🌿 Overview: Cannabis Business Disputes

California's legal cannabis industry operates under unique circumstances. Despite federal prohibition, California courts now enforce cannabis business contracts - a major shift from the historical approach where courts refused to enforce "illegal" agreements. If you're in a cannabis business dispute, you have real legal remedies.

💡 Key Development: Contracts Now Enforceable

California courts have shifted dramatically. Following cases like Harrens Partners, LLC v. Kessler (2023), cannabis contracts are now enforceable in California courts despite federal illegality. This means partnership agreements, investor contracts, vendor agreements, and license-related contracts can be enforced through litigation.

Common Cannabis Business Disputes

👥 Partnership Disputes

Disagreements over ownership percentages, profit distribution, management control, or partner buyouts in cannabis businesses.

📄 License Transfer Issues

Failed transfers, undisclosed license conditions, regulatory violations affecting transfer, or disputes over license value.

💰 Investor Disputes

Failed capital calls, undisclosed risks, misrepresentation of license status, or disputes over equity/debt terms.

📦 Vendor Non-Payment

Unpaid invoices for products, services, equipment, or consulting. Cannabis businesses owe you money? You can collect.

⚠ Federal Illegality Creates Unique Challenges

While California courts will enforce contracts, several complications remain:

  • Banking issues: Wire transfers and payments may be complicated
  • Bankruptcy unavailable: Federal bankruptcy courts won't hear cannabis cases
  • Tax issues: Section 280E limits federal tax deductions
  • Cross-state issues: Other states may not enforce California cannabis judgments

Whether You Sent OR Received a Demand Letter

This guide covers both sides of cannabis business disputes:

  • If you're sending a demand: I explain how to structure your claims and calculate damages under California law
  • If you received a demand: I explain your response options, potential defenses, and negotiation strategies

💼 Types of Cannabis Business Disputes

Each type of cannabis business dispute has unique characteristics and legal strategies.

Partnership Disputes

Cannabis partnerships often involve informal arrangements that become contentious as the business grows:

  • Ownership disputes: Disagreements over who owns what percentage
  • Profit distribution: Disputes over how profits should be split
  • Management control: Who makes operational decisions
  • Capital contributions: Disputes over who contributed what and when
  • Partner buyouts: Valuation disputes and exit terms
  • Breach of fiduciary duty: Self-dealing, diversion of opportunities

💡 DCC Ownership Disclosure Requirements

Under MAUCRSA, all owners with 20% or greater interest must be disclosed to the DCC. "Hidden" partners or undisclosed equity arrangements can create regulatory problems and affect contract enforceability. If ownership wasn't properly disclosed, this affects both regulatory standing and contract claims.

License Transfer Disputes

Cannabis license transfers involve unique regulatory complexities:

  • Failed transfers: Deals that fall through due to regulatory issues
  • Misrepresentation of license status: Undisclosed violations, conditions, or pending actions
  • Local approval issues: Transfers require local jurisdiction approval
  • Earnest money disputes: Who keeps deposits when transfers fail
  • Due diligence failures: Undisclosed liabilities or compliance issues

Investor Disputes

Cannabis investments often involve complex equity and debt structures:

  • Securities law issues: Many cannabis investments are securities
  • Misrepresentation claims: False statements about license status, revenue, or compliance
  • Failure to make distributions: Promised returns not paid
  • Capital call disputes: Disputes over additional funding requirements
  • Conversion claims: Investors' funds used for unauthorized purposes

Vendor Non-Payment

Cannabis businesses owe money to vendors, suppliers, and service providers:

  • Product suppliers: Unpaid invoices for cannabis products
  • Equipment vendors: Cultivation equipment, packaging, processing equipment
  • Service providers: Security, compliance consulting, legal, accounting
  • Contractors: Construction, build-out, installation
  • Landlords: Unpaid rent for cannabis facilities

⚠ Collection Challenges in Cannabis

Collecting from cannabis businesses presents unique challenges:

  • Limited banking means many assets are in cash
  • Licenses are valuable but transfer requires DCC approval
  • Federal bankruptcy protection is unavailable
  • Traditional collection agencies may refuse cannabis-related debts

✅ Evidence Checklist

Gather this documentation to support your cannabis business dispute claim.

📄 Contract Documents

  • ✓ Operating agreement or partnership agreement
  • ✓ Investment agreements and term sheets
  • ✓ Purchase/sale agreements for license or business
  • ✓ Vendor contracts and invoices

🌿 License Documentation

  • ✓ DCC license and any conditions
  • ✓ Local permit/authorization documents
  • ✓ Ownership disclosure filings
  • ✓ Transfer applications or denials

💰 Financial Records

  • ✓ Capital contribution documentation
  • ✓ Bank statements and wire transfers
  • ✓ Distribution records and K-1s
  • ✓ Metrc/track-and-trace sales reports

📩 Communications

  • ✓ Emails and text messages about the dispute
  • ✓ Representations made before signing
  • ✓ Investor materials and pitch decks
  • ✓ Payment demands and responses

📈 Calculate Damages

Cannabis business damages can be substantial given license values and industry cash flow.

Damage Type Description Calculation
Lost Investment Capital contributed that was lost due to fraud or breach Total contributions + interest
Lost Profits Profits that would have been earned but for the breach Projected profits with reasonable certainty
License Value Value of license wrongfully taken or diminished Fair market value of license
Unpaid Invoices Amounts owed for products or services Invoice amounts + interest
Equity Value Value of ownership interest wrongfully diluted or taken Percentage x business valuation

📊 Sample Damages Calculation - Partner Buyout Dispute

Example: 25% partner forced out of dispensary with $4M annual revenue

Original capital contribution $150,000
Business valuation (2x revenue method) $8,000,000
25% ownership interest value $2,000,000
Unpaid distributions (2 years) $200,000
Interest at 10% $40,000
TOTAL POTENTIAL CLAIM $2,240,000+

💡 License Valuation is Critical

California cannabis licenses have significant value that varies by type and location. Retail licenses in desirable locations can be worth $1-5M+. Valuation typically considers: license type, location, local market saturation, remaining term, compliance history, and attached real estate.

