Legal Cannabis, Unenforceable Contracts?

 

A Michigan marijuana grower won a $31.8 million jury verdict for breach of contract. The Sixth Circuit took it away because the contract was illegal under federal law.

Marijuana businesses operate in arguably the strangest legal environment in American commerce. They obtain state licenses. They employ people. They lease buildings, borrow money, buy equipment, enter supply agreements, pay taxes, and sue each other when deals go bad. At the same time, marijuana remains illegal under federal law.

Last week, the Sixth Circuit Court of Appeals reminded the industry that this conflict is not theoretical. In Hello Farms Licensing MI, LLC v. GR Vending MI, LLC(opens in new tab), a Michigan marijuana grower obtained a $31.8 million jury verdict against a buyer that breached a marijuana supply contract.

The Sixth Circuit Court of Appeals reversed the judgment. Its reason was that federal courts cannot enforce a contract when the contract itself requires the parties to engage in conduct that federal law makes criminal. State legalization does not change that result.

That is a major issue for marijuana operators, particularly in Michigan, Ohio, Kentucky, and Tennessee, where the Sixth Circuit’s published decision is binding federal appellate precedent. It also exposes an uncomfortable truth about federal marijuana policy. A cannabis business can be “legal enough” for a state to license and regulate it, but still “illegal enough” that a federal court may refuse to enforce its most important contracts.

What happened

Hello Farms was a licensed Michigan marijuana grower. In November 2020, it entered into an output contract with GR Vending MI, LLC and CURA MI, LLC, both subsidiaries of Curaleaf Holdings. GR Vending agreed to buy all of Hello Farms’ marijuana from its 2020 and 2021 harvests, and CURA acted as guarantor.

The parties anticipated a 2020 harvest of approximately 12,000 to 15,000 pounds of marijuana, or about 6,000 plants. GR Vending agreed to pay a $2.2 million deposit. Hello Farms was required to test each 50-pound batch for potency and contaminants, and the contract specifically required compliance with recreational cannabis testing requirements.

Hello Farms ultimately harvested approximately 16,300 pounds in 2020. The product passed the required testing. GR Vending accepted about 2,000 pounds. Then the marijuana market fell. According to the court, prices were in “freefall” by January 2021, and GR Vending refused to accept the remaining product. Hello Farms sold the rest of its 2020 crop to another buyer at lower prices.

Hello Farms then expanded its cultivation acreage, obtained recreational growing licenses, and produced approximately 37,500 pounds in 2021. It again sold that marijuana to another purchaser at prices below what GR Vending had agreed to pay. Hello Farms then sued in Michigan state court for its lost profits.

The defendants removed the case to federal court based on diversity jurisdiction and raised what lawyers call the illegality defense. Their position was that the contract required the cultivation, possession, distribution, and sale of marijuana, all conduct prohibited by the federal Controlled Substances Act. The federal district judge rejected that argument and sent the case to trial, and a jury awarded Hello Farms $31.8 million. The Sixth Circuit overturned the award.

The federal illegality problem

The Sixth Circuit started with a basic contract principle. Federal courts generally enforce contracts. But they will not enforce an agreement when doing so would enforce conduct that federal law prohibits. The court found that the Hello Farms agreement was this type of contract. Hello Farms promised to grow and deliver marijuana. GR Vending promised to buy it. To perform the agreement, Hello Farms had to possess marijuana with the intent to distribute it and then distribute it. GR Vending, in turn, would possess the marijuana for further distribution or sale. Those acts violated the Controlled Substances Act, and the court therefore concluded that the agreement itself was founded on conduct that federal law criminalized.

Hello Farms argued that an award of money damages would not require anyone to possess or sell marijuana. The court would simply order the breaching party to write a check. The Sixth Circuit rejected that distinction. The damages were the profits Hello Farms expected to earn from selling marijuana. According to the court, awarding those profits would still amount to enforcing the illegal bargain.

A cannabis operator should not assume that an illegality problem can be avoided merely because the lawsuit seeks money rather than an order requiring the actual transfer of marijuana. If the right to the money depends on enforcing a federally illegal transaction, the Sixth Circuit says the problem remains.

Medical marijuana did not save the contract

Hello Farms also argued that the agreement involved medical marijuana and should therefore receive different treatment. Congress has prohibited the Department of Justice for years from using appropriated funds to interfere with qualifying state medical marijuana programs. This protection is commonly called the Rohrabacher-Farr or Rohrabacher-Blumenauer rider. The Sixth Circuit was not persuaded.

First, the court concluded that the contract was not actually limited to medical marijuana. GR Vending held both medical and recreational licenses, Michigan permitted certain transfers between the two markets, and the contract expressly referred to recreational cannabis testing requirements. The court found that the agreement supplied both markets.

The court went further, saying that the result would be the same even if the agreement were limited entirely to medical marijuana. The congressional appropriations rider restricts how DOJ may spend money. It does not repeal the Controlled Substances Act, legalize medical marijuana, or eliminate the underlying federal criminal prohibition. In other words, reduced federal enforcement is not the same thing as legality.

What about Schedule III?

In April 2026, the federal government moved FDA-approved marijuana products and marijuana covered by state medical marijuana licenses into Schedule III. The rule(opens in new tab) also created a process for state medical marijuana licensees to obtain federal DEA registration.

