MedMen, a publicly traded, multi-state cannabis company, is being sued by its former landlord in federal court over allegations of a broken lease of an Illinois-based property. The landlord, 942 Fulton Street, LLC (“Thor”), now claims that MedMen owes at least $950,960.02 in unpaid rent.
In a move that could have outsized effects on interstate cannabis contracts, MedMen filed a motion for summary judgment arguing that the federal court cannot enforce the lease and make MedMen pay back rent because cannabis is federally illegal, making the underlying lease invalid and unenforceable under federal law.
Federal courts do not enforce contracts that involve illegal activities as such contracts are considered to run counter to public policy. For example, one cannot sue an assassin for a broken contract, as enforcing said contract would go against the public policy against murders. Similarly to a contract for murder by an assassin, a federal court will not enforce a contract for the sale and purchase of illegal drugs because doing so would contradict public policy by encouraging illegal activity.
Using this theory rooted in public policy, MedMen’s argument is that the lease with Thor was explicitly for property intended only to be used as a cannabis dispensary because MedMen’s primary business is selling Cannabis. MedMen argues that Thor would then be collecting rent based on selling a federally illegal drug. (While Cannabis is legal in many states, including Illinois and New Jersey, it is still federally illegal. See 21 U.S.C. § 812(c)(10)(listing marijuana/cannabis as a Schedule I controlled substance).) Therefore, if the Court were to enforce the lease and force MedMen to pay back rent, the Court would be endorsing illegal activity; which MedMen asserts the Court cannot do. Thus, MedMen asserts the Court cannot force MedMen to pay back rent.
Even MedMen acknowledges that this is a grey area for federal courts. While federal courts have refused to enforce cannabis related contracts in the past, there are no controlling or appellate decisions squarely addressing this topic. Therefore, the Court’s decision could cause a significant impact on the future operations of cannabis companies.
Should the Court choose to enforce the lease, it would be a strong sign of the federal government loosening its stance on Cannabis and a signal to Cannabis companies that they cannot evade their contractual commitments in federal court.
On the other hand, should the Court choose not to enforce the lease, it would force cannabis companies and those seeking to contract with them to be even more proactive and diligent. Cannabis companies would have to consider the potential downside of entering into a contract with an out-of-state entity that could end up in federal court. Additionally, non-cannabis companies such as real-estate companies or general suppliers would most likely be more reticent to contract with out-of-state companies or cannabis companies in general due to a fear that they could renege on their commitments.
Regardless of the outcome in this case, contracts involving cannabis or cannabis businesses should have a choice of law clause requiring any dispute to be litigated in the Court of a state with legalized Cannabis where the contract would not be considered against public policy. This will prevent the uncertainty of litigating a cannabis involved contract in federal court where enforceability is unclear.
If you have any questions about how you can protect your business, please contact a member of the firm’s Cannabis Law Group.
