Cannabis Litigation Is Exploding: How To Protect YOUR Cannabis Business From Costly Lawsuits
The cannabis industry is one of the most lawsuit-heavy sectors in the country.
Cannabis litigation is exploding. Judges are frustrated, businesses are losing money, and lawsuits that should never have been filed are clogging up the courts. If you run a cannabis business, you need to know why this is happening—and how to avoid becoming the next case on the docket.
Many cannabis businesses enter legal disputes without realizing how much time, money, and risk they are taking on. Others assume that winning in court guarantees they’ll be paid—which is often far from the truth. This blog post will not only explain why cannabis companies face so much litigation but also how you can protect your business from becoming another case in an already overburdened legal system.
The cannabis industry, while booming, remains a complex and highly regulated landscape. Navigating this sector is not for the faint of heart. Cannabis businesses face unique legal challenges that, unfortunately, often land them in court. The umber of cannabis-related lawsuits is skyrocketing. The reasons behind this surge are a mix of predictable issues and, thankfully, preventable mistakes.
If you’re running a cannabis business, this post will provide crucial insights into:
- Why cannabis lawsuits are more common than other business disputes.
- Why judges are growing increasingly frustrated with cannabis cases.
- How to protect yourself with better contracts and smarter legal strategies.
- Why many cannabis lawsuits aren’t worth bringing—even if you win.
- And most importantly—how to keep your cannabis business out of court in the first place.
1. Why Are There So Many Cannabis Lawsuits?
Beyond general business disputes, the cannabis industry faces unique litigation risks tied to its regulated nature and specific product offerings. These risks can catch businesses off guard, leading to costly legal battles that could have been avoided with proper planning.
a. High-Risk Industry, High-Risk Deals
Many cannabis businesses operate on thin margins, often facing uncertain and ever-shifting regulations. This creates a volatile environment where disputes over money, partnerships, and contracts are commonplace. The inherent risks of the industry often lead to desperate measures and questionable deals, increasing the likelihood of litigation.
b. Bad Contracts
A significant problem is the prevalence of poorly drafted contracts. Many cannabis companies, especially in their early stages, fail to retain experienced business lawyers. This results in contracts that are vague, incomplete, unenforceable, or heavily one-sided. When disputes inevitably arise, these contracts offer no clear guidance, leaving both parties to fight it out in court. Common contract issues in the cannabis industry include vague licensing terms, unclear intellectual property ownership, and failure to address regulatory compliance.
c. Fewer Settlements, More Trials
Cannabis companies, it seems, tend to be more litigious than businesses in other industries. This may be due to the competitive nature of the market, the high stakes involved, or a combination of factors. Combine this tendency with unclear contracts and tough-minded business owners, and you have a recipe for cases that don’t settle easily, resulting in more trials than in most other industries.
d. Financial Instability
Many cannabis companies, particularly smaller operators, are struggling financially. This vulnerability makes them more likely to engage in risky deals that, when they go south, quickly turn into lawsuits. It also makes them unable to settle lawsuits.
e. Rapidly Evolving Regulations
The cannabis industry is in constant flux. New regulations are frequently introduced, and existing ones are often amended. This creates a complex legal landscape that can be difficult for businesses to navigate, increasing the risk of compliance issues and subsequent litigation.
Example 1: The Contract That Wasn’t Worth the Paper It Was Written On
One of our cannabis business lawyers recently advised a client who wanted to sue a supplier for breach of contract. The client was convinced they had a rock-solid agreement. However, upon reviewing the contract, we saw immediate red flags. The terms were vague and incomplete, lacking essential details like delivery schedules, quality standards, and payment terms. The contract was also legally weak, making it difficult to enforce in court. Worse, the contract did not specify jurisdiction, meaning a lawsuit could have been fought in multiple states, significantly increasing costs and complexity.
Instead of rushing into costly litigation, we helped our client negotiate a settlement with the supplier. This saved them tens of thousands of dollars in legal fees and prevented a protracted and likely unsuccessful legal battle. Had we been involved in drafting the contract from the start, they likely wouldn’t have faced this problem at all.
2. Why Judges Are Frustrated with Cannabis Lawsuits
Judges seem frustrated with cannabis lawsuits clogging up their dockets. One judge even told one of our cannabis litigation attorneys that cannabis companies should be using arbitration a lot more often.
This frustration stems from several factors:
a. Poorly Drafted Contracts
As mentioned earlier, many cannabis lawsuits arise from poorly written contracts. Judges are tired of seeing cases where the parties have failed to clearly define their obligations, leaving the court to effectively rewrite the agreement.
b. Frivolous Lawsuits
Some cannabis lawsuits are based on weak legal arguments or are driven by personal animosity rather than legitimate business disputes. Judges have little patience for such cases, which waste valuable court time and resources.
c. Lack of Understanding of the Industry
Some judges lack a deep understanding of the unique challenges and complexities of the cannabis industry. This can lead to rulings that are not well-tailored to the specific circumstances of the case.