Hello Farms argued that this change supported enforcement of its contract. The Sixth Circuit rejected the argument for two reasons.

First, the contract was entered in 2020. The court applied the general rule that a contract that was illegal when made does not ordinarily become enforceable because the law changes years later. The April 2026 rule was not retroactive.

Second, and more important for businesses entering contracts today, Schedule III is not the same thing as general federal legalization.

The Sixth Circuit observed that the federal rule requires state medical marijuana businesses to obtain DEA registration. The court stated that if the parties entered the same medical marijuana contract today without the required DEA registration, the transaction would still violate federal law.

I have noticed a tendency for commentators to talk about Schedule III as though it resolves the federal-state conflict for marijuana businesses. As the Hello Farms ruling demonstrates, it does not.

Schedule III has significant consequences, including tax consequences, but it does not automatically convert every transaction authorized under a state marijuana license into a federally lawful transaction.

Not every cannabis contract is necessarily unenforceable

The opinion should not be read too broadly. The Sixth Circuit did not hold that every contract involving a marijuana business is void. The court distinguished between a contract whose central promise is itself illegal and a lawful agreement that happens to exist alongside some illegal activity.

That distinction could be important for ancillary contracts involving real estate, equipment, technology, intellectual property, professional services, construction, or other lawful goods and services. If the contractual obligation a party seeks to enforce is a separate and lawful economic transaction, there may be a much stronger argument for enforcement.

But merely inserting a severability clause into a marijuana contract will not solve the problem. The Hello Farms court focused on economic substance. The obligation to pay could not realistically be separated from the obligation to deliver marijuana. One existed because of the other. Cannabis businesses and their lawyers should think about that distinction when structuring agreements.

State court may matter, but it is not a complete solution

There is another practical point here. Hello Farms originally sued in Michigan state court. The defendants removed the case to federal court because the requirements for diversity jurisdiction were satisfied. Once the case was in federal court, the Sixth Circuit held that the effect of illegality under a federal statute was a question of federal law.

Choosing Michigan law in the contract would not change that. Operators should therefore pay more attention to dispute-resolution provisions. Depending on the circumstances, parties may want to consider an exclusive state-court forum clause, an express waiver of federal removal rights, arbitration, or another carefully structured dispute mechanism. None of those provisions can make federally illegal conduct legal, and none guarantees that an illegality defense will disappear. But after Hello Farms, treating the dispute-resolution paragraph as routine boilerplate is a mistake.

Practical lessons for operators

Know what the contract actually requires. A contract for the direct cultivation, purchase, or distribution of marijuana presents a different federal enforceability problem than an agreement for lawful goods or services provided to a marijuana company.

Separate lawful transactions where possible. If a transaction contains distinct lawful obligations, document them as distinct economic obligations. Courts are more likely to consider enforcing a genuinely separate lawful agreement than an obligation whose value exists entirely because of a marijuana sale.

Do not assume a guaranty solves the problem. CURA guaranteed GR Vending’s obligations in Hello Farms. That did not save a contract the court found federally unenforceable.

Limit credit exposure. Deposits, shorter payment cycles, staged deliveries, payment before or upon delivery, and other ordinary credit-risk tools become more important when litigation may not provide the remedy a business expects.

Pay attention to forum selection. Particularly within the Sixth Circuit, operators should discuss state-court forum clauses, removal waivers, arbitration provisions, and governing-law provisions with counsel rather than simply copying them from an old agreement.

Medical operators should understand what Schedule III actually does. A state medical marijuana license and Schedule III status do not necessarily mean that a transaction complies with federal law. DEA registration and other federal requirements remain important.

And finally, hemp is different. A contract involving a product that is lawful hemp under federal law does not start from the same Controlled Substances Act problem. That distinction is another reason why preserving a meaningful federal legal category for hemp matters.

The larger problem is federal law

There is something deeply unsatisfactory about the result in Hello Farms. The defendants entered the contract. They allegedly breached it when market prices collapsed. A jury heard the evidence and awarded the grower $31.8 million, then federal marijuana law allowed the defendants to avoid the judgment.

The Supreme Court once described the illegality defense as “a very dishonest one.” The Sixth Circuit quoted that language in its opinion. But the court also correctly noted that judges do not get to rewrite federal drug policy simply because the result seems unfair.

For years, state governments have encouraged businesses to invest enormous amounts of capital in licensed marijuana markets while federal law continues to treat much of their ordinary commercial activity as criminal. That contradiction produces consequences far beyond the risk of a DEA raid. It affects banking. Bankruptcy. Intellectual property. Financing. Taxation. And now, very clearly, contract enforcement. Schedule III addresses some of these problems, but as the Hello Farms ruling shows, it does not resolve the fundamental conflict.

Marijuana businesses should draft around federal illegality where they reasonably can. They should manage payment and counterparty risk more carefully. And they should understand that state legalization does not always mean that a court will enforce the bargain they signed. But there is only so much that good contract drafting can accomplish.

At some point, Congress needs to stop asking state-licensed cannabis businesses to operate like legitimate businesses while federal law continues to insist that their ordinary business transactions are crimes.

September 14, 2026