Can Contracts With the Marijuana Industry Be Enforced in a Court of Law? – Part 2 (Part 1 below)
By: Anthony Vanicek
In January, 2019 this blog page published a piece about the enforceability of contracts in the marijuana industry which described the development of court decisions in both Colorado state courts and federal courts. The Supreme Court’s recent decision in People v. McKnight, 2019 WL 2167746, (Colo. 2019) calls for an update. Previously, this blog page noted that although the Colorado Supreme Court has not ruled on any case that are specifically about enforcing marijuana contracts (and McKnight, a ruling on a criminal procedure issue, is no exception), these marijuana related cases that can give us some guidance.
In People v. Crouse, 388 P.3d 39, 41 (Colo. 2017), the Colorado Supreme Court indicated that it would not ignore the federal illegality of marijuana when it comes to issues of preemption or the fact that the possession or use of marijuana remains a federal crime. As this blog noted, the Crouse decision, if extended into the realm of contract law, could spell doom for anyone trying to enforce a contract with the marijuana industry (and likely result in a declaration that C.R.S. § 13-22-601which provides for the enforceability of contracts in marijuana, would be declared void and preempted by federal law). However, the composition of the Colorado Supreme Court has changed since Crouse in a way that likely brings good news for anyone who may be trying to enforce a marijuana contract in Colorado.
In January, 2019 this blog stated that “[w]hether the Colorado Supreme Court will be following the federal trend [of enforcing contracts in the marijuana industry] will be illuminated by their soon-to-come decision where they will review the Court of Appeals’ ruling in People v. McKnight.” The Supreme Court issued its ruling in May, 2019 where it upheld the decision of the Colorado Court of Appeals that dogs who are trained to alert to the scent of marijuana cannot form the basis for probable cause needed by police to legally search your car under the 4th amendment of the United States Constitution.
The McKnight Decision
Under the facts of the case, Kevin McKnight was driving in Moffat, County Colorado when he was pulled over. A drug sniffing dog gave a positive alert to the smell of drugs, allowing the officers to search the vehicle. Inside Mr. McKnight’s truck was a pipe containing “what later proved to be methamphetamine residue.” McKnight WL 2167746 at 1. The problem: the drug sniffing dog, Deputy Kilo, was trained to smell and alert to a variety of drugs, including marijuana, which legal under state law, remains a federal crime. Under cases interpreting the 4th Amendment of the United States Constitution, a drug sniffing dog’s alert is not in itself a “search” for the purpose of the 4th amendment. U.S. v. Reed, 141 F.3d 644 (6th Cir. 1998). A dog sniff, however, can form the basis for probable cause to allow a police officer to legally search a vehicle. But individuals also have a reasonable expectation of privacy to anything that is legal. Under McKnight, a sniff is a search if the dog can smell substances that are legal under state law, despite their federal illegality. Essentially, Kevin McKnight had a reasonable expectation of privacy as to marijuana, which the dog was trained to smell. And a dog sniff from a dog that is trained to smell legal substances is a search that must be supported by probable cause.
McKnight was a 4 to 3 decision, and it is not without its critics. The dissenting opinions note the irony of Mr. KcKnights’ use of the federal Constitution as a shield, whilst also asking Courts to ignore parts of federal law that are less convenient. The dissenting opinion by Justice Samour points out that the Colorado Supreme Court has just ruled that there is a reasonable expectation of privacy as to a federal crime. McKnight WL 2167746 at 1 (Samour, J., dissenting).
What does McKnight mean for Contracts?
But whatever McKnight’s shortcomings, the opinion reflects an attitude shift that has positive consequences for those who wish to enforce contractual rights and obligations with the marijuana industry. As this blog noted, federal courts, seem to have grown annoyed with litigants who enter into marijuana related agreements only to attempt to abandon their obligations down the road by claiming that the whole deal was illegal to begin with. See generally Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, 163 F. Supp. 3d 821 (D. Colo. 2016).
In this blog’s previous post on this topic, we concluded that “as a matter of irony, anyone attempting to enforce contracts with the marijuana industry should probably file in federal court if they can.” That may no longer ring true. After all, a decision that marijuana related contracts should be enforced would arguably be less controversial than the McKnight decision. What more, it would be a decision that already has precedent in Federal courts. In the end, contract litigants who have made deals with the marijuana industry can be reasonably confident that their contractual rights will be upheld in court whether they choose to file in Colorado state court or federal court.
Can Contracts With the Marijuana Industry Be Enforced in a Court of Law? – Part 1
By: Anthony Vanicek, Esq.
When Colorado passed Amendment 64 legalizing the sale of recreational marijuana, it also passed C.R.S. § 13-22-601 which states that, “[i]t 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 and article 12 of title 44.” But while Colorado state law says that contracts with the marijuana industry are enforceable, Federal Statutes still regards Marijuana retailers to be operators of a criminal enterprise under the Controlled Substances Act (“CSA”) of 1970. The primary issue raised is whether courts will deem C.R.S. § 13-22-601 to be constitutionally preempted by the Federal CSA.
Initially, both state and federal courts seemed to take the position that contracts with the marijuana industry were void for illegality despite their legal status under state law. However, due to a continued policy of non-enforcement of the CSA by the U.S. Attorney General’s Office (at least for cannabis), both state and federal courts seem to be exhibiting a trend towards enforcing a party’s contractual rights and obligations under contract. Colorado’s Supreme Court has not made it clear which way it would rule on a marijuana contract case. However, under the current composition of the Colorado Supreme Court, some key cases set to be decided this term should soon shed more light on this hazy area of law.
