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Risk Allocation in Cannabis Contracts

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One of the main reasons why I am such a vocal supporter of written cannabis contracts is allocation of risk and liabilities. Parties to a cannabis contract have a number of ways that they can allocate risks and liabilities that they just won’t have in a “handshake” deal. Today I’ll explore six of the top ways to allocate risk in a cannabis contract.

#1 Disclaimers

If you’ve ever read through a cannabis contract, there’s a good chance you’ve seen disclaimers of representations, warranties, or guarantees. By making a disclaimer, a party is refusing to make an express or implied warranty (promise) about a certain condition. If a seller sells a piece of equipment on an as-is basis and disclaims all warranties about the product, then if the product does not perform as desired, the buyer may not have recourse (except for warranties that can’t be disclaimed by law). Without the disclaimer, there may be implied warranties that give the buyer recourse against the seller.

Disclaimers can be general, such as a disclaimer of any warranty not specifically made in the contract. Even more generally, “as-is” language can serve as a disclaimer of sorts (i.e., “buyer acquires the asset as-is, with all faults, and without any warranty from seller”). They can also be specific, such as a specific disclaimer of the implied warranty of merchantability. In many cases, you’ll see both the general disclaimer, followed by non-exclusive carveouts of warranties.

A savvy counterparty will often push back against one-sided disclaimers. In most cannabis contracts where cannabis products are transferred (intellectual property licenses, white label contracts, distribution agreements, manufacturing agreements, supply agreements, etc.), the buyer or transferee will insist that the manufacturer/supplier/seller makes certain representations explicitly, such as that the products will be fit for human consumption, comply with applicable laws, and so on. I see lots of negotiation around these provisions, as they can make or break a cannabis contract.

#2 Assumption of Risks

Cannabis contracts can also force certain parties to assume specific risks. Risk assumption comes up frequently in contracts with percentage splits. Imagine a cannabis distribution contract where a distributor agrees to sell a manufacturer’s products in exchange for 15% of the profits. Usually, when the distributor sells the goods and is paid, it pockets its cut and remits the rest to the manufacturer.

These kinds of arrangements involve some deal of trust by the manufacturer – trust that the distributor will sell the goods, will sell them at the desired purchase price, will promptly collect payment, and will promptly remit payment. Most of this can be dealt with in a contract. However, the first part – making promises about sales levels – obviously is a risk for many distributors.

I have seen plenty of cannabis contracts like this where one party assumes the risk that some of the above things will not happen right. For example, if the distributor has to buy the cannabis goods from the manufacturer, it will assume the risk that it won’t resell the goods. If the contract is a consignment arrangement, the manufacturer may take the financial hit if the manufacturer can’t sell the goods.

Often, risk assumption is not expressed affirmatively but happens by virtue of assignment of specific obligations to a specific party, or even through warranty disclaimers as noted above. To really do a good job here, the parties will need to think of every step in performance of the contract, what could go wrong at each step, and who should be on the hook if/when things do go south. I’ve been writing these kinds of cannabis contracts consistently for more than five years now and can tell you that there are tons of blind spots that can lead to massive financial hurt if parties don’t consider these impacts early on.

#3 Risk of Loss/Title

Related to the last point, in purchase and sale or commercial-type contracts where products are sold or transported from one party to another, the concepts of risk of loss and transfer of title are immensely important. Our firm does a lot of international work and has seen first-hand the massive adverse impacts of failure to address these provisions in international shipping. But because cannabis deals don’t involve international (or even interstate) shipment, cannabis companies overlook these basic concepts, often to their downfall. I’ll go over why they are important now.

First, let’s talk title. Title to a good means ownership of that good. One can hold title to a good without being in possession of that good. If you lend your friend your phone, your friend possesses the phone but doesn’t hold title to it (you do). In some distribution contexts, the manufacturer may hold title to the good, while the distributor transports it to a retailer. This is consignment. In the consignment cannabis contract, the manufacturer will sell the good directly to the retailer, at which point title will transfer from the manufacturer to the retailer. The distributor will never hold legal title, will only possess the good while performing services, and will generally be paid as a service provider. Keep in mind that the parties can negotiate a different transfer of title, i.e., upon pickup by the distributor.

