With spreading legalization the cannabis industry continues to increase in size, cannabis companies increase their levels of sophistication and formality, and litigation between cannabis businesses and business people will no doubt increase as well. While we always recommend hiring an established cannabis attorney to handle such disputes, this can also put a huge dent in your budget and shift focus away from your company’s vision. In general, we believe that prevention is more efficient and effective than treatment.
This blog post is the first installment in a two-part series about how best to prevent business litigation in the cannabis industry. In Part 1, we will focus on preventing litigation internally amongst business partners. Part 2 will address external disputes between separate companies.
5 Tips To Avoid Taking Your Business Partners To Court:
1. Put It In Writing:
We know. If you had a dollar for every time an attorney told you to get something in writing you’d probably have enough to pay for the attorney. Now consider the common cannabis industry scenario where smaller cultivators, both life-long friends, decide to launch a mainstream licensed operation. They might think that contracts will only turn their friendly relationship into one that is awkward and formal. Then again, what’s more awkward than feeling compelled to sue your friend when you reach a serious disagreement over how your business should be run? Operating agreements and bylaws, as well as shareholder and membership agreements exist to provide a pre-determined roadmap for business management procedure and decision-making. You and your partners should start with an understanding of how important issues like division of responsibility, voting rights, equity ownership and issuance, or employment and hiring decisions will be handled. This way, when the inevitable disagreement occurs, it’s simply a matter of referring back to the roadmap. That contract was agreed to in an atmosphere of mutual respect and understanding, and will now serve its purpose by maintaining that atmosphere.
2. Establish Expectations and Responsibilities Clearly and Early:
This is an integral component of our first step, but the concept should expand beyond the language of a company’s formative documents to include regular, if not daily, communication. We all know the idiom about the ‘best-laid plans of mice and men,’ and in business change is a constant. That rule applies two-fold in the volatile world of cannabis. If you entered into an initial arrangement that one partner has since outgrown or now finds unsustainable, it is crucial to recognize and address that new reality before it becomes a detriment to the business. Consider accommodating the other side instead of continuing to enforce the unbalanced terms. If we can anticipate change, we should embrace flexibility and the opportunity to restructure when required.
3. Know Your Partners:
…That is, know something about them before they become your partners. Some risk is unavoidable in all business, and the cannabis industry tends to attract those who are generally less risk-averse—actually it’s almost a requirement. But that is no excuse to forego conducting proper due diligence on your prospective partners. It is routine in other industries to request financial, criminal, and business histories before entering into an agreement. In cannabis, where licenses will be issued based in part upon such information, knowledge of the facts is essential.
4. Establish Alternatives to Litigation:
Alternative dispute resolution (or ADR), specifically mediation and arbitration, can be a much cheaper and effective means of settling business differences. What’s more, these forums often go a step further, actually laying new groundwork for a workable post-dispute relationship. Corporate documents should spell out exactly how disputes will be handled, including what forums, and in what order. There are several mediation services that cater specifically to the cannabis space, taking into consideration the sensitivity of the legal landscape and the need for confidentiality. Again, keep in mind that it’s much easier to make plans for resolving a dispute before the dispute occurs.
5. Enlist the Help You Need:
Make sure that you find an attorney or, more appropriately, attorneys with knowledge of the industry and the dexterity to encourage and support transactions when times are good, but also with the foresight to plan ahead for when times are bad. It is often beneficial for each party entering a business endeavor to retain his or her own attorney to work out optimal terms without any conflict of interest. This may cost a bit more time and money in the short term, but avoiding imbalance and settling on the appropriate plan will pay dividends over the long life of your business.
For more information on this and related topics, or to setup a free consultation, please contact the Law Offices of James P. Marion, Esq.
DISCLAIMER: This article is intended to provide information only, and should not be construed as formal legal advice or the formation of an attorney-client relationship. You should not act or refrain from acting based on the materials contained herein and The Law Offices of James P. Marion, Esq. explicitly disclaims any liability for your action or inaction based on the contents of this article.
