Marijuana Reshapes Franchise Contracts

Franchise opportunities in the budding marijuana industry are growing and many are wondering how compliances clauses will work in the context of businesses that are in perpetual violation …

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Franchise opportunities in the budding marijuana industry are growing and many are wondering how compliances clauses will work in the context of businesses that are in perpetual violation of federal law. Fortunately, this problem does not extend to franchise opportunities involving clinics wherein doctors recommend the use of marijuana, because the right to make that recommendation is protected by the First Amendment. If the typical compliance and termination clause were applied to a dispensary, however, it may be invalidated the illegal activity involved. For more on this continue reading the following article from Blue MauMau.

As the medical marijuana industry continues to grow, medical marijuana franchise business models have become more popular. In fact, recently we reviewed a franchise agreement for a business that provides doctor recommendations for using medical marijuana in California. The question arose: How should medical marijuana franchise agreements structure provisions requiring the franchisee to comply with all laws, regulations, and ordinances?

The right to terminate

In most franchise agreements, the franchisor has a right to terminate immediately if the franchisee fails to comply with any law, rule, regulation, ordinance, or order. With medical marijuana franchises, how can this be feasible when the sale, purchase, use, or possession of the substance is always in violation of federal law? In this particular instance, it turned out that the question was not relevant because the franchised business provided doctor recommendations for the use of medical marijuana, and courts have found that the First Amendment protects a doctor’s right to advise that medical marijuana may help a specific patient.

Reviewing a medical marijuana franchise agreement

Unlike most franchise agreements, this particular agreement did not require the franchisee to comply with all laws. Instead, it simply stated that any illegal activity of any kind "associated with the parties will immediately terminate [the] contract."

At first glance, it did not appear that this business violated any marijuana-related laws because recommending medical marijuana is a constitutionally protected right. (Whether the franchise violated other laws with respect to franchising would be another issue.)

Automatic termination provisions

However, if a medical marijuana dispensary franchise contained a similar automatic termination provision to the one found in the medical marijuana franchise agreement we reviewed, you could argue that the contract would be immediately terminated upon execution because the sale, purchase, use, and possession of marijuana is prohibited under federal law.

With this in mind, it is important to discuss with a franchise attorney the dangers and opportunities in the medical marijuana franchise context. The industry is growing significantly and this will lead to numerous investment and business opportunities, but there is substantial risk accompanying those opportunities, particularly in the franchise context. You do not want to purchase a franchise that is essentially terminable at will, and most standard franchise agreements, if applied to the medical marijuana industry, would be so terminable.

This article was republished with permission from Blue MauMau.

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