With roughly half of U.S. states legalizing cannabis and an ever-increasing number of cannabis businesses, much of the social stigma surrounding cannabis has (thankfully) lifted. Seismic changes in public opinion and state laws, however, have not yet resulted in a change in federal law. Despite hopeful signs of potential change, marijuana remains a federally illegal Schedule I controlled substance.

The dichotomy between state-legal cannabis and federal illegality has a tendency to rear its head at the most inopportune time. For example, a recent string of federal court decisions has reinforced that drafting and enforcing cannabis-related contracts is an area fraught with peril, and courthouse doors can be slammed shut, potentially leaving cannabis businesses with no legal recourse for otherwise viable claims.

Illegal Contracts Are Typically Unenforceable
It’s a well-established principle of law that contracts concerning illegal conduct are unenforceable as a matter of public policy. For example, if you give a drug dealer $1,000 to buy heroin and the dealer has the audacity to stiff you, you have no legal recourse to sue for return of your $1,000. As a matter of public policy, courts will not lend aid in furtherance of criminal activity. This is a common law rule that most law students learn in their first year Contracts class.

As with all things cannabis, this analysis becomes infinitely more complicated in light of state legalization and regulation of marijuana while federal law maintains its unwavering prohibition. State-legal cannabis businesses are engaged in federally illegal activity—namely violations of the Controlled Substances Act of 1970 (“CSA”). (See, e.g., 21 U.S.C. §§ 841, 843(b), 844, 848; 18 U.S.C. § 1957.)

Because a regulated cannabis industry is practically impossible without the ability of cannabis businesses to enter into contracts, the issue of contract enforcement is usually identified by drafters of state cannabis laws. State laws often provide that the state’s public policy is that contracts related to state-legal cannabis business are enforceable. See, e.g., Mich. Comp. Laws § 333.27960(3); Ohio Rev. Code § 3780.33(I); Ill. Comp. Stat. 705/55-75; N.Y. CAN Law § 134(1). These provisions are critically important. It is not hyperbole to suggest that absent the ability to enforce contracts the entire state-regulated cannabis industry would collapse. Making contractual obligations stick is simply a prerequisite to doing business. Otherwise, customers, vendors, employees, suppliers, etc., would be free to ignore their obligations without consequence.

As the cannabis industry matures, lessons and practical considerations that were “front of mind” for the industry at the outset have an unfortunate tendency to become an afterthought. Worse yet, the prevalence of state-legal cannabis can lead the uninformed to blindly dive into this space without having a full grasp of the legal framework. Numerous cannabis businesses have learned this lesson the hard way when contract disputes wound up in federal court only to be dismissed because the federal court looked to federal law with respect to illegality. Contracting parties have been left with no recourse for alleged breaches of their contracts sometimes to the tune of hundreds of thousands—if not millions—of dollars.

Recent Examples of Cannabis Breach of Contract Cases
For state-legal cannabis businesses, whose very existence violates federal law, federal court is typically the last place that they should turn. In a growing number of cases, federal courts have refused to enforce cannabis contracts because the contract’s subject matter violates federal law.

For instance, on February 25, 2025, a U.S. District Court in Ohio dismissed a breach of contract case involving a Michigan-licensed cannabis business and an Ohio-based buyer of the business that allegedly failed to close on a purchase agreement. In CCH Acquisitions, LLC et al v. J&J&D Holdings, LLC et al, the plaintiffs filed suit for breach of contract in federal court in Ohio. The court granted the defendants’ motion to dismiss the case in its entirety—on the basis that federal courts may not aid parties in furtherance of criminal activity by carrying out the terms of an illegal contract. 

While federal courts are not universally aligned on this issue, there are other federal decisions that comport with the decision in CCH Acquisitions, LLC. (See, for example, 1240 S. Bannock, LLC v. Siem et al, No. 2:21-cv-183. Evidencing the sometimes enormous consequences of this doctrine, Curaleaf is presently asserting federal illegality in asking a federal district court in Michigan to set aside a $31.8 million jury verdict in a breach of contract case against the company. (See Hello Farms Licensing MI, LLC v. GR Vending MI, LLC et al., No. 1:21-cv-10499.)

Unresolved Issues
Under the legal doctrine of res judicata, when a claim between parties has been decided on the merits, it cannot be brought again in a new action. Typically, then, when a claim based on state law has been dismissed with prejudice by a federal court, the claim cannot be refiled in state court.There are exceptions to this doctrine, and it’s theoretically possible to convince a state court that, given the conflict between state and federal policy, the state court should allow a federally dismissed cannabis breach of contract claim to be refiled. To date, though, this does not appear to be an issue that’s been addressed—and every state might look at the question differently.

Additionally, the federal illegality defense does not appear to have yet been squarely addressed by any U.S. Court of Appeals. The closest that a federal appellate court has come on this issue seems to be the 10^th Circuit Court of Appeals in Bartch v. Barch, but that case largely concerned procedural issues without addressing the underlying legal questions. Despite the lack of federal appellate affirmation of the defense, no cannabis business should want to be the proverbial “guinea pig” on this issue. As a result, we now turn to some practical considerations and guidance for cannabis businesses in their contract drafting efforts.

