Selling Pot Like a Pro: Top 10 Contract Terms

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In the old days, people rarely wrote things down when they sold cannabis. Selling the flower was risky, and leaving a paper trail riskier still. With the advent of medical marijuana programs, though, cannabis supply contracts became routine. Such agreements may be styled as “patient-caregiver agreements” or “patient-grower agreements,” and state agencies may even require their use. These limited scale agreements are often between two individuals for small sums of marijuana and cash. In the world of pot contracts, those deals are beta.

Today, four states have scaled adult-use (“recreational”) cannabis programs (Washington, Oregon, Colorado and Alaska), with four others close behind (California, Nevada, Massachusetts, Maine). In these states, trading in cannabis is no longer limited to patient-caregiver transactions. Instead, it involves licensed agribusinesses bringing statutorily designated “crops” to increasingly differentiated markets. For this reason, cannabis distribution agreements have become a key contract for many of our clients.

Below are ten critical terms in any cannabis distribution agreement. This list is by no means exhaustive, but is curated to show how unique these agreements are and should be:

  1. Distribution Grant. This term covers the territory in which the cannabis can be distributed by the purchaser, as well as other items, like whether sub-distributors are allowed and what their roles may be. The key consideration here is ensuring that cannabis is kept within state borders, pursuant to whatever tracking system may be required.
  2. Term and Termination. Terms tend to be short in cannabis distribution agreements and with multiple renewal options, to account for price fluctuation and general market dynamism. Termination may be allowed for a variety of specific reasons, or for no reason at all. Specific reasons may include cessation of business operations, contract breach, business impracticability, regulatory violations, etc.
  3. Testing Obligations. States with robust regulatory systems require cannabis be tested for pesticides and other contaminants. Therefore, the distribution agreement should designate which party is responsible for testing and its associated costs, and what happens in the event of a failed test.
  4. Inspection.  Marijuana is a perishable and essentially fungible commodity, and the purchaser will want a right to inspect upon delivery, and sometimes for a window of time thereafter. Sellers will want to limit this right as much as possible because once the marijuana is out of sight, the seller has no control over the care and treatment of the product.
  5. Purchase Orders and Payment. Your standard cannabis distribution agreement will detail the method a purchaser must use to communicate its product needs to the seller, how invoices are presented, and at what point payment must be made. Sometimes, the agreement will contain a requirement for one party to notify the other of market changes; i.e. of the wholesale market rate per pound of marijuana.
  6. Sales and Marketing. Sellers will want purchasers to comply with all advertising and sale regulations and make good faith efforts to market the sellers’ marijuana among shelves of competing products. In many cases, trademarks will be in play, and sellers will have specific parameters around how a name and logo may be used in association with these efforts.
  7. Representations and Warranties. Distribution agreements in all industries are chock full of representations and warranties, but cannabis agreements take this concept to the next level. In a cannabis distribution deal, warranties will cover everything from program compliance concepts to product safety.
  8. Confidential information. Because cannabis companies have fewer options to protect intellectual property through formal registrations than companies in other industries, the industry relies heavily on non-disclosure and trade secrets.  When one party is selling cannabis to another, the parties are bound to learn a bit about each other, especially where site visits are involved. In many cases, the distribution agreement itself may even be designated as confidential.
  9. Limitation of Liability. This section is often heavily negotiated, as the parties attempt to carve out who would be responsible for what unfortunate event, and to what degree. It takes little imagination to dream up things that could go wrong in a cannabis distribution deal, from product recalls to intellectual property infringement. Here, each party will seek indemnification for anything beyond its control.
  10. Federal Law Concepts. Federal illegality will flow through nearly every section of the pot distribution agreement, from licensing to termination to dispute resolution protocols. When reading through each contract term, both lawyer and client should ask “how might federal illegality affect this provision?”

At the end of the day, like all cannabis industry contracts, agreements for the distribution and sale of pot are unique. Generic distribution agreements may do more harm than good when trading in cannabis, and although courts may recognize the existence of oral contracts, no legitimate business will move its goods without a tailored, written agreement.

In that sense, the old days are gone. It’s time for a new approach.