Cannabis Litigation vs. Arbitration

By Jennifer Cabrera

Nov 20, 2020

While it’s best to avoid litigation and arbitration in the first place, disputes happen and are occurring more frequently in the maturing cannabis sector. Cannabis industry disputes are unique and often more complicated due to the federal illegality of cannabis and jurisdictional complexities, but these issues can be resolved.

When faced with a dispute, knowing your options is the best way to move forward. But which option is best for your business: litigation or arbitration?

What’s the difference between litigation and arbitration?

Litigation is the process for handling dispute resolution in the court system. Taxes fund this process: The salary of the judge deciding a case, their clerks' salaries and support staff, and the cost of the courthouses are all paid from the public purse. Filing fees are relatively low, and the parties are not required to pay for their case costs.

Arbitration is a method of dispute resolution that is essentially a trial before a private judge. The parties must agree to arbitration and jointly choose an arbitrator (or choose their own arbitrator and together agree to a third arbitrator who will preside over the panel) and pay their fees. Arbitrator fees, like lawyer fees, are often charged hourly. The parties also need to find (and possibly pay for) a space to hold the hearing.

Should I write an arbitration clause in my cannabis contract?

The honest answer is “it depends.”

You usually can’t decide whether to go to arbitration or litigation once a dispute has arisen because the method of dispute resolution is usually set by contract. Once parties find themselves in a dispute, they are unlikely to agree to change their minds.

The lawyer(s) drafting a cannabis contract make the decision, and usually can’t anticipate the value of the dispute or whether their client will be the plaintiff or defendant. The following considerations can inform a decision of which to choose.

Administered arbitration or ad hoc?

Filing fees in arbitration vary depending on whether the arbitration is administered or non-administered. Some examples of institutions that will administer domestic arbitrations include the American Arbitration Association (the AAA), JAMS, and many regional centers like JAG. An institutional administrator will help the parties select an arbitrator in a timely way and assign a case manager to ensure deadlines are met. Administered arbitrations are more expensive and will involve a higher filing fee often tied to the amount in dispute. A non-administered arbitration, or ad hoc arbitration, will be cheaper, but you will lose out on the benefits of a dedicated case manager. A non-administered arbitration will work best in cases with lower dollar amounts or with parties that can still cooperate.

Is arbitration more expensive than litigation?

While the up-front filing fees and costs of arbitration are undoubtedly higher than in litigation, arbitration can still end up being cheaper over the course of a full dispute. Litigations, on average, take longer to bring a case to resolution than arbitration. Arbitration can cut down the case's length by a year or more, meaning a year or more of lawyer fees saved.

The delays in litigation aren’t only the result of overburdened courts—some of them are structural. Litigation offers the parties the chance to file dispositive motions before trial, where a party may be able to dispose of a case right after filing (motion to dismiss) or after the exchange of evidence (motion for summary judgment). Researching, writing, and arguing one of these motions will involve a lot of lawyer time. If successful, a dispositive motion can shorten the length of a case. But if the motion is denied, it was a time consuming and expensive unsuccessful gamble.

For better or worse, most arbitration rules do not allow for dispositive motions.

What are factors specific to cannabis?

Cannabis disputes involve several unique problems for litigants, including the federal illegality of cannabis. Some courts (federal courts and state courts in states without legal cannabis) may find a contract void based on the subject matter's illegality. State courts in states with adult-use cannabis markets are less likely to rule in this way and more likely to enforce a cannabis contract as though it were a contract in any other industry, as are arbitrators with cannabis industry expertise.

Perhaps the strongest factor weighing in favor of arbitration is the parties’ power to choose a skilled arbitrator (or arbitrators) who understands the cannabis industry and the legal framework under which it operates. While many judges are experienced and dedicated lawyers, very few are familiar with the cannabis industry and its myriad state-level regulatory restrictions. Although few in number, there are arbitrators who know this industry and its legal ecosystem well. As the number of cannabis disputes continues to rise over the coming years, the number of arbitrators with industry expertise will also increase.

Whether you find yourself in court or in arbitration, you need a trusted advocate who understands the interplay between dispute resolution and cannabis law. Please contact Vicente Sederberg’s experienced litigation and arbitration team for assistance.