Cross-Border Disputes In The Cannabis Industry & International Arbitration –

As continued legalization of cannabis across jurisdictions in
the U.S. and foreign countries causes the industry to become
increasingly lucrative, determining proper avenues for dispute
resolution controlling underlying agreements and investments has
become a critical consideration for business-owners and foreign
investors alike. Foreign investment in businesses involving
cannabis is subject to a complex web of oversight that could
include any combination of local and foreign laws, agreements,
regulations, and practices. Many foreign investors in the cannabis
industry have turned to international arbitration as a method for
navigating these complexities and resolving disputes that may arise
from such investments and business relationships. This post
explores high-level considerations for foreign investors in the
cannabis industry when assessing the viability of arbitration as a
means for dispute resolution.

A preliminary consideration for investors contemplating foreign
investment into the cannabis industry is whether such investments
are governed by any applicable International Investment Agreements
(IIAs) that may grant foreign investors certain protections,
benefits, and forms of recourse through Investor-State Dispute
Settlement (ISDS).

One such investment agreement involving the U.S. is the North
American Free Trade Agreement (NAFTA). NAFTA was replaced by the
United-States-Mexico-Canada Agreement (USMCA) on July 1, 2020,
providing a three-year “sunset period” during which North
American investors can still obtain certain investment protections.
Beginning on July 1, 2023, investors in these locations seeking to
bring claims forward under IIA terms will need to comply with the
terms of the USMCA, which may significantly impact available
recourse for investors through substantive and procedural
limitations that did not exist under NAFTA. For example, investment
arbitration will no longer be available under the USMCA for claims
involving Canada, aggrieved investors will need to exhaust local
remedies in the national court of the host State before resorting
to international arbitration, and certain substantive claims for
items such as indirect expropriation may no longer be arbitrated
under the USMCA. Notably, many of these limitations do not apply to
investors with a “covered government contract.” Investors
intending to bring future claims forward under IIAs—whether
it be the USMCA or any other applicable agreement—and ISDS
will need to carefully consider the rights, limitations, and
available forms of recourse set out in the specific language of
each agreement. Where arbitration is not included, or is
specifically excluded, as an available form of recourse under an
IIA, investors may consider structuring investments to provide
contractual or other remedies.

For private investments between business-owners and investors
that are not governed by IIAs, dispute resolution may be primarily
governed by the terms of any applicable agreement between the
parties. This gives investors the opportunity to choose the form of
dispute resolution, deciding parties, applicable law, and other
factors by way of the agreement. For effective implementation of
these dispute resolution provisions in the case of foreign
investments, business-owners and investors should carefully craft
each of these provisions to fully cover the terms of any potential
disputes that may arise. The importance of including a
carefully-crafted dispute resolution provision in foreign
investment agreements is especially significant for investments
involving cannabis-related industries.

Cannabis litigation is often dismissed without proper resolution
due to the complexities of determining the forum and choice-of-law
governing these claims and the inability of many judges to issue
and enforce binding decisions involving conduct with questionable
legality. While some states in the U.S.—including
California—are working towards the possibility of interstate
cannabis agreements that could facilitate certain investments,
issues of competing cannabis laws in different states and countries
continue to create barriers to effective litigation. For example,
the court in Sensoria, LLC v. Kawekse in the United States
District Court for the District of Colorado refused to enforce a
contract formed pursuant to Colorado state law for a cannabis
business, holding that “the Court may not vindicate equity in
or award profits from a business that grows, processes, and sells
marijuana” due to proposed relief that would endorse violating
the Controlled Substances Act (CSA). While some courts across
Colorado, California, Arizona, and Texas appear to have enforced
cannabis-related contracts despite illegality arguments, the risks
of enforcement of a contract being precluded by illegality concerns
are high in U.S.-based cannabis litigation. Similar risks may exist
under the applicable laws governing cannabis in foreign
countries.

Arbitration, by contrast, offers business-owners and investors
the opportunity to privately resolve disputes and to choose the law
that will govern such claims. Where an enforceable arbitration
clause governing an investment agreement exists, an arbitrator or
arbitration panel will serve to issue decisions on any claims that
arise thereunder. Parties are free to select the applicable laws
governing the arbitration of such claims, meaning that parties can
intentionally avoid thorny precedent from jurisdictions that are
unfriendly to the cannabis industry by being deliberate in their
selection of the applicable jurisdiction’s laws that will
apply. Arbitrators can thus issue decisions based on the terms that
have been agreed upon by the parties making the investments,
instead of on competing laws from different jurisdictions a claim
might otherwise be subject to.