Second, let’s talk risk of loss. This just refers to who bears responsibility if a good is stolen, damaged, destroyed, lost, etc. In the foregoing example, let’s assume that the manufacturer and retailer sign a sales agreement before the distributor picks up the good for transport. The manufacturer may want risk of loss to transfer to the retailer upon the distributor’s pickup, whereas the retailer will want risk of loss to transfer upon delivery. The reason for this should be clear – neither party will want to bear the risk that the distributor loses the good. But, somebody will have to. One way to address this is to pick a time to allocate risk of loss between manufacturer and retailer, and separately have distributor bear responsibility in the distribution contract.

Third, let’s talk about acceptance and rejection. These concepts are not the same as risk of loss and transfer of title, but often are mixed in and/or in the same part of the contract. In the example I’ve used, when the retailer receives the goods, it will have some fixed period of time (say 48 hours) to inspect the goods, and will be able to reject the goods for a specific set of reasons within that period. Title and risk of loss likely would already have transferred to the retailer, but upon rejection, the goods will be returned to the manufacturer.

As you can imagine, there are endless possibilities of ways to allocate risks and liabilities in the context of risk of loss and title. Inspection and rejection adds far more criteria. Cannabis contracts that are silent on these provisions are just begging to wind up in litigation.

#4 Indemnification

I explained indemnification in an earlier post, which I’ll quote here:

If you’re not familiar with indemnification, let’s go back to the purchase example. Say a retailer purchases edibles from a manufacturer, and customers get sick when they eat the edibles. And say those customers sue the retailer. The retailer didn’t make the edibles, so it would want the manufacturer to foot the bill for its defense and any damages that are awarded. This is called “indemnification.”

Here’s another example: Party A licenses its trademarks to Party B, a manufacturer and distributor, to make and sell branded goods. Party C decides that it is the real owner of these trademarks and sues Party B. Party B is going to be upset because it did not intend to infringe Party C’s trademarks and was probably promised in the cannabis contract that Party A actually owned the goods. With a good IP indemnification clause, Party B can force Party A to engage defense counsel and pay any costs associated with Party B’s defense.

Nobody wants to get hauled into court because the other party to a cannabis contract did something wrong. Indemnification is the gold standard for dealing with risks caused by a contracting party.

#5 Limitations of Liability

I also explained these clauses in my earlier post:

If you’ve ever looked at a written contract, you’ve probably seen a provision about halfway through in all caps with a heading that reads, “LIMITATION OF LIABILITY.” As the name suggests, these provisions are intended to narrow or eliminate liabilities of one or both parties. They generally include provisions that carve out things like consequential and incidental damages (i.e., damages that are not a direct result of a breach) and punitive damages (i.e., damages that are intended to punish a wrongdoer). But limitations of liability may also place caps on one or both parties’ damages, which can be a big advantage in a dispute.

Generally speaking, contract disputes do not lead to punitive damages, which are damages that are intended to punish a wrongdoer. These are usually reserved for certain “torts” like battery, interference with a third-party contract, etc. Some cases may involve both contract and tort claims where punitive damages may be on the table. A carefully crafted limitation of liability clause in a cannabis contract may be able to touch on both (depending on applicable state law).

That said, even if punitive damages are not available in contract disputes, incidental and consequential damages may be on the table, though they are often hard to get. Imagine that a cannabis company has a water leak and hires a plumber to fix it. The plumber does not perform work in accordance with the contract and the business floods overnight. The business is forced to shut down for a week and loses tens of thousands of revenues. The direct damages in the dispute will be fixing the negligent repair and maybe even some of the damage to the premises. The incidental and consequential damages may be the loss of revenue. While again, this can be hard to prove, it is very easy to disclaim those types of damages in a written contract so as to never need to worry about complex battles over damages.