In River North Properties, LLC v. City and County of Denver, 2014WL7437048 (U.S. Dist. CO 2014), the U.S. District Court for the District of Colorado, the Court refused to enforce a commercial lease agreement for a facility that would be used for the cultivation of medical marijuana. The plaintiff argued that Federal law’s refusal to recognize the right to grow medical marijuana was irrelevant because Colo. Const., art. XVIII, sect. 14, “created and granted that right.” The Court disagreed stating “the benefits of this lease agreement (i.e., rent from the tenant) is inextricably linked to and contingent upon the tenant’s cultivation of medical marijuana, which, . . . is contraband under the CSA, 21 U.S.C. § 801 et seq.” In Staffin v. County of Shasta, 2013WL1896812 (E.D. Cal. 2013) the United States Court for the Eastern District of California likewise refused to enforce a contract with the marijuana industry citing federal preemption.
However, more recent federal court decisions have started enforcing contracts involving the marijuana industry. In Green Earth Wellness Center, LLC v. Atain Specialty Insurance Company, 163 F. Supp. 3d 821 (D. Colo. 2016), where an operator of a medical marijuana dispensary brought suit against its insurer, the insurer attempted to have the contract declared void on the basis of illegality. The Court upheld the insurer’s liability “in light of several additional years evidencing a continued erosion of any clear and consistent federal public policy in this area.” Id. at 835. A similar case in California, Mann v. Gullickson, No. 15cv-0360.MEJ, WL 6473215 (N. D. Cal. Nov. 2, 2016), explicitly declined to follow appellate precedent citing the erosion of clear and consistent federal policy. Green Earth Wellness Center has been cited and followed by three federal cases and one state case. This line of cases emphasize that courts do not look favorably upon parties seeking to derive benefits from a contract only to attempt to abandon their obligations down the road.
Some states, such as Arizona, have mimicked the Federal trend. In a 2012 case, Hammer v. Today’s Health Care II, WL 12874349 (Sup. Ct. Az. 2012) the Court held that two lenders who sought repayment of a $250,000 loan extended to a marijuana retailer were unable to use to Courts to enforce their loan. However, 5 years later in Green Cross Med., Inc. v. Gally, 395 P.3d 302 (Ariz. App. 2017) in a dispute between a landlord and a tenant marijuana dispensary, the court stated that the CSA does not render a contract unenforceable in all circumstances. The Court applied a “balancing test” in which the interest of the federal government is weighed against the unfairness of unjust enrichment. Using similar logic to Green Earth Wellness Center, the Court upheld the contract citing a lack of clarity in the federal government’s interest in light of non-enforcement by the U.S. Attorney General.
In Colorado, decisions issued by many state court judges reflected the early federal trend of refusing to enforce marijuana related contracts. While there is little guidance on the enforcement of contracts in the marijuana industry at the appellate level, the Colorado Court of Appeals has generally rejected arguments that depend on the illegality of marijuana under the CSA. In People v. McKnight, 2017 WL 2981808 (Colo. App. 2017), cert granted during a traffic stop, a police officer deployed a drug sniffing dog who alerted to the smell of drugs. The police officer relied on the positive alert from the dog for probable cause to search the vehicle. For the purposes of the 4th amendment to the United States Constitution, a dog sniff is not a “search” so long as the dog is trained to smell only illegal substances. The Court of Appeals stated that because this dog was also trained to alert to the smell of marijuana, now legal in Colorado, there was no probable cause for the search. The Court reasoned that while people do not have a reasonable expectation of privacy with regard to illegal drugs, they do have a reasonable expectation of privacy for legal substances such as marijuana. The Court rejected any argument based on the federal illegality of marijuana. The Supreme Court of Colorado is set to review the appellate Court’s decision, and heard oral arguments in mid December.
But unlike the Colorado Court of Appeals, the decisions from Colorado’s Supreme Court (although having never ruled on a marijuana contract case) has demonstrated a willingness to recognize cannabis’ illegal status at the federal level. In 2015 the Colorado Supreme Court decided Coats v. Dish Network, L.L.C., 350 P.3d 849, 853 (Colo. 2015).which upheld a company’s right to terminate an employee because of the employee’s marijuana use. Specifically, the Court stated that medical marijuana was not “lawful activity” for the purposes of the Colorado’s lawful activities statute.
Similarly, in People v. Crouse, 388 P.3d 39, 41 (Colo. 2017), the plaintiff challenged the legality of a Colorado law requiring police to return marijuana to its original owner after being confiscated in the course of law enforcement operations. In a narrow 4-3 decision, the Colorado Supreme Court held that the CSA expressly preempts section 14(2)(e) of article XVIII of the Colorado Constitution. The logic of the decision, if extended into the contract world, would almost certainly result in a Colorado Supreme Court decision declaring C.R.S. § 13-22-601, which purports to make all contracts involving marijuana legal, to be void and preempted by the CSA.
However, the current supreme court is not the same one that ruled on Crouse. Among the four Justices in the majority was Justice Allison Eid (one of only two justices on the bench to have been appointed by former Governor Bill Owens). On June of 2017, Allison Eid left the Colorado Supreme Court to fill the vacancy of Neil Gorsuch on the Federal Court of Appeals for the 10th Circuit. In December of 2017, Former Governor John Hickenlooper filled the vacancy on the Colorado Supreme Court by appointing Justice Melissa Hart. Whether the Colorado Supreme Court will be following the federal trend will be illuminated by their soon-to-come decision where they will review the Court of Appeals’ ruling in People v. McKnight.
Colorado’s Courts of Appeals and Supreme Court have not offered any firm answers specifically related to the contract question. But the Crouse and Dish Network decisions provide some guidance as to how they may rule. For now, as a matter of irony, anyone attempting to enforce contracts with the marijuana industry should probably file in federal court if they can.