Michigan Cannabis Contract Dispute Results in $32M Verdict: Key Lessons for Industry Participants

A recent $32 million federal court verdict in favor of Michigan cannabis grower Hello Farms serves as a stark reminder of the challenges facing cannabis businesses operating in volatile market conditions. The case, which centered on a breached purchase agreement with Curaleaf, offers important lessons for industry participants about contract structuring and risk management.

Background

In 2020, Hello Farms entered into what appeared to be a promising agreement with Curaleaf, with Curaleaf committing to purchase 16,000 pounds of cannabis at $1,000 per pound in 2020 and $850 per pound in 2021. The agreement specified that Hello Farms' product needed to achieve a minimum of 12% THC content to meet contract requirements.

After purchasing only 2,000 pounds of the contracted amount, Curaleaf demanded to renegotiate the agreement, citing the dramatic decline in Michigan's cannabis market prices. Specifically, Curaleaf demanded a 60% price reduction for the 2020 harvest and sought to negotiate new terms for 2021. Between early 2020 and late 2021, recreational cannabis prices in Michigan had fallen by 64%, putting significant pressure on existing contract commitments.

Hello Farms filed suit in February 2021, alleging that Curaleaf's breach forced them to seek new buyers in a rapidly declining market. They also claimed that, at Curaleaf's urging, they had expanded their 2021 production capacity, leaving them with significant unsold inventory when Curaleaf failed to honor the agreement. Curaleaf countersued, claiming Hello Farms had failed to meet product specifications, but this countersuit was dismissed by a judge in 2021.

The dispute ultimately went to trial in federal court, where the jury sided with Hello Farms, awarding $31.9 million in damages.

Contract Risks in a Volatile Market

This case highlights a common challenge in the cannabis industry (as well as others, such as automotive): long-term purchase agreements that become financially untenable when market conditions shift dramatically. While such agreements can provide valuable certainty for both buyers and sellers, they can also create existential risks for companies when markets move against them.

Key Considerations for Industry Participants

When entering into long-term purchase agreements, cannabis businesses should consider:

1. Market volatility provisions that allow for some price adjustment based on significant market changes

2. Clear quality specifications and testing procedures to avoid disputes over product acceptance

3. Volume flexibility mechanisms that provide some adjustment rights while maintaining the core business arrangement

4. Regular review periods to assess contract performance and market alignment

The Broader Impact on Michigan Cannabis Companies

As the Hello Farms case demonstrates, when long-term contracts with fixed pricing terms get disrupted by market volatility, the financial impact can be severe. In Michigan's cannabis market, these types of disruptions have contributed to broader financial distress across the industry. Given that federal bankruptcy protection isn't available to cannabis companies, many distressed operations have turned to state court receivership proceedings to address their financial challenges and restructure their obligations.

The Dragich Law Firm has significant experience providing legal counsel in such proceedings. Whether you're facing potential financial distress or considering entering into significant long-term agreements, early consultation with experienced counsel can help protect your interests and avoid costly disputes down the road.