Litigating Disputes Involving the Medical Marijuana Industry
| Publication year | 2012 |
| Pages | 103 |
2012, August, Pg. 103. Litigating Disputes Involving the Medical Marijuana Industry
August 2012
Vol. 41, No. 8 [Page103]
Medical Marijuana Law articles are published occasionally. Article submissions are welcomed.
Coordinating Editor
Leonard I. Frieling, Boulder-(303) 666-4064, lfrieling@lfrieling.com
About the Author
Eric J. Moutz founded his own firm in Boulder after nearly a decade as a litigator at two large national firms. He specializes in commercial litigation and has handled a number of complex business disputes involving the medical marijuana industry-(303) 440-3923, eric@moutzlaw.com. He thanks Leonard Frieling for his excellent editorial assistance and suggestions.
This article provides an overview of representing clients in the medical marijuana industry, including risks, regulatory issues, and ethical considerations.
Over the past two years, Colorado's medical marijuana industry has generated more than its fair share of private business litigation.(fn1) Handling these cases requires sensitivity to the practical and legal issues that confront the industry. Some of the more important of these issues are: (1) understanding and mitigating the risk of criminal prosecution; (2) responding effectively to regulatory issues that arise during litigation; (3) handling novel legal issues, including the enforceability of agreements that are or become illegal; and (4) navigating ethical traps and issues involving clients and opposing parties. This article provides an introduction to these issues and some basic suggestions for effectively addressing them.
Legislative and Cultural Roots of Medical Marijuana Industry Disputes
In November 2000, Coloradans passed Amendment 20 to the Colorado Constitution, which provides for the legal and constitutionally protected use of medical marijuana. The legal medical marijuana businesses that arose over the following years were a loose association of independent retailers and producers that served a relatively small patient base. Many participants in the medical marijuana industry were not familiar with basic concepts of contract or corporate law and opted to do business based on cash transactions and long-time personal bonds. Within these relationships, disputes were handled informally, because participants in the industry were reluctant, for obvious reasons, to discuss their activities in public.
All of this began to change rapidly in 2010 when the Colorado General Assembly enacted the Colorado Medical Marijuana Code, CRS §§ 12-43.3.101 et seq. (Code).Among other things, the Code also required vertical integration of the industry and put in place a moratorium on new medical marijuana businesses after July 1, 2010. The net effect of these requirements was to create a perceived scarcity that encouraged individuals to make long-term investments in obtaining a medical marijuana business license over a period of only months. For example, many producers and retail distributors entered into hastily arranged partnerships, in an effort to comply with the vertical integration requirements of the Code.
As the industry continued to develop, the state of Colorado and many local jurisdictions complicated matters further by enacting complex rules that required material changes to existing arrangements, leading to broken promises and abandoned agreements. This constantly changing regulatory landscape, along with participants' lack of familiarity with traditional business practices and shotgun partnerships, gave rise to a significant number of serious disputes. At the same time, the industry was increasingly being perceived as legitimate by participants because of both the Code and communications from the federal government suggesting it would not interfere with some medical marijuana businesses. This perceived legitimacy dissolved some of the industry's cultural aversion to litigation. It should be no surprise to anyone that these developments have collectively resulted in a significant amount of commercial litigation. However, although the industry has undoubtedly changed, some of its historical concerns about seeking recourse in the courts remain valid.
Mitigating the Risk of Criminal Prosecution or State Regulatory Agency Action
The most important risk of litigating a civil case involving the medical marijuana industry is that a party may be prosecuted criminally as a result of information disclosed during the case. Marijuana is still illegal under federal law, and state and local laws provide that violation of the labyrinthine and often ambiguous industry regulations may result in criminal prosecution.(fn2) Even routine testimony or discovery responses concerning medical marijuana business revenue, product production, and sales therefore may be an admission of serious criminal activity.
At a minimum, litigation may draw regulatory scrutiny from any of a number of state or local agencies and officials and cause additional problems for the business. Local authorities have been known to strictly enforce local building codes or use local permitting, zoning, or health and safety inspections to effectively shut down medical marijuana businesses that are subject to even unsubstantiated allegations of misconduct.
These risks present serious problems for any attorney involved with a medical marijuana business dispute. As an initial matter, an attorney who deliberately employs litigation strategies solely to conceal criminal activity or eliminate evidence of criminal conduct is potentially on dangerous ground from an ethical or even criminal perspective. The attorney therefore must be clear about his or her own obligations to uphold the law. At the same time, an attorney must be cognizant of the need to ensure that his or her client's right to avoid self-incrimination is not compromised unnecessarily through statements made in litigation.
Avoiding Litigation
The best way to mitigate the risk of unnecessary or damaging admissions is to avoid litigation entirely. Therefore, the best legal advice to a client involved in a potential dispute involving the medical marijuana industry may be to behave like a reasonable and compassionate human being and to recognize the perilous position facing both sides if litigation ensues. Often, disputes can be resolved informally when both parties receive appropriate counsel in this regard from the outset. However, even when that advice fails, there still are a number of strategies that may mitigate the need for unnecessary admissions.
The most obvious strategy is to arbitrate disputes rather than litigating them in court. Arbitration generally can be conducted without public filings that may draw the attention of law enforcement. Further, an arbitrator can be instructed to issue a summary opinion devoid of any factual findings that later could be used against the parties. Proposed findings of fact that minimize the prosecution risk may be presented by the parties to the arbitrator.
Arbitration also gives the parties the opportunity to agree to other strategies that may reduce the probability of creating a sworn record that can be used against the participants. For example, parties may agree to forego depositions, sworn interrogatory responses, and transcripts of hearings (or key parts thereof). Similarly, arbitration may be conducted using procedures for discovery and the handling of documents and pleadings that will reduce the risk that law enforcement or regulators will gain access to them.(fn3)
Minimizing Risks During Litigation
If a medical marijuana business chooses to litigate in court, there are options available that may offer some protection to the business. The first is to conduct a mediation before or early in the litigation process. A skilled mediator, sensitive (or sensitized) to the issues, can use the risk of litigation and of criminal prosecution or regulatory action to convince both sides in a dispute to make concessions that would be unlikely in an ordinary civil dispute. Mediation also will provide both sides useful information regarding the allegations the other side is likely to make. Often this information-particularly if it involves allegations of illegal or improper conduct-may move the parties toward settlement. All of this also may raise ethical issues, as discussed later in this article.
If mediation fails, careful stipulations of fact, procedure, or law may allow the parties to present the gravamen of their dispute to a court without making public admissions concerning facts that could be used against them in a criminal prosecution. For example, the parties may agree that certain facts or allegations will not be presented or discussed in the litigation or...
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