📝 Sample Demand Language

Customize these templates for your cannabis business dispute demand letter.

Partnership Dispute - Opening
I am writing on behalf of [CLIENT NAME] regarding their ownership interest in [COMPANY NAME], a California limited liability company holding DCC License No. [LICENSE NUMBER]. As a [PERCENTAGE]% owner of the company, my client has been improperly excluded from management decisions, denied access to company financial records, and has not received distributions to which they are entitled under the Operating Agreement dated [DATE].
License Transfer Misrepresentation
Prior to executing the Asset Purchase Agreement dated [DATE], you represented that DCC License No. [LICENSE NUMBER] was in good standing with no pending enforcement actions, outstanding violations, or conditions that would impair transfer. My client relied on these representations in agreeing to pay $[AMOUNT] for the license and associated business assets.

We have since discovered that at the time of your representations:
1. The license had an outstanding Notice of Violation dated [DATE] for [VIOLATION];
2. The DCC had opened an investigation regarding [ISSUE];
3. [OTHER UNDISCLOSED ISSUE].

These misrepresentations constitute fraud under California Civil Code Section 1709 and entitle my client to rescission of the agreement and return of all amounts paid.
Investor Dispute - Misrepresentation
In [DATE], my client invested $[AMOUNT] in [COMPANY NAME] in exchange for a [PERCENTAGE]% equity interest. This investment was made in reliance on representations in your investor materials including:

1. That the company held a valid DCC [LICENSE TYPE] license;
2. That the company had annual revenues of approximately $[AMOUNT];
3. That investor funds would be used for [STATED PURPOSE].

We have discovered these representations were materially false. [DESCRIBE ACTUAL FACTS]. Under California law, my client is entitled to rescission and return of their full investment of $[AMOUNT], plus interest at the legal rate.
Vendor Non-Payment Demand
[VENDOR NAME] provided [PRODUCTS/SERVICES] to [CANNABIS COMPANY] pursuant to our agreement dated [DATE]. Despite satisfactory delivery and performance, the following invoices remain unpaid:

Invoice No. [NUMBER] dated [DATE]: $[AMOUNT]
Invoice No. [NUMBER] dated [DATE]: $[AMOUNT]
TOTAL OUTSTANDING: $[TOTAL]

Demand is hereby made for payment in full within fourteen (14) days. If payment is not received by [DEADLINE DATE], we will pursue all available legal remedies including filing suit and seeking prejudgment attachment of assets including your DCC license.
Arbitration Notice (If Required)
Pursuant to Section [X] of the Operating Agreement dated [DATE], any disputes arising under the agreement are subject to binding arbitration administered by [JAMS/AAA] in [CITY], California.

This letter constitutes formal notice of my client's intent to initiate arbitration proceedings if this dispute is not resolved within [30] days. My client's claims include:

1. Breach of fiduciary duty;
2. Breach of the Operating Agreement;
3. Accounting and access to books and records;
4. Damages in an amount to be proven at arbitration.

We remain willing to discuss resolution prior to filing. Please respond within [14] days.

🚀 Next Steps

Here's how to proceed with your cannabis business dispute.

1. Review Your Agreements ▾

Before taking action, carefully review all relevant documents:

  • Check for arbitration clauses - most cannabis contracts require arbitration
  • Review dispute resolution procedures and notice requirements
  • Identify choice of law and venue provisions
  • Understand the specific terms allegedly breached
  • Look for attorney fee provisions (who pays if you win)
2. Gather Documentation ▾

Collect and preserve all relevant evidence:

  • All signed agreements and amendments
  • Financial records showing contributions and distributions
  • Communications (emails, texts, letters) about the dispute
  • DCC license documentation and correspondence
  • Metrc reports and financial statements
3. Send Formal Demand ▾

A well-crafted demand letter often resolves disputes:

  • Send via certified mail with return receipt
  • Clearly state the factual basis for your claim
  • Specify the legal violations and damages
  • Set a reasonable deadline for response (14-30 days)
  • Indicate willingness to discuss resolution
4. Consider Regulatory Implications ▾

Cannabis disputes may have regulatory dimensions:

  • Ownership disputes may require DCC notification
  • Undisclosed owners can result in license issues
  • Compliance violations may affect contract claims
  • Consider whether regulatory complaints are appropriate
5. Pursue Legal Remedies ▾

If negotiation fails, formal legal action may be necessary:

  • Arbitration: If required by contract, file demand with JAMS or AAA
  • Lawsuit: File in California Superior Court if no arbitration clause
  • Provisional remedies: Consider attachment, TRO, or receiver if assets at risk
  • Mediation: Many contracts require mediation before arbitration/litigation

💡 Cannabis Contracts ARE Enforceable

Don't let anyone tell you that cannabis contracts can't be enforced because of federal law. California courts now routinely enforce cannabis business agreements. I personally handle these disputes and have seen successful outcomes for clients on both sides of cannabis contract claims.

Need Help With Your Cannabis Business Dispute?

I personally draft demand letters for cannabis business disputes. Flat fee for demand letters: $450. Contingency available for larger claims.

Schedule Consultation Email Me