Judges often express frustration with the frequency and nature of these disputes. They often view both parties as being equally at fault for entering into poorly structured agreements or failing to resolve their differences outside of court.
This means that when a cannabis case does go to trial, the ruling is sometimes less about who’s strictly “right” and more about teaching both sides a lesson: Get better legal help before disputes arise. Don’t expect the court to fix your business mistakes.
3. Why Many Cannabis Lawsuits Aren’t Worth Bringing—Even If You Win
One of the biggest mistakes we see in cannabis litigation is lawsuits that should never have been filed in the first place. Winning a lawsuit doesn’t guarantee you’ll actually see any money.
A good cannabis litigation attorney will discuss the following with you early in your case:
a. Your Likelihood of Prevailing
Do you actually have a strong case, or is it a long shot? A thorough assessment of the facts and the law is crucial.
b. Estimated Duration and Cost
How long will the litigation likely take, and what will it likely cost? No lawyer can predict this with absolute certainty, but an unwillingness to even try is usually a sign of inexperience or a lack of candor.
c. Likelihood of Collection
Your likelihood of actually collecting any judgment if you do prevail. Winning a lawsuit doesn’t mean you’ll ever see a dime. If the defendant has no money, no assets, and no insurance, your “win” may be worthless.
Example 2: The Victory That Was a Financial Loss
A cannabis company reached out to one of our cannabis litigation attorneys after they had already “won” their lawsuit. They had grown frustrated with their existing counsel and wanted us to either appeal the case or try to collect the funds the trial court had awarded them.
We explained that an appeal made no sense—they had already won. Before starting any collection efforts, we advised them to first assess whether such efforts would be worthwhile. Using publicly available cannabis sales records and additional information from proprietary databases to which we have access, we determined that collecting from the judgment debtor would be nearly impossible. The defendant company was deeply in debt and had few, if any, assets.
We charged them around $3,500 for this due diligence, after which they asked us whether this information had been available before they brought the lawsuit. Our answer? Almost certainly, yes. Their next question: Why did we sue if there was no realistic way to collect? Our answer? They probably shouldn’t have. This highlights the importance of pre-litigation due diligence.
4. How to Protect Your Cannabis Business from Lawsuits
Keeping your cannabis business out of court is the best way to protect your bottom line. Here are some key strategies:
a. Strong Contracts
Work with an experienced cannabis business lawyer to draft clear, comprehensive, and enforceable contracts. These contracts should address all key aspects of your business relationships, including payment terms, delivery schedules, quality standards, intellectual property rights, and dispute resolution mechanisms. Don’t rely on generic templates or try to save money by cutting corners on legal advice. A well-drafted contract is an investment that can save you significant time, money, and headaches down the road.
b. Smart Legal Strategies Beyond Contracts
While strong contracts are essential, they are not the only form of protection. Consider these additional strategies:
c. Alternative Dispute Resolution (ADR)
Include clauses in your contracts that require mediation or arbitration before resorting to litigation. ADR can be a faster, less expensive, and less adversarial way to resolve disputes.
d. Regulatory Compliance
Stay up-to-date on all applicable cannabis regulations and ensure your business operations are in full compliance. This will minimize the risk of legal challenges related to licensing, product testing, advertising, or other regulatory matters.
e. Intellectual Property Protection
Secure your trademarks, patents, and copyrights to protect your brand and your innovative products or processes. Strong IP protection can deter infringement and provide a solid legal foundation in case of disputes.
f. Insurance Coverage
Obtain appropriate insurance coverage to protect your business against potential liabilities, such as product liability claims or property damage.
g. Proactive Communication
Maintain open and proactive communication with your business partners, suppliers, and customers. Addressing concerns promptly and resolving issues amicably can prevent misunderstandings from escalating into full-blown disputes.
h. Due Diligence
Before entering into any significant business transaction, conduct thorough due diligence on the other party. Assess their financial stability, reputation, and track record. This can help you avoid dealing with unreliable or unscrupulous businesses.
Example 3: The Company That Avoided a Costly Lawsuit
One of our cannabis business lawyers recently worked with a distributor who was in a major dispute with a supplier over delayed shipments. The supplier was demanding payment, while our client was refusing to pay due to the significant delays.
