Concerns remain over the enforceability of cannabis contracts as recent cases highlight the conflict between state-sanctioned operations and federal illegality. In both state and federal courts, judges have anchored to the Controlled Substances Act of 1970 (21 U.S.C. § 801 et seq.) (the “CSA”) in dismissing cases and ruling against cannabis operators, even when medical and adult use marijuana are legal in the relevant state.
To avoid a similar result for your contract, it is imperative to examine contracts closely before execution and implement particular provisions to curb the erosion of operators’ rights and remedies.
I. Waiver of Illegality Defense
Two recent actions involving breach of contract demonstrate how a once-willing party can seek to invalidate an entire contract to prevent enforcement.
A federal court in Ohio recently dismissed a suit seeking to enforce the $5 million sale of a licensed Michigan cannabis business, finding that the purchase agreement is illegal because it requires acquisition of cultivation licenses and inventory that includes marijuana plants, both of which violate the CSA. CCH Acquisitions, LLC v. J&J&D Holdings, LLC, Case No. 2:23-cv-2983, 2025 U.S. Dist. LEXIS 33593 (S.D. Ohio 2025).
Similarly, following a $31.8 million jury trial verdict against it, a Michigan cannabis company is arguing in federal court that the illegality argument has even greater force where the contract involves the direct purchase and sale of marijuana. Hello Farms Licensing Mi, LLC v. GR Vending Mi, LLC, Case No. 21-cv-10499 (E.D. Mich. 2025).
To prevent this outcome, parties in a cannabis-related transaction should include these clauses:
- acknowledgment of the federal illegality of cannabis, and
- waiver of the defense of illegality and/or contravention of public policy.
By acknowledging the federal illegality, the parties recognize the availability of a potential defense. Then, by expressly waiving these defenses, the parties establish that they have intentionally relinquished a known right.
That, however, is not a complete panacea in all circumstances. While certain states allow parties to waive the defense of illegality, a court may sua sponte raise illegality as a reason for unenforceability in certain circumstances where contravention of public policy is so grave it essentially rises to the level of a serious crime or tort. Accordingly, contracting parties should also consider choice of jurisdiction and venue provisions to protect their enforcement rights.
II. Choice of Jurisdiction and Venue
While some may fall into the trap of treating these provisions as boilerplate, forum selections are critical in any cannabis-related contract. Choice of jurisdiction provisions designate a particular court system, e.g., state or federal court in a particular State, where the parties submit to its authority. Choice of venue provisions designate a specific geographic location where disputes must be resolved, e.g., a specific county or anywhere in a given state.
Critically, both cases discussed above are situated in federal courts, which may limit the remedies available. In the Ohio case, defense counsel argued that despite memorializing “their illegal business deal in a contract,” a federal court cannot direct the transfer of marijuana-derived business assets or income. Similarly, counsel in the Michigan case argues that as a matter of federal public policy, contracts calling for the direct performance of an illegal act may not be enforced.
Cannabis operators should ensure their forum selection of state court, and not federal court, is both unambiguous and mandatory, not merely permissible. The contract should also expressly waive any party’s right to remove the dispute from state court to federal court, and the parties should also consider a mandatory arbitration clause. While a federal court cannot be divested of subject matter jurisdiction, if the parties find themselves in federal court, it is imperative to affirmatively ask the court to enforce the forum selection clause. Otherwise, a party may waive the protection a forum selection provision may provide.
Parties should also consider how these choices can influence the dynamics of any ensuing dispute, including:
- residency of the parties,
- location of performance,
- where their attorneys are situated,
- familiarity with local rules and judges, and
- time and expense of travel.
III. Choice of Law
Given the tension between state and federal law on cannabis, choosing the law under which the contract will be construed, interpreted, and enforced is paramount. Certain states, like Colorado, have passed legislation (C.R.S. § 13-22-601) specifically addressing the issue of enforceability of cannabis contracts:
It is the public policy of the state of Colorado that a contract is not void or voidable as against public policy if it pertains to lawful activities authorized by section 16 of article XVIII of the state constitution [(Personal use and regulation of marijuana)] and article 10 of title 44 [(Regulated Marijuana)].
While other states have enacted similar statutes, their protection is not guaranteed. A recent ruling in California state court held that the CSA preempted Cal. Civ. Code § 1550.5 and a landowner could not be forced to allow his property to be used in cannabis transportation. JCCrandall, LLC v. County of Santa Barbara, 107 Cal. App. 5th 1135 (Cal. App. 2d Dist. 2025). The court did not decide whether the California statute is valid between contracting parties who voluntarily agree to enter into the cannabis business but expressly stated that “[n]o matter how much California voters and the Legislature might try, cannabis cultivation and transportation are illegal in California as long as it remains illegal under federal law.”
Keep in mind that there must be some nexus between the contracting parties and the state in which the law is chosen.
These recent cases demonstrate that careful contracting can significantly influence how disputes get resolved during litigation. In addition to the provisions mentioned herein, parties should also scrutinize limitations on liability, penalties for breach, and severability terms. The conflict between state and federal law on cannabis has broad impacts on the industry, including, among others, contracting, labor and employment law, bankruptcy and restructuring, intellectual property, and banking.