The American Arbitration Association (AAA) includes
cannabis-related disputes as one of its practice areas, reporting
that over 100 cannabis-related disputes were filed with the AAA
within the last five years. The AAA defines these disputes as
“business disputes” which can be “commercial,
construction, or real estate disputes; domestic or international
ones.” The AAA’s self-reported caseload lists, among
others, disputes involving joint venture agreements, purchase/sale
agreements, breach of contract, profit-sharing agreements, and
shareholder settlement agreements, all of which may potentially
arise in the case of foreign investment into cannabis-related
businesses. The AAA has a designated Cannabis Industry Panel for
arbitrating such disputes, and stresses the importance of inserting
a well-written dispute resolution clause into contracts between
parties to ensure a fair, timely, cost-efficient dispute resolution
process. Other arbitration organizations, such as JAMS, have
similarly provided the opportunity to arbitrate disputes arising
from claims involving cannabis-related industries. While many of
the disputes arbitrated in the U.S. involve business partnerships,
consulting agreements, or investing relationships that occur within
the U.S., this also presents a potential forum for claims arising
under agreements involving foreign investments or business
relationships, subject to general considerations involving
international investments.

In any instance where private arbitration is chosen as a means
for dispute resolution, business owners and investors must take
care to ensure that the terms of any corresponding agreement
provide the language necessary to properly resolve such disputes.
For investments involving cannabis-related industries, special
consideration should be given to the choice-of-law and seat of
arbitration to ensure that the law and the seat are friendly to the
cannabis industry. This is especially important for enforcement
purposes in any applicable jurisdiction. The challenges of
enforcing an arbitration award in the industry once it has been
granted should not be understated.

Some jurisdictions take the default position that there are
public policy concerns with enforcing a contract tainted with
illegality, introducing a degree of uncertainty as to whether
awards granted under arbitration proceedings will be enforceable in
a jurisdiction where cannabis is deemed illegal. This creates a
balancing act of priorities that could involve a myriad of
complicated public policy issues. In the U.S., further complexities
arise due to conflicts between state and federal law where federal
law may be necessary as an enforcement tool.

An example of competing priorities arising in certain U.S.
jurisdictions is found under the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, 10 June 1958 (the New York
Convention). Under the New York Convention, state courts are faced
with the tension between the need to ensure respect for the
finality of an international arbitration award and the need to
ensure respect for legitimate public policy concerns. By contrast,
in Williams v. Eaze Solutions, Inc., the court in the
United States District Court for the Northern District of
California determined that any issues of illegality involving a
contract for a cannabis mobile application were to be determined by
arbitrators, not the federal courts, where the parties’
contract expressly provided for arbitration of the parties’
disputes. Under the FAA and Supreme Court precedent, arbitration
provisions in such contracts are severable from the rest of the
contract. Claims that illegality preclude enforcement of the
contract are thus left to the arbitrators.

Business owners and investors partaking in cannabis-related
industries must therefore evaluate the applicable choice-of-law and
seat of arbitration carefully in the jurisdiction that would be
enforcing any drafted arbitration provisions. Furthermore, even
where a jurisdiction is found to be “cannabis
industry-friendly,” owners and investors should ensure that
there are sufficient assets to enforce an arbitration award against
in that jurisdiction so as to avoid hollow victories. Parties
drafting provisions for arbitration of claims should look to the
applicable laws and practices pertaining to the enforceability of
arbitration provisions in each involved jurisdiction.

Even where a claim involving foreign investments into
cannabis-related industries is subject to arbitration with an
enforceable judgment, there are additional considerations that
business owners and investors should take into account in making
investment decisions. One such consideration is the interaction
between foreign investments in cannabis-related industries and
applicable immigration law. For foreign investments made in the
U.S., these considerations are largely governed by the Immigration
and Nationality Act (INA). In the U.S., cannabis remains a Schedule
I controlled substance under the CSA. Under the INA, a person who
has been a knowing aider, abettor, or conspirator in the illicit
trafficking of any controlled substance under the CSA is
inadmissible to the U.S. and/or may be unable to naturalize as a
citizen in the future. Whether an investment into a
cannabis-related industry qualifies as aiding, abetting, or
conspiring under the INA may depend on whether such investment is
seen as an active or passive investment. Nonetheless,
business-owners and investors who may later be considering U.S.
citizenship or naturalization should weigh the implications
investments involving cannabis-related industries. Business-owners
and investors looking to make investments into cannabis-related
industries in foreign countries should evaluate potential
applicable immigration consequences in any involved
jurisdictions.

