Why is Arbitration Ideal for Resolving Cannabis Industry Disputes?

Kyle-Beth Hilfer spoke on a New York State Bar Association panel: “Why is Arbitration Ideal for Resolving Cannabis Industry Disputes?” The September 2023 panel discussed the unique advantages of arbitration for cannabis industry participants. Ms. Hilfer addressed arbitration procedural advantages, remedies, and dispute resolution clause drafting in her remarks.

The full program is available to stream here. This blog contains some of Ms. Hilfer’s key insights the use of arbitration to resolve cannabis industry disputes.

What are the advantages of arbitration for cannabis industry disputes?

• Cannabis disputes are often complex and can be expensive to resolve in court.
• Arbitration offers a more efficient and cost-effective way to resolve cannabis disputes.
• Speed is critical for most cannabis industry disputes since the cannabis product loses value the longer it sits. Arbitration can move much more quickly than the court system.
• Arbitration offers confidentiality to its participants, whereas court filings are typically available publicly. (For more on confidentiality in arbitration, click here.)
• Parties to a cannabis industry dispute can choose their arbitrator. They may want to screen candidates to identify those who are not biased against the industry, have experience with the industry, understand how to grant equitable remedies, and run an efficient arbitration process.

What powers does an arbitrator have that are important for cannabis industry disputes?

• In addition to providing monetary awards that are enforceable in courts, arbitrators are empowered to provide emergency relief, sometimes within days. Such remedies can be critical to preserving the plant. In addition, arbitrators may be persuaded to award long term injunctive relief, specific performance, and a range of other equitable remedies.
• In certain states, the arbitrator may be able to appoint a receiver in the event of bankruptcy.
• An arbitrator may choose to bifurcate proceedings and decide liability before damages in certain instances. A bifurcated proceeding may be more cost and time efficient, allowing disputants to move on quickly with their business goals.

What considerations should transactional attorneys give to drafting dispute resolution clauses in cannabis industry deals?

• Too often advocates use a “form” arbitration clause without thought for how it will affect arbitration proceedings if there is a dispute.
• When drafting an arbitration clause, a great resource is the American Arbitration Association’s Clause Builder. It offers customization options and even potential language to use.
• Keep in mind how an arbitrator thinks. Even in cannabis industry disputes, the first thing she will do is confirm her jurisdiction. She will want to see if she has the proper and all parties to a dispute in front of her. She will confirm the governing law based the contract.
• For cannabis industry disputes, governing law is particularly important. An ideal clause delineates applicable state law but also voids as a defense federal illegality or improper purposes. It may even provide for federal law to govern, except if contradicted by state law or the business operation is voided under federal law. 
• As the cannabis industry matures, consumer facing contracts in the cannabis industry, for example, loyalty programs, sweepstakes ,etc., may also incorporate arbitration clauses. Advocates need to be aware of the developing body of case law around mass arbitration and draft proactively to secure a cost-efficient process for cannabis industry disputes with consumers.
• Often arbitration clauses contain a carve out to go to court for intellectual property ownership or infringement disputes. Is that appropriate in the cannabis context? Federal statutory remedies under the Lanham Act, for example, may not be available due to the federal illegality of cannabis. Another carve out that frequently occurs is for injunctive relief. Do you need it? An arbitrator has authority to grant emergency and long term injunctive relief, and typically, the arbitrator will move more quickly than the courts with less publicity.

If you have questions about how to draft an arbitration clause for your cannabis transaction or you are interested in learning more about Kyle-Beth Hilfer’s arbitration services for cannabis industry disputes, click here.