#6 Caps

Caps are also a great way to shift risks. Caps can be used in all sorts of contexts. Limitation of liability clauses may have caps on damages in addition to damage carve outs. For example, a distribution contract may provide that except for certain cases of willful misconduct, the distributor’s maximum liability to the manufacturer may be the amounts paid by the manufacturer to the distributor in X period of time.

Indemnification provisions also often have caps. This comes up a lot when buying and selling businesses or business assets – and it’s usually the seller that pushes for them. Imagine selling a business for $750,000. If indemnification clauses are unlimited, and a dispute arises that requires seller-side indemnification, the seller may end up paying the buyer more than it was paid for the business. So as you can imagine, sellers will often push to cap indemnification at some percentage of the purchase price. In my experience in non-cannabis deals, the percentage is often relatively low. In cannabis deals, I often see a much higher percentage. That tends to be due to the fact that there are often (not always) many more potential issues for buying a cannabis business than most other kinds of businesses.

As an aside, M&A transactions sometimes also include deductibles as well. In those cases, a party seeking indemnification won’t be entitled to indemnification unless it has some minimum threshold of losses. If that number is $50,000, and the buyer seeking indemnification only had $40,000 in damages, it won’t be indemnified. Once it hits that $50,000 mark, it can either (depending on the cannabis contract’s terms) be indemnified for the entire basket of damages, or only for what’s over the $50,000 mark.


Parties to cannabis contracts have myriad tools at their disposal when it comes to shifting risks and liabilities. Of course, this can really only be done well in a written contract.



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How Legal is CBD, Really?

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The legality of CBD remains a subject of considerable debate. Despite the fact that many CBD companies[1]  have now existed for more than a decade, the legal context surrounding this non-intoxicating cannabinoid remains muddy for the average shopper. In this guide, we’ll explore the legality of CBD in detail, examining the implications along the way.

History of CBD Laws

Extracts of Cannabis sativa have been widely prepared and sold for centuries beyond count. It’s unclear exactly when human beings and cannabis intersected, but it’s believed cannabis has been a part of daily life at least as long as apples and potatoes.

 

It’s only recently that laws have turned discriminatory toward cannabis. Starting in Europe in the 19th century, this anti-cannabis fervor eventually reached the United States, spurring the “Reefer Madness” craze that ultimately led to cannabis being illegalized with the 1937 Marihuana Tax Act.

 

In 1970, the Controlled Substances Act sealed the deal, and hemp was not grown in considerable acreage until academic pilot programs began resurfacing in the early 2000s. By the early 2010s, legal loopholes were identified at the federal level that allowed CBD commerce to emerge online.

 

In 2014 and 2018, the United States Congress gave CBD the nod with Farm Bills that facilitated hemp cultivation and commerce. Not much has changed in the ensuing years, however, leading to a hemp economy that has begun to stagnate in some sectors.

Recent Developments in CBD Legislation

Cannabis-related measures continue to be proposed at both the state and federal level. Few of them focus specifically on CBD, however, which remains in a gray area loosely delineated by the 2018 Farm Bill and subsequent clarifications from the FDA, DEA, and USDA.

 

It appears the situation with CBD will remain unclear federally for the foreseeable future. There seems to be an “unwritten rule” that upstanding CBD companies will not run afoul of federal agencies as long as their conduct meets a certain unofficial threshold.

 

The FDA continues to issue warning letters to CBD companies that violate the dictates of the 2018 Farm Bill, but enforcement is rare and usually amounts to relatively small fines. At the state level, legislators continue to evolve their stances on CBD and related products, mainly in an effort to siphon tax revenue.

Potential Future CBD Regulations

Over time, the slew of largely unrelated hemp and cannabis laws continuously being produced by Congress may begin to amount to a comprehensive federal stance on cannabinoids. At this current juncture, however, cannabinoid regulations ever more commonly have less to do with the shopper’s interests and more to do with securing government revenue.