Similarly, business-owners and investors looking to invest in
foreign cannabis-related industries should consider whether such
business or investment activities may be subject to prosecution or
other criminal consequences in relevant jurisdictions. The law
surrounding the treatment and enforcement of federal criminal
implications on the cannabis industry in the U.S. is somewhat
inconclusive. While federal prosecutors in the U.S. may
theoretically have grounds to prosecute such activities under, for
example, money laundering laws, the U.S. government and
corresponding enforcement agencies have seemed generally reluctant
to prosecute such claims. These agencies have largely tended to
ignore investments into cannabis-related industries where the
activity is not illicit under the law of the jurisdiction in which
it is occurring, whether that be a state in the U.S. or a
jurisdiction abroad. As with considerations involving the INA,
whether such activities are considered illicit under federal laws
in the U.S. may center on how active or passive the foreign
investment is determined to be. Business-owners and investors
operating in foreign countries should consider similar general
practices of government and enforcement agencies in any involved
jurisdictions.

Moreover, many foreign investments into cannabis-related
industries are subject to strict disclosure laws that may require
specific information surrounding owners, investors, or other
financial interest holders—even where the interest held is
comparatively small—to be disclosed at the individual level.
This may subject investors in the industry to additional
liabilities or criminal implications. Business-owners and investors
into the industry must also consider the financing of such
investments, as countries such as the U.S. will not allow federally
regulated and insured banks to fund the industry due to federal
illegality. The same holds true for any foreign investors who may
be subject to legal regulations involving investment into
cannabis-related industries under the laws of jurisdictions
involved in the investment. Business owners and investors should
weigh the implications of legality—under the jurisdiction of
both the location of the investor and the location where the
investment will be made—when making decisions involving
foreign investments into cannabis-related industries.

Finally, business-owners and investors looking to make foreign
investments in cannabis-related industries should consider any
applicable economic, political, social, and/or regulatory
implications of involvement in such industries in foreign
countries. Several countries across the globe have presented
examples of both the benefits and restrictions of international
relationships in cannabis-related industries. Well-known Canadian
cannabis companies such as Canopy Growth and Cronos Group have
established operations, licenses, joint ventures, and global trade
models overseas following federal legalization of cannabis allowing
the country to become a large source of overall investment in the
industry. The U.S., Canada, Colombia, China, and parts of Europe
held the highest levels of foreign investment into the industry as
of reports issued as early as 2019. Jamaica’s introduction of
the Dangerous Drug Amendment Act in 2015 created a legal regime for
the cannabis industry that opened the country to partnerships with
overseas cannabis firms and pharmaceutical companies from Canada,
Europe, and the U.S. Other countries across the globe have begun to
legalize cannabis in various forms, introducing the possibility of
global trade and investment in the market. Trade and investment is
often subject to regulations heavily influenced by the
socioeconomic and political implications of such activities on
individual countries.

For example, as a component of legalizing forms of cannabis,
countries such as Thailand and Colombia have adopted policy
approaches to protect domestic actors in the industry from foreign
influence. This has taken the form of implementing prohibitions and
regulations protecting small and medium scale domestic growers.
Similarly, Jamaica and other countries consider factors such as the
mission, brand reputation, potential export market, technical and
market knowledge, and influence of particular investors in deciding
whether to allow those investors into the market. Business-owners
and investors seeking to make foreign investments into
cannabis-related industries should thus carefully evaluate the
goals of each country where an investment is set to be made and any
corresponding influential factors, policy approaches, regulations,
and protections involved in the foreign market.

Foreign investment in the cannabis industry has grown
exponentially over the past few years due to legalization in an
increasing number of jurisdictions in the U.S. and abroad. This
presents lucrative opportunities for business-owners and investors
to capitalize on an emerging global market in the early stages of
growth. Nevertheless, these investments are subject to a
combination of local and international laws, agreements,
regulations, and practices that create complexities in the
resolution of any resulting disputes, which may deter foreign
investment into the industry as a whole. International arbitration
of foreign investment claims in the cannabis industry—under
applicable IIAs, contractual provisions, or otherwise—allows
parties to resolve these disputes while mitigating the risks of
such underlying complexities. Parties intending to invest in the
cannabis industry overseas should thus strongly consider
arbitration as a method of dispute resolution. Where arbitration is
selected as a form of dispute resolution by way of investment
agreements between the parties, the language of any applicable
dispute resolution provisions should be carefully crafted to ensure
that the method of arbitration and selection of governing law
allows for enforceable resolution of such claims under agreed-upon
terms. Parties should additionally consider the specific
implications—in both the host country of any investor and the
country where such investment is being made—involving the
enforceability of arbitration treaties and provisions, applicable
criminal or immigration consequences, and any corresponding
influential factors, policy approaches, regulations, and
protections specific to the involved jurisdictions.

Disclaimer: This Alert has been
prepared and published for informational purposes only and is not
offered, nor should be construed, as legal advice. For more
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