The commercial litigation landscape for CBD, hemp and marijuana is constantly evolving as federal and state courts issue decisions that impact investors, commercial contracts, employment issues, intellectual property and insolvency. The CannaBizDisputes™ blog regularly tracks and reports on these developments.
California federal court lights the way for cannabis companies to avoid costly class action litigation
A recent decision from the Northern District of California provides a useful roadmap for how companies in the cannabis industry might successfully stave off class action lawsuits by ensuring that their disputes are resolved through arbitration. In Williams v. Eaze Sols., Inc., a consumer commenced a class action suit against the maker of a cannabis delivery app for violating the Telephone Consumer Protection Act (“TCPA”) by sending her unsolicited, autodialed text messages. 2019 WL 5312956, at *4 (N.D. Cal. Oct. 21, 2019). The defendant moved to compel arbitration based on a “click through” arbitration agreement (and class action waiver) contained within the app’s terms of service, to which users were required to agree during the sign-up process. In opposing the motion, the plaintiff argued that given the federal illegality of cannabis, the contract lacked a lawful purpose and was therefore unenforceable.
The Court first determined that the agreement was governed by the Federal Arbitration Act (“FAA”) because the parties did not agree otherwise, and because “even purely intrastate marijuana possession and distribution…[has] a substantial effect on interstate commerce.” The Court then granted the defendant’s motion and compelled arbitration, relying heavily on the Supreme Court’s FAA jurisprudence. The Court found that where parties to an arbitration agreement agree to delegate the issue of enforceability to an arbitrator, the court must compel arbitration unless the plaintiff challenges the specific provision delegating that authority. Therefore, because the plaintiff’s challenge was to the enforceability of the agreement as a whole, the Court held that the parties must arbitrate: “There is no challenge to the delegation provision here and, so the Court will treat it as valid under § 2, and must enforce it under §§ 3 and 4, leaving any challenge to the validity of the Agreement as a whole for the arbitrator.”
The Plaintiff has since appealed the decision to the Ninth Circuit. However, assuming the decision stands, it suggests that courts will enforce arbitration provisions and apply the Federal Arbitration Act to cannabis contracts notwithstanding the underlying federal illegality of cannabis.
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