 

The ideal solution that hemp proponents have expounded for years, namely that CBD be judged an over-the-counter substance, appears further and further away as time goes by. At present, it seems the de facto approach is to not address the underlying legality of cannabinoids but to instead determine how best they should be taxed.

 

It might not be an ideal situation, but for the average CBD producer, this is still good news. There was a time in the not-so-distant past when it seemed the federal government was on the verge of attempting to ban CBD products outright. Though the current circumstances may remain muddy, at least there’s no longer any indication that the federal government is antithetical to hemp and CBD overall.

CBD Legality: The Bottom Line

As we finish up, it’s important to carefully address a few final points:

CBD regulations vary by state

For most intents and purposes, CBD can be considered federally legal. Each state has its own laws and regulations pertaining to CBD and other cannabinoids, however, some of which are more restrictive than others. CBD laws can be restrictive both in states that are firmly anti-cannabis and in those that have newer adult-use cannabis industries that suffer from direct competition with online CBD vendors.

No medical claims

CBD is certainly not legal when it is advertised as offering medical benefits. It’s fine to reference evidence that CBD might be useful for a particular ailment. To outright say that CBD treats or cures a medical condition, is tantamount to asking for the scrutiny of the federal government.

Professionalism first

The CBD companies that are currently succeeding are those that go above and beyond. Clean products, transparent communication, impeccable certification: these are the hallmarks of the future’s top CBD brands. Focusing on quality will make it less likely to flub regulations.

Respect CBD

CBD is a powerful compound, and it comes from a plant that has an amazing power to heal. Put CBD’s benefits first and foremost, and you’ll find that your company naturally begins to fit the parameters that both shoppers and regulators approve of most.



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California Cities: Prohibition Doesn’t Work

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California has a population of nearly 40 million, six years of cannabis licensing, but only has about 1,200 licensed dispensaries. These stores are mostly spread out in highly populated areas like Los Angeles, San Francisco, and so on. The problem is that many California cities still prohibit cannabis licensing, even in places where a majority of the locals approved the state’s recreational cannabis program in 2016. This is a massive problem and is one of the key reasons the illegal market thrives. Let’s look at why that is the case and what these cities can do to change it.

Why prohibition doesn’t work

When the government prohibits something, there is an existing market for that thing, and a fear on the part of the government (justifiable or otherwise) that failure to prohibit it would lead to some kind of societal harm. Because there is an existing market for the thing, there is necessarily some kind of demand for it. If the government bans the thing, some people will realize that the potential cost (prison, fines, stigma, etc.) outweighs the benefit, and demand will go down.

But others will find that the benefit outweighs the potential cost, no matter how high it is — which is why people still roll the dice in countries like Singapore that will execute drug traffickers. So while prohibition may decrease demand, it won’t end it. And so long as there is some demand, again, some people will roll the dice.

This is exactly what has happened in the decades since cannabis was prohibited. If prohibition were an effective deterrent, then you would expect there not to be a high level of use or incarceration. But we’ve seen the opposite. There have been millions of people arrested and incarcerated for violating the Controlled Substances Act and state-law counterparts. It’s pretty clear then that these laws don’t have their intended effects, which brings me to the next point.

What problems are California cities creating?

When California voters passed the state’s flagship recreational licensing law in 2016, California cities were given an immense amount of control over the new industry. Perhaps realizing the initiative would face strong opposition if it took power away from cities, the drafters included provisions that allowed California cities to completely ban cannabis activities within their limits. These provisions led to local bans in vast swathes of the state.

While cities have slowly “come online” over the years, there are still vast swathes of the state without legal access to cannabis. In fact, many cities even sued the state when it tried to officially sanction statewide delivery rules. What this means is that there are still many California cities that prohibit cannabis.

If those cities are trying to eliminate local cannabis markets, I’ve got a bridge to sell them. Prohibition didn’t work before the state legalized cannabis, and it certainly won’t work when the state won’t lift a finger on enforcement. California cities that keep their bans alive are only bolstering their illegal markets and making it more difficult for the legal market to survive.

