A growing number of U.S. companies selling hemp products and hemp-derived CBD products are forming international partnerships with suppliers. These business agreements, which frequently include arbitration clauses, must be carefully drafted by an experienced corporate CBD attorney. As a recent ruling by the U.S. Court of Appeals for the Eleventh Circuit showed, arbitration agreements and awards are likely to be enforced.
Why Cannabis Companies, CBD Corporations Use Arbitration Agreements
As our Los Angeles corporate CBD lawyers can explain, many cannabis company contracts contain arbitration clauses. Some examples include sales contracts, operating agreements, employment contracts and intellectual property licenses. Dispute resolution should never be an afterthought, so this provision is important.
Arbitration is used in lieu of pursuing the case in court. There is no judge or jury in arbitration. Both parties instead pay an arbitration company or private arbitrator (usually an attorney or former judge) or arbitration panel to preside. Arbitrators don’t represent either side. They’re neutral third parties who hear both sides and then reach a resolution. That can involve damage awards, requiring one party to pay the other.
Arbitration Award Against CBD Distributor Upheld
The question at issue before the Eleventh Circuit in Earth Science Tech, Inc. v. Impact UA, Inc. was whether an arbitration award against a CBD distributor in favor of an international supplier could be enforced. It involved a Florida CBD products distributor and an El Salvador hemp-based product supplier. The two businesses signed a distribution agreement that gave the Florida company exclusive rights to market, sell and distribute the international supplier’s CBD oil in the U.S. The companies would then split the profits.
There was an arbitration clause in the distribution agreement indicating both agreed New York law would apply and if a dispute arose, they would resolve it with arbitration using a specific arbitration firm.
However, the business relationship went south within just a few months, with the supplier, demanding arbitration, accusing the distributor of breach of contract, tortious interference and conversion. The distributor instead filed a state court lawsuit. It was later removed to federal court, but the matter was put on hold pending the outcome of the arbitration.
The case went before an arbitration panel, which awarded the supplier nearly $4 million (mostly on the tortious interference claims). The supplier then asked the federal district court to confirm that award.
The distributor sought to either vacate or modify it, argued the tort claim should never have been subject to arbitration and asserted the award couldn’t be affirmed because it wasn’t consistent with the U.S. Controlled Substances Act.
The court disagreed, siding with the supplier. The distributor appealed, but the Eleventh Circuit affirmed.
Why the Court Rejected CBD Distributor’s Arguments
On the question of whether tort claims were subject to arbitration, the court pointed to the applicability of the Panama Convention, which spells out arbitration rules for how commercial disputes involving the companies in the U.S. and most of Latin America should be resolved. (There are several potentially applicable conventions in these cases, depending on the location of the international company involved.) Provisions of that law allowed for arbitration on the tort claim. But even if they didn’t, the CBD distributor forfeited its right to dispute the award because it agreed – as did the supplier – to submit that issue to the arbitrator.
On the issue of modification, the only grounds distributor would have had to make this argument were that there was an evidence miscalculation. The court quickly determined there was not.
As for the argument of the award’s inconsistency with the U.S. Controlled Substances Act, the distributor argued that when the contract (to which it was a party) was signed six years ago, federal law prohibited the sales of any THC-containing product – including CBD. If the court affirmed the award, the distributor argued, they would be enforcing a contract whose subject was illegal under federal law.
No, the court answered. The distributor bore the burden of proof to establish the subject of the contract was illegal, and its own website stated at the time that its products were federally legal “everywhere in the USA.” The appellate court said it wouldn’t assume the distributor was flagrantly advertising products as legal if they believed them to be illegal. The court further cited the 2018 Farm Bill that removed hemp and hemp-derived CBD from the Controlled Substances Act. Even if the product was illegal then, it isn’t now.
That decision doesn’t set any binding precedent within that circuit, let alone the Ninth Circuit, which oversees cases in California. However, it may prove persuasive to sister courts if similar cases regarding international contracts involving sales of CBD and hemp arise.
Bottom line for California hemp and CBD businesses:
- Talk to an experienced Los Angeles CBD lawyer before entering an agreement with any international firm so you know exactly what rules are gong to apply.
- If you are involved in arbitration with an international firm, you need to be sure you know which convention applies so you can make a strong argument.
- If you had a hemp-CBD business contract that was signed prior to the passage of the 2018 Farm Bill, it’s unlikely you’ll be able to challenge the validity of it on the grounds the subject is unlawful. You might consider, nonetheless, having your attorney review it.
The Los Angeles CANNABIS LAW Group represents growers, dispensaries, ancillary companies, patients, doctors and those facing marijuana charges. Call us at 714-937-2050.
Earth Science Tech, Inc. v. Impact UA, Inc. , April 14, 2020, U.S. Court of Appeals for the Eleventh Circuit