We previously explored enforceability problems presented by commercial cannabis contracts in California, as well as some examples of how courts have strained to reconcile state-legal conduct with federal illegality. On October 6, California Governor Brown signed into law AB 1159, a short bill with important implications for commercial cannabis operators, service providers, and investors relating to the enforcement of commercial cannabis contracts in California.
Section 1 of the bill states that “commercial activity relating to medicinal cannabis or adult-use cannabis conducted in compliance with California law and any applicable local standards, requirements, and regulations shall be deemed to be: (1) A lawful object of a contract; (2) Not contrary to, an express provision of law, any policy of express law, or good morals; and (3) Not against public policy.”
California statutory law requires contracts have a lawful object, but until now it was not clear whether this legality requirement encompassed federal as well as state law. And since cannabis is illegal under federal law, both state and federal courts wrestled with how and whether to enforce contracts that involved cannabis. Even though California law allows for commercial cannabis activity, the law pertaining to interpretation and enforcement of contracts in California remained ambiguous, and as noted in the Senate Floor Analysis of the bill, many California cannabis companies have been reluctant to litigate meritorious claims for fear the courts would not enforce their contracts. AB 1159 changes that by making clear that parties to contracts involving commercial cannabis activity can now rely on statutory law in making sure those contracts are enforceable—provided that the underlying activity complies with California state and local laws and provided the contract is interpreted under California law.
This will make it crucial you think carefully about the jurisdiction and the choice of law provisions you put into in your cannabis contracts.
The second section of AB 1159 is essentially an amendment to the California Evidence Code that solidifies the attorney-client privilege for “legal services rendered in compliance with state and local laws on medicinal cannabis or adult-use cannabis, and confidential communications provided for the purpose of rendering those services … provided the lawyer also advises the client on conflicts with respect to federal law.” The general rule in California (as elsewhere) is that the attorney-client privilege does not apply to legal services sought or obtained to enable or aid a crime or fraud. Because cannabis activity is still a crime under federal law, some thought this jeopardized the confidentiality of the attorney-client relationship in the event of an indictment or litigation. AB 1159 changes that by securing the attorney-client privilege where it pertains to cannabis activity, but only if the legal services were rendered in compliance with California state and local law and only if the lawyer advises the client on conflicts regarding federal law.
Bottom Line: California is making serious and productive moves to normalize things for its cannabis businesses. But for California cannabis businesses to take advantage of these new opportunities, they must be sure to comply with California state and local laws.