What California cities should be doing to combat the illegal market

I recently corresponded with Hirsh Jain of Ananda Strategy, who believes that the state needs 4,000 to 5,000 dispensaries to carry the legal market. And those dispensaries shouldn’t just be in Los Angeles or San Diego. They’d need to be dispersed across the state so that people have access and the legal dispensaries could compete with the illegal ones (and ideally put them out of business). If more California cities don’t end prohibition, illegal dispensaries and delivery services will continue to operate whether they like it or not.

That said, there are other things that California cities can do to combat the illegal market without allowing brick-and-mortar sales. One big one would be to allow outside delivery services to deliver into their borders. While the state did pass a law attempting to expand statewide access to medical cannabis deliveries, that fails to include the much larger recreational market. It also likely excludes potential medical cannabis purchasers who don’t want to or don’t have the resources to obtain a physician’s recommendation or medical marijuana ID card (MMIC).

Expanding retail deliveries would be a win-win for the legal market and cities alike. Yet for some reason, California cities fought it tooth and nail. While those cities may have thought they won, the real victory belonged to the illegal market, which continues to grow and grow.


If the legal market is to survive, California cities are going to have to make compromises when it comes to cannabis prohibition. After all, cannabis is still being sold within their borders. For some of my thoughts on California’s problematic illegal market, check out these posts:





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The Good ‘Dirty Little Secret’ about Weed

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cannabis marijuana secrets

 

You may remember that Justin Timberlake once said, “Some people are just better on weed”. Well, if he was referring to people with ADHD or ADD, he may be right.  While many studies on marijuana for ADD or ADHD show great results to help people with “scatter” brain start to focus, UFC Sean O’Malley is the latest person to preach the plants’ benefits for focus.

Bantamweight champion Sean O’Malley breaks the stereotype associated with marijuana users. At 29, he incorporates marijuana into his training regimen to achieve a state of intense focus, which appears to yield positive results.

 

In an interview with Demetrious Johnson, O’Malley clarified misconceptions about his marijuana use: “Contrary to popular belief, I don’t consume as much as people assume.” Asserting his professionalism as an athlete, he claims to excel in managing his recovery compared to others in the UFC, attributing it to his disciplined habits and routines.

 

Recognizing the potential drawbacks of smoking on lung health and conditioning, O’Malley adopts measures to safeguard his fitness standards. He opts for vaporizing marijuana, particularly during training camps, using a high-quality vaporizer once daily instead of traditional methods like joints, bongs, pipes, or dabbing.

 

O’Malley reveals that during specific training sessions, such as longer, lower-intensity workouts lasting up to 60 minutes, he trains while under the influence, leveraging marijuana to enhance his focus. However, he acknowledges the importance of using it as a tool responsibly, cautioning against falling into unproductive habits like aimlessly watching YouTube while high.

 

The upcoming UFC 299 main event on March 9 sees O’Malley defending his 135-pound championship title for the first time against his rival, Marlon “Chito” Vera. Seeking redemption for his only career loss, which Vera inflicted upon him at UFC 252 in August 2020, O’Malley is determined to emerge victorious.

 

The Science Behind O’Malley’s Approach

 

Sean O’Malley’s use of cannabis to increase concentration during training begs interesting concerns concerning the relationship between marijuana use and athletics. Cannabis includes chemicals like THC and CBD that interact with the brain’s endocannabinoid system to influence a variety of physiological activities, despite being frequently linked to relaxation and altered perception.

 

Studies suggest that low to moderate doses of THC may improve focus, creativity, and cognitive performance in some individuals, potentially explaining O’Malley’s reported ability to “hyper-focus” during workouts. Additionally, CBD, another prominent compound in cannabis, has been linked to reduced anxiety and improved recovery, which could complement O’Malley’s training regimen.