Tip #1: Make Sure Your Contracts Are in Writing

As a starting point, the cannabis industry as a whole tends to operate with a “move fast and break things” mentality. Given the pace of change in this space, such an approach is often necessary. However, this mentality also leads to far too many “handshake deals.” With the impediments to contract enforcement, it is critically important that the cannabis industry reduce contracts to writing.

Tip #2: Make Sure Your Contracts Designate State Court as the Exclusive Judicial Forum
Written contracts should incorporate dispute resolution mechanisms that effectively exclude federal court as a judicial forum. Federal district courts generally only have subject matter jurisdiction over cases arising under federal law or based on diversity of parties, i.e., the plaintiffs and defendants are from different states. Contracts are a creature of state law, so federal jurisdiction over breach of contract cases is usually predicated on diversity jurisdiction. (Suits to enforce arbitration agreements and awards are an exception discussed below.)

While parties cannot contractually strip a federal court of subject matter jurisdiction, they can contractually provide that the exclusive forum to hear a dispute is in state court. Federal courts generally dismiss claims arising out of such contracts without prejudice—meaning that they can be refiled in another court—by applying the doctrine of forum non conveniens. (See, for example, Atl. Marine Constr. Co. v. United States Dist. Ct.(2013) (holding that “a valid forum-selection clause should be given controlling weight in all but the most exceptional cases”) (cleaned up). Exclusive forum-selection clauses thus provide a means to potentially avoid the federal illegality defense. Such clauses should make clear that any disputes arising out of the contract must be brought in state court, preferably in the state that issued the cannabis license.

To say that a judicial forum should be limited to state courts is not to say that arbitration or other alternative dispute resolution mechanisms should not be used.Indeed, for numerous reasons (cost, efficiency, expertise of arbitrators, confidentiality), arbitration is often an ideal choice. But it may be necessary to turn to the courts to compel a party to fulfill its agreement to arbitrate or to enforce an arbitration award.

The Federal Arbitration Act (FAA) allows parties to an arbitration agreement to use the federal courts for enforcement, even when the parties are not diverse and the issues are governed by state law. (See 9 U.S.C. § 9.)Under the FAA, the grounds on which a federal court can refuse to enforce an arbitration award are extremely limited.(See 9 U.S.C. § 11.)Thus, there is an argument that federal illegality of an underlying contract should not be a defense once an arbitration award has been rendered. It does not appear that this issue has been addressed by a federal court, however, so the preferable approach should still be to provide for state court as the exclusive forum to resolve arbitration-related disputes. 

Tip #3: Consider the Implications of Enforcing the Contract at the Drafting Stage
In addition to documenting the agreement of the parties, the purpose of a contract is to address what happens in the case of disagreements. With every contract, cannabis businesses and their lawyers should be asking themselves: “How would I enforce a judgment if the contract is breached and we need to enforce our remedies?” This simple question may seem obvious—nothing in the cannabis industry is as easy as it seems.

We regularly see contracts where out-of-state parties seek to contract with state-licensed cannabis businesses and then push for a forum-selection clause for that out-of-state party’s state, e.g., a California-based marketing company seeks to contract with an Illinois-based licensed cannabis retailer for marketing services but demands that disputes arising out of the contract be litigated in California state courts. This practice is relatively commonplace outside of the cannabis industry, so the cannabis-related implications may go overlooked.

However, if the agreement is breached and judgment entered by the California court, what will need to happen to enforce this judgment? What if the Illinois business is insolvent? A receivership may make sense as a creditor remedy in this scenario—but does a California state court have the ability to appoint and order a receivership for an Illinois cannabis business? Would the State of Illinois even recognize such a receivership order given its obvious implications on the state and municipal cannabis regulatory regimes in Illinois, i.e., a California-appointed receiver operating an Illinois cannabis business without vetting and approval of Illinois regulators?

Providing for dispute resolution in the “wrong” state court can create countless complications. Our tip—why bother with these legal headaches? As academically interesting as they may be to lawyers, is having “home court” in California really worth these headaches for the California-based marketing company, when they may impact enforceability? Instead, we think best practice is generally to draft cannabis contracts with forum-selection clauses that select state court in the state where the cannabis business is licensed as the exclusive forum.

Conclusion
The normalization of the cannabis industry is undoubtedly a good thing. However, the cannabis industry and the lawyers advising them need to avoid the complacency that comes with acceptance. This industry is still fraught with legal landmines. Drafting and entering into contracts that will ultimately be enforceable at the end of the day is a lynchpin to a successful and thriving industry. Accordingly, this is your gentle reminder to double check your contracts. Like all things in life: “Everything is fine, until it’s not.”

John Fraser is a member and Michigan Team Leader for Dykema’s Cannabis Practice, providing regulatory guidance to help cannabis businesses secure and maintain licensure amid complex and often conflicting state, local, and federal laws. He has successfully organized, guided, and obtained state and local licensure for numerous cannabis businesses across Michigan, ranging from small startups to large enterprises. From initial applications through ongoing compliance, Fraser advises clients on navigating the evolving regulatory landscape.

Lance Boldrey is a member and leader of the Cannabis Industry Group at Dykema, guiding clients through the evolving legal and regulatory landscape of the cannabis industry. His practice covers licensing, compliance, legislative matters, and government relations, representing clients ranging from small retailers to large vertically integrated companies, as well as lenders and investors. Lance also coordinates Dykema’s work on real estate, corporate transactions, M&A, and other legal needs critical to the industry’s growth.