Ohio Court Declares Cannabis Sale Contract Illegal, Highlights Ongoing Legal Risks
In a significant decision for the cannabis industry, a federal magistrate judge in Ohio recently dismissed a breach of contract suit involving the $5 million sale of a cannabis business, citing the federal prohibition against marijuana as the primary reason for the ruling. Consistent with a handful of other federal court rulings that have refused to enforce cannabis-related contracts due to the conflict with federal law, this decision underscores the ongoing legal risks for businesses operating in the cannabis space.
The case, CCH Acquisitions LLC et al. v. J&J&D Holdings LLC et al., centered on a 2023 agreement between J&J&D Holdings LLC and CCH Acquisitions LLC to sell both a cannabis business and the underlying property. The sale included cannabis plants, seeds, tissue cultures, and a license to cultivate cannabis. However, after one of the defendants failed to obtain necessary approval from the state licensing authority, the defendants terminated the agreement. CCH Acquisitions, along with other plaintiffs, filed a lawsuit alleging breach of contract.
J&J&D Holdings and co-defendants argued that the contract itself was illegal because it involved the sale of cannabis and other activities prohibited under the federal Controlled Substances Act (CSA). The defendants’ bid to dismiss the lawsuit was granted by U.S. Magistrate Judge Kimberly A. Jolson, who agreed that the contract was so intertwined with the illegal sale of cannabis that the federal court could not enforce it.
Judge Jolson noted that while some courts have upheld contracts between cannabis businesses, this contract violated federal law. The judge pointed to the specific provisions of the agreement requiring the purchase of cannabis plants and a license to cultivate cannabis, both of which are prohibited by federal law. Despite the evolving landscape of cannabis law, including proposed rulemaking to reschedule cannabis, the judge concluded that federal law still considers the sale and cultivation of marijuana illegal.
The ruling also applied to the plaintiffs' claim for specific performance (i.e., forcing the defendants to complete the contract), which the judge dismissed, stating that such an order would also violate the CSA. Similarly, the court could not award damages, as doing so would require valuing the illegal cannabis business, which is not permissible under federal law.
This ruling reinforces a longstanding legal principle: contracts involving illegal activities are void and unenforceable. It also illustrates the ongoing tension between state and federal cannabis laws, highlighting the challenges faced by businesses in the industry. For cannabis companies entering contracts, it is essential to seek advice from attorneys experienced in this space. Knowledgeable legal counsel can help draft agreements with provisions designed to mitigate the risk of successful challenges to enforceability. Until federal law evolves to align with state legalization efforts, navigating these legal complexities will remain a significant challenge for the cannabis industry.