 

However, the effects of cannabis on athletic performance remain complex and multifaceted. While some athletes may experience benefits in terms of concentration and relaxation, others may encounter impairments in coordination, reaction time, and cardiovascular function. Furthermore, individual responses to cannabis can vary widely based on factors such as dosage, method of consumption, and personal tolerance levels.

 

Experts caution that while cannabis may have its place as a performance-enhancing tool for certain athletes, careful consideration must be given to its potential drawbacks, including the risk of dependence, negative effects on lung health, and legal implications, particularly in professional sports settings.

 

O’Malley’s method offers as an engaging case study for negotiating the complex link between cannabis use and sports performance as researchers continue to investigate the physiological and psychological impacts of cannabis. O’Malley starts a wider discussion about the place of cannabis in contemporary sports training and competition by illuminating the science underlying his unorthodox training techniques.

 

Managing Marijuana Use in Professional Athletics

 

Navigating the use of marijuana in professional athletics involves a delicate balance between personal choice, regulatory compliance, and performance optimization. Despite evolving attitudes toward cannabis, organizations like the UFC maintain stringent anti-doping policies, prohibiting its use above specified thresholds during competition periods. Athletes such as Sean O’Malley must therefore carefully manage their marijuana consumption to ensure adherence to these guidelines while still leveraging its potential benefits for training and recovery.

 

For O’Malley and others incorporating cannabis into their routines, managing marijuana use requires strategic planning and adherence to regulatory standards. This involves selecting consumption methods and timing consumption to minimize the risk of exceeding allowable THC thresholds during testing. O’Malley’s transparency about his usage patterns and advocacy for responsible consumption practices set a precedent for athletes navigating the complex landscape of drug policy in professional sports.

 

Professional sports may see more changes in policies and attitudes as talks about decriminalizing and legalizing cannabis continue. Athletes who are willing to share their personal stories and advocate for more nuanced approaches to drug policy, such as O’Malley, are vital in influencing this conversation. Going forward, managing the changing link between cannabis usage and sports performance will need constant communication and cooperation between players, coaches, and regulating authorities.

 

O’Malley’s Training Rituals: Balancing Intensity and Recovery

 

Gain insight into Sean O’Malley’s methodical strategy to integrating cannabis into his routine while striking a balance between intensity and recuperation by learning about his training rituals. To maximize effectiveness in the octagon, O’Malley’s training regimen combines focused rest times with intense sessions in a calculated manner.

 

The understanding that efficient recuperation is equally as important as intense exercise is at the heart of O’Malley’s training philosophy. O’Malley makes sure that his body can adjust and get stronger in response to the demands of his training routine by using restorative habits like healthy eating, drinking enough of water, and getting enough sleep. When utilized responsibly, cannabis is another weapon in O’Malley’s toolbox that he can employ to improve concentrate during longer, lower-intensity sessions without jeopardizing his recuperation.

 

O’Malley is a perfect example of the value of an all-encompassing approach to sports training as he strikes a balance between effort and recuperation. O’Malley reduces the chance of injury and fatigue while simultaneously optimizing his performance capacity by placing equal emphasis on restorative techniques and physical activity. O’Malley’s training regimens are always being improved, and his techniques are proof of the need of smart, individualized approaches to physical preparation for success in the UFC and other competitions.

 

Bottom Line

 

Sean O’Malley’s pioneering approach to incorporating cannabis into his training regimen challenges stereotypes and opens up discussions about its potential benefits and drawbacks in professional athletics. His transparency and advocacy for responsible usage set a precedent for athletes navigating complex drug policies while seeking performance optimization. As attitudes toward cannabis continue to evolve, ongoing dialogue and collaboration among athletes, coaches, and governing bodies will be crucial in shaping policies that balance regulatory compliance with individual health and performance goals. O’Malley’s dedication to balancing intensity and recovery underscores the importance of personalized, holistic approaches to training, serving as a blueprint for athletes striving for success in high-level competitions like the UFC.

 

CANNABIS AND ADD/ADHD, READ ON…

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