but two examples of state statutes reinforcing the validity of arbitration agreements.

The arbitration process typically includes:

1. An enforceable agreement to arbitrate.
2. The selection of an arbitrator.
3. Preparation for the hearing.
4. Presentation of the case by each party.
5. An award.
6. The enforcement of the arbitrator’s decision.

Certain characteristics of arbitration may make it attractive to resolve disputes:

• Customization
• Choice
• Privacy and confidentiality
• Certainty
• Costs
• Appellate rights
• Challenging Arbitration in Court
• Non-Binding Arbitration

Here’s a look at what those entail:

Customization

The principal benefit of arbitration is the ability to agree in advance to the form of arbitration. For example, parties to a contract may agree to:

1. The Number of Arbitrators. Arbitrations can range from having one arbitrator, which reduces   the costs, to three or more, depending on the nature and complexities of the dispute. Having an odd number of arbitrators may streamline the process by removing the possibility of a tie.
2. Desired Qualifications of Arbitrators. Parties can select arbitrators with their desired level of experience, e.g., with cannabis disputes or from an American Arbitration Association (AAA) specialty panel. Such arbitrators may be either cannabis industry veterans or arbitrators who have heard cannabis disputes in the past.
3. Location of the Arbitration. The location of the arbitration hearing may be where both parties reside, the location of the desired arbitrator, or a neutral location of the parties. Deciding on a mutually agreeable location adds convenience and flexibility for the parties.
4. Governing Law. The parties may decide the governing law of the dispute, whether it is the law of where one or both parties reside or a mutually beneficial locale.
5. Scope of Discovery. Parties may agree to narrow discovery depending on the complexities involved. The scope of discovery can range from disclosure of hearing testimony and exhibits to be presented during the hearing to full-scale trial discovery.
6. Duration of the Arbitration. Parties may decide that the arbitration last a few days, a couple weeks, or span months with breaks between hearing days. Duration and scheduling will be dictated by the case’s complexity, the parties and arbitrator’s schedule, and whether cost is a factor.
7. Apportionment of Costs. Parties may apportion arbitration costs in any manner they wish, e.g., equal split regardless of result or the prevailing party is entitled to its fees and costs as part of the award.        
8. Available Damages. In some cases, only monetary damages may be available. Other arbitration provisions may permit injunctive relief or emergency orders from an arbitrator.

A well-crafted arbitration clause alleviates the burden of the unknown. For parties that cannot agree to certain customizations, the AAA has published sets of rules for certain types of disputes. Parties could simply agree to adhere to a certain set of AAA rules.

Choice

Arbitration can be an attractive tool for parties who seek to have a say over who hears their case. For example, parties may decide how many arbitrators should make up a tribunal. Additionally, parties can seek arbitrators with the desired specialties or qualities to appropriately resolve the dispute. Choosing an arbitrator is far more flexible than filing a complaint in court, where the case is assigned to a judge without the parties having much say, if any.

Privacy and Confidentiality

Privacy may be the most desired advantage of arbitration. By default, and unless there is a court-approved exception, court trials are often open to the general public, and judgments are readily available in the public domain. In arbitration, the fact that a party is involved in an arbitral proceeding is rarely public, and decisions can be protected from public consumption. Many states, e.g., California and Missouri, have statutes or rules of evidence protecting the confidentiality of arbitration proceedings.

Certainty

By agreeing to arbitration and its parameters at the outset of a business relationship,  parties should feel comfortable knowing how disputes arising under their contract will be resolved. This can lead to cost savings, as it removes the possibility of jurisdiction battles that ensue from interstate conflicts between entities.

Costs

Arbitration is often perceived as a cost-effective alternative to traditional litigation. Its affordability, however, can at times be overstated. Initially, parties involved in arbitration proceedings often incur various expenses, which includes tribunal fees, travel expenses, and administrative costs, none of which include costs associated with hiring attorneys to represent a party’s interests. As noted above, arbitration clauses can apportion these costs evenly amongst the parties. Although every dispute is different, costs may be more predictable depending on the language of the contract for reasons noted above (apportionment of costs, duration of arbitration, location of arbitration, etc.).

Arbitration Appeals

In court, parties have the right to appeal for review by a higher court, which might not be the case in arbitration. While this may be seen as a positive if the arbitrator decides in your favor, the appeal process is far stricter in arbitration. Unless a party seeks judicial intervention (see below), parties may only obtain secondary review by an arbitrator of an initial arbitration decision if the parties agree to such secondary review. Under the rules of the AAA, “[i]f the parties agree to use the AAA to handle the appeal, the AAA will treat the appeal like a new case filing and more fees would have to be paid.” Costs associated with fully re-arbitrating the dispute create an obvious drawback to seeking an appeal. If the parties did not agree at the outset, or do not agree following an arbitration decision, what the process for appeals will be, options for appellate review in arbitration are limited.

