During my research on cannabis trends for 2022, I came across a top-ranking Reuters article that revealed a surprising new trend in the industry – litigation. As someone who was at the time navigating a partner dispute, this news didn’t come as a shock. With California’s cannabis industry facing some significant challenges in recent times, businesses are struggling to keep their heads above water. These financial strains often put pressure on partnerships, leading to investor unrest and disagreements that can escalate to legal battles.

Unfortunately, it seems that litigation is becoming a more common occurrence in the industry, which can be concerning for businesses looking to operate smoothly and successfully. But don’t worry, we’ll delve into what this means for your business and explore ways to avoid finding yourself in a similar situation.

Emerging trends in cannabis litigation

According to the article, roughly 34% of the lawsuits were related to commercial disputes, including breach of contract, landlord-tenant disputes, securities issues, and other business torts like a breach of fiduciary duty and fraud. State and local governments were the next targets of legal action at 21%, while employment disputes and unpaid taxes accounted for 14% and 10%, respectively. Intellectual property disputes like trademark infringement made up 9% of the total.

Classifying lawsuits, particularly partner disputes, as an emerging trend is unsettling, especially for an industry that built its foundation on thousands of handshake deals that stood the test of time across decades, businesses, recessions, state lines, and countries. So how did we get here?

From an underground industry flourishing on trust and handshakes to a business burdened with paperwork and legal disputes?

One word can sum up the answer: money. Specifically, the need to spend money to comply with the endless rules and regulations of the new legal market, from mandated construction upgrades to new insurance requirements and inflated but necessary overheads. And just like that, you can no longer have your homies over to help you trim.

So, in this new era, how do you avoid becoming part of the unfortunate trend of partner disputes? Here are some of my tips:

Protect your cannabis business by familiarizing the operating agreement

Operating agreement – it’s the document that lists the company’s rules. Just like in a board game, if you do not follow the rules, even the small ones, you may face being kicked out of the game or worse, being sued for fraud or mismanagement. To avoid disaster, understanding the rules is top priority when taking on partners or an investment. The operating agreement covers the company’s structure, member ownership, voting, accounting, spending limits, and contingency plans for worst-case scenarios. Being pessimistic in business planning may not sound fun, but it’s necessary to prepare for the worst and hope for the best.

Let me give you a brief example. I had an indoor cultivation facility that needed outside investment and partners to capitalize on California’s booming cannabis industry. But when the market started tanking, and the facility needed an AC upgrade, the investors wanted out. When I explained that we needed more money to keep the business afloat, they began looking for technicalities in the operating agreement to sue me or remove me from the company.

Luckily, our operating agreement required quarterly meetings to review financials, so I set up automatic emails to request a meeting time. Even though the investors often ignored my emails or rescheduled, I had a written record of my efforts to schedule the meetings. You need to show in writing that you try to honor the rules of the game.

Written record

In partner disputes, what matters is what is written down. Phone calls and conversations do not count unless they are recorded or followed up with an email or meeting minutes. Your emails are your shields or weapons, so use them wisely to show that you’re playing by the rules and that the other partner isn’t.

But be careful, over-communication can backfire. Make sure you know the laws and operating agreements before documenting everything. Use collaborative communication methods like shared drives and group emails to keep everyone in the loop. If you have a relevant phone call, send a follow-up email to create a written record of the conversation. This way, you have a shield to protect you in case things go south.

Remember, communication is key in any partnership. Be transparent and demonstrate good judgment to build trust with your partners.

Your intention

Your intention is the most important thing to focus on when building a successful business, whether you’re on your own or have partners. Good intentions and a positive mindset are the secret sauce to life and business. If you lead with positivity and a desire to build something meaningful and impactful, you’ll attract like-minded people to build with. 

On the other hand, if you’re just about the money, you’ll attract investors who are only interested in the same thing. It’s important to speak your truth and reconcile or sever ties if a partnership becomes unhappy or sour. Have a high-level roadmap for your company, define success, and plan your exit strategy. Align interests and manage expectations by being true to yourself, open, honest, and ethical. Remember, knowing where you’re going and how and when you’ll get there is the key to success.

When it comes to partnerships, it’s important to remember that not all money is created equal.

Sure, there’s a lot of capital out there, but you don’t want just any capital. You want efficient capital that comes with synergy. Think about it this way: if you have one group offering you $100,000 for 10%, but they know nothing about the cannabis industry and are only focused on dollar signs, and another group offering you $90,000 for 10% and they’re also invested in a processing facility or vape brand, which one do you think is more attractive? The latter, of course! If they’re aligned with your long-term goals and want to see you succeed, that’s the kind of investor you want. Don’t just look at the dollar signs; take the overall picture into account when choosing your investors.

Alright, let’s recap some key takeaways. First, familiarize yourself with your operating agreement and know it inside out. Second, communicate in writing to have a clear and documented record of agreements and conversations. Third, be intentional and create a roadmap to success, including an exit plan. Fourth, attract the right money and partnerships that align with your long-term goals.

I hope these tips help you find the right tribe of investors and partners to help take your business to new heights. I wish you success and growth in this emerging market, and I hope to be a part of your journey. Remember, the goal is to build a business conflict-free, but if issues arise, I hope you found these tips helpful to navigate the cannabis industry rollercoaster with confidence.

Listen to the full episode:

If you’re competing, or you’re thinking about competing for a license, but don’t know where to start, I went ahead and cleaned up all of my application material, and updated a lot of it and you can get your own copy here: https://highsalwa.com/business-downloads.  It is what I use to win licenses in multiple different markets. I have cultivation, production, and retail that are currently available and I’m looking forward to adding more to give you a head start.