Instead of heading straight to litigation, we leveraged the contract’s arbitration clause to force a quick and cost-effective resolution. Because we had drafted the contract ourselves, we had ensured that arbitration would be the default dispute resolution method. This saved our client months of legal headaches and hundreds of thousands of dollars in legal fees. The arbitrator was able to review the evidence and the contract quickly, issuing a decision that was fair to both parties. This example highlights the importance of not just having contracts, but having well-drafted contracts with appropriate dispute resolution mechanisms in place.
5. Understanding Specific Cannabis Litigation Risks
Beyond general business disputes, the cannabis industry faces unique litigation risks tied to its regulated nature and specific product offerings. Here are some key areas cannabis businesses should be aware of:
a. Licensing Disputes
Cannabis businesses operate under strict licensing regimes. Disputes can arise regarding the issuance, renewal, or revocation of licenses. Challenges to licensing decisions can be complex and time-consuming.
b. Product Liability Claims
Cannabis products, like any consumer goods, can be subject to product liability claims. These claims may allege defects in the product itself, improper labeling, or inadequate warnings. Given the relatively new and evolving nature of cannabis product testing and regulation, these claims can be particularly challenging.
c. Intellectual Property Infringement
With the increasing importance of branding in the cannabis market, intellectual property disputes are becoming more common. These disputes can involve trademark infringement, patent infringement, or trade secret misappropriation. Protecting your intellectual property is crucial in this competitive landscape.
d. Contractual Disputes Specific to the Industry
Beyond general contract issues, cannabis businesses often encounter disputes related to specialized contracts, such as cultivation agreements, distribution agreements, or licensing agreements for intellectual property related to strains or cultivation methods.
e. Regulatory Enforcement Actions
Cannabis businesses must comply with a complex web of federal, state, and local regulations. Violations of these regulations can lead to enforcement actions by regulatory agencies, including fines, license suspensions, or even criminal charges. These actions can be costly and disruptive, even if the business is ultimately cleared of wrongdoing.
f. Employment Law Issues
The rapid growth of the cannabis industry has led to a surge in employment. This growth, coupled with the complexities of labor law, can create fertile ground for employment-related litigation, including claims of wrongful termination, discrimination, or wage and hour violations.
6. Proactive Legal Strategies for the Cannabis Industry
To mitigate these risks and keep your cannabis business out of court, a proactive legal approach is essential. This includes:
a. Regular Contract Reviews
Don’t just file your contracts away after they’re signed. Regularly review them with your attorney to ensure they are still aligned with your business practices and current regulations.
b. Compliance Audits
Conduct regular internal audits to ensure your business operations are in full compliance with all applicable laws and regulations. This can help you identify and address potential compliance issues before they lead to legal problems.
c. Employee Training
Provide regular training to your employees on relevant laws and regulations, as well as your company’s policies and procedures. This can help prevent employment-related disputes and ensure a compliant workplace.
d. Intellectual Property Portfolio Management
Develop a comprehensive strategy for protecting your intellectual property. This includes conducting regular trademark searches, filing patent applications for innovative products or processes, and implementing robust trade secret protection measures.
e. Relationship Management
Foster strong and positive relationships with your business partners, suppliers, and customers. Open communication and a collaborative approach can help prevent misunderstandings and resolve disputes amicably.
Protect YOUR Cannabis Business
The cannabis industry is more litigious than ever, but legal disputes don’t have to be inevitable. With the right legal strategies, risk management, and proactive planning, you can significantly reduce your exposure to costly litigation and protect your business from unnecessary legal battles.
For more than 15 years, we’ve helped cannabis companies of all sizes navigate the complex and ever-changing legal landscape. Whether you’re launching, expanding, or already dealing with a dispute, our team can help you:
- Structure your deals properly to avoid legal pitfalls from the outset.
- Negotiate strong, clear contracts that prevent disputes before they arise.
- Develop and implement smart legal strategies to protect your business, including guidance on insurance coverage and risk management.
- Effectively represent you in court when litigation is unavoidable.
Litigation Isn’t Always the Answer—Know When to Fight and When to Walk Away
Too often, businesses rush into lawsuits without evaluating whether the case is truly worth pursuing. Suing a company that can’t afford to pay is often a waste of time and money.
Before spending tens to hundreds of thousands of dollars in legal fees, it’s critical to assess your likelihood of success and, more importantly, your likelihood of actually collecting if you win. One of our experienced cannabis litigation attorneys can objectively analyze your case—before you invest valuable time and resources into a lawsuit that may not pay off.
The cannabis industry is tough, competitive, and unpredictable, but you don’t have to navigate it alone. The sooner you take proactive legal steps, the stronger and more resilient your business will be.
Schedule a consultation with one of our cannabis lawyers today to discuss how we can protect your business, brand, and bottom line. We’ll help you stay ahead of legal risks and ensure your cannabis business thrives.
Source: Canna Law Blog
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