Judicial Intervention

Once an arbitration award is made, the prevailing party in the arbitration may apply to traditional courts for an order confirming the award, which allows that party to enforce the award like any other court judgment, e.g. pursue collection efforts. Conversely, the non-prevailing party may ask a court to vacate the arbitration award. In some states, such as Ohio, courts may vacate an arbitration award only if it was procured by fraud, corruption, undue means, partiality, or corruption on the part of the arbitrators, in addition to other, limited reasons. Courts may also modify awards depending on the court’s review of the proceedings. Nonetheless, courts will often confirm arbitration awards unless there is a showing that the proceeding was fundamentally unfair or the award was undue.

Non-Binding Arbitration

Parties considering arbitration tend to prefer binding arbitration, but non-binding arbitration is also an option, namely to evaluate each party’s respective positions. Non-binding arbitration allows parties to have a neutral third party evaluate their positions. However, this option can be costly just to obtain what is a non-binding opinion. Nonetheless, non-binding arbitration can be valuable for parties seeking an unbiased understanding of the dispute. For example, parties may need to be close in their positions in relation to dispute for mediation to be beneficial, or parties may want to understand the strengths and weaknesses of their positions before subjecting themselves to a binding arbitration decision.

What Is Mediation and What Does It Entail?

While arbitration allows a neutral third party to render a binding decision, mediation often guides the parties to a mutually agreeable resolution. Mediation is an attractive alternative to arbitration, especially when parties may continue their relationship after resolution of a dispute but require a neutral third party to either close a deal or effectuate a settlement. Two of the more common mediation models are:

1. facilitative mediation, wherein a mediator explores parties’ interests and options for resolution, rather than suggesting or imposing a resolution, and
2. evaluative mediation, wherein a mediator may assess the legal merits of parties’ arguments and advise on a likely outcome at court.

Mediation offers the parties more control in reaching a resolution, but mediation may have hidden drawbacks. Mediators likely lack the power to impose a resolution on the parties. Each party must, therefore, be open to compromise, as any resolution will require a settlement agreement to memorialize a resolution reached in mediation. Mediation may also be more inexpensive than traditional litigation unless a resolution cannot be reached, at which point litigation would commence or continue. Even so, mediation is a valuable tool to allow parties to conclude disputes and reach a middle ground.

Mediation allows parties to test legal arguments or theories on a neutral and/or opposing party. This process allows each party to understand the nature of the dispute. Although rare, a well-managed mediation may assist in changing the parties’ thinking. Because each party may be entrenched in their beliefs and legal theories, mediation might help them broaden their perspectives.

Before mediation, each party is usually required to submit a mediation statement. This statement is essentially a summary of a party’s claims and/or defenses and serves as a roadmap for the mediation process. It should be persuasive, yet objective when distilling the issues in the case. Discussing dispositive legal issues is crucial. By setting forth a summary of the dispute, dispositive legal issues, and the strengths and weaknesses of each party’s claims, the mediation statement can significantly contribute to a more efficient and cost-effective process. Particularly in the cannabis space, mediation statements can prove invaluable by apprising the mediator of the intricacies of cannabis law and business, particularly if the mediator is inexperienced in cannabis disputes.

Conclusion
As the cannabis industry expands and disputes continue to become more prevalent, the option of seeking alternative dispute resolution becomes crucial for parties encountering disputes. While arbitration and mediation offer alternatives to traditional court litigation, outcomes and approaches can differ significantly. Arbitration, governed by state and federal laws, can provide a structured process for parties seeking binding resolutions. On the other hand, mediation offers a more collaborative approach, emphasizing a collaborative approach to resolve disputes. Ultimately, the decision between traditional litigation, arbitration, and mediation depends on the dispute's specific needs and the parties' preferences.

Tom Haren is partner at Frantz Ward and Chair of the firm's Cannabis Law Group. He has represented cannabis clients since 2016, helping them with innumerable legal issues, including public policy, regulatory compliance, corporate governance, contract negotiations, risk management, litigation and other day-to-day business issues. Haren has led some of the largest M&A transactions in Ohio’s cannabis market, representing both selling license holders and acquiring entities. In addition to his policy and legal work, he serves as the chair of Frantz Ward’s Cannabis Law and Policy practice and he was also named to the firm’s Management Committee in January 2024.

Keenan Jones, partner at Frantz Ward, represents businesses of all sizes in litigation matters, corporate formation, business development, and protection of intellectual property rights. Since 2017, he has focused his practice on assisting companies operating in the regulated cannabis space, including hemp, marijuana, and ancillary endeavors.

Before joining Frantz Ward, Jones co-founded Foster & Jones and worked at the Hoban Law Group. In both roles, he guided businesses in the emerging cannabis industry. He also teaches political science courses at Heidelberg University as an adjunct professor and serves as counsel and an ex-officio member of the board of directors of Model United Nations of the Far West.

Ben Kerns served as the chief publications editor for the Cleveland State Law Review, while in law school. He also notably gained experience as a law clerk for the United States Attorney’s Office for the Northern District of Ohio. There, he assisted on a wide range of matters including complex civil forfeiture cases. Prior to attending law school, he acted as a special education teaching consultant for a public school system in Upstate New York. Kerns received his J.D. with honors from Cleveland State University College of Law.