Cannabusiness lawsuit highlights need for Congress to clarify federal treatment of marijuana

A chain of Michigan marijuana retailers is exploiting the federal marijuana ban to attempt to void its contract obligations with a supplier.  A supplier alleges that it failed to pay for marijuana the retailer had contractually agreed to buy, and the retail chain says courts can’t enforce a contract involving illegal activity. If successful, this argument could massively disrupt state-regulated marijuana markets. It’s another example of why Congress needs to resolve this discrepancy in federal and state marijuana laws.

Cura MI, a Michigan subsidiary of Massachusetts-based Curaleaf Holdings, signed a contract in 2020 agreeing to purchase the 2020 and 2021 harvests of its local supplier and cultivator, Hello Farms. Cura MI accepted roughly 53,000 pounds of this marijuana, but now says it doesn’t have to pay its supplier because federal courts can’t enforce a contract that involves illegal activity.

By early 2021, Cura MI was already allegedly failing to make payments, and Hello Farms sued Cura MI in a Michigan court, hoping to collect roughly $32 million that the retailer had agreed to pay. Michigan’s marijuana laws make clear that contracts between licensed marijuana businesses are enforceable in Michigan (see MCL § 333.27960). So, an observer might assume that none of this is a federal matter. However, because Cura MI is owned by a Massachusetts-based parent company, Curaleaf Holdings was able to petition in March 2021 to remove the proceeding to federal court because the dispute is between residents of different states.

Once in federal district court, Curaleaf ultimately argued the court could not enforce contract provisions involving marijuana because trafficking in marijuana is a federal crime. Many U.S. Supreme Court rulings have held that courts cannot use their equitable powers to facilitate criminal activity, so litigants ultimately have no legal recourse to enforce contracts involving illegal acts.

But U.S. District Judge Matthew Leitman developed a novel interpretation of Supreme Court precedent by pointing to prior U.S. Supreme Court rulings, such as McMullen v. Hoffman and Continental Wallpaper v. Voight & Sons, in which the illegality defense hinged on the action being contrary to public policy. In both cases, the Supreme Court ruled the disputes involved illegal contracts and therefore courts could not lend their assistance, but the language used in these rulings said things like, “In such cases, the aid of the court is denied not for the benefit of the defendant, but because public policy demands that it should be denied… .”

Leitman interpreted these rulings to mean the intent of public policy may be the more appropriate lens through which to view a contract dispute than per se illegality, and public policy regarding marijuana is ambiguous. In particular, although Congress declared marijuana commerce criminal in passing the Controlled Substances Act, it has also protected state medical marijuana markets from federal intervention through the budget process. In every year since 2014, the Rohrabacher-Farr amendments to federal appropriations legislation have prohibited the U.S. Justice Department from using any resources to prosecute medical marijuana companies in compliance with state law.

During 2020, all of Hello Farms’ marijuana was grown under a medical license, and the cultivator remained in compliance with state regulations, so Leitman’s so-called “public-policy doctrine” implied the contract could be enforceable even under federal law. However, Leitman acknowledged that, “[U]nder a straightforward application of the … [Controlled Substances Act] … there’s a very serious argument to be made that this contract is not enforceable.”

Leitman’s legal analysis was critical to establishing whether the court held the authority to intervene in the Curaleaf case, and it ultimately allowed a federal jury to render a decision in 2025 holding Curaleaf in breach of contract and awarded $32 million in damages in Hello Farms.

This isn’t the first time a federal court has interpreted the Rohrabacher-Farr amendments as a Congressional acknowledgment of legitimacy of state-regulated marijuana markets. In 2022, the First Circuit Court of Appeals struck down Maine’s in-state residency requirements for cannabis licensure by pointing, in part, to these provisions. The judges there concluded that Congress had expressly recognized a market for marijuana through the amendments, and therefore it alone held the power to regulate interstate commerce within that market.

However, Leitman’s novel ruling is not settled. In November 2025, Curaleaf appealed the district court’s decision to the Sixth Circuit, arguing, “Under black-letter law, this contract to violate federal law is void and unenforceable, and both parties should have known it.” Whether the Sixth Circuit (and, perhaps, eventually the Supreme Court) accepts Leitman’s creative rationale or applies the law strictly could have a massive impact on state-regulated marijuana markets.

As legal cannabis markets have matured, consolidation has resulted in a few large companies holding licenses across numerous states and becoming dominant buyers and sellers of marijuana. If these multi-state operators can abandon their financial commitments to local operators and to each other by removing any claim to federal court and then claiming illegality, then a large share of contractual arrangements would ultimately become unenforceable. Licensed marijuana businesses would then be forced to rely solely on the goodwill of their counterparty to any exchange, exactly as occurs in purely illicit markets.

Marijuana licensees that also issue securities traded on public markets, like Curaleaf, may face additional complications arising from a need to disclose in their filings with the U.S. Securities and Exchange Commission or foreign regulatory agencies that all of their contractual rights are also unenforceable. That might force them to impair key assets like accounts receivable or leasehold improvements to remain in compliance with legal and accounting standards.

The progression of this case highlights the urgent need for Congress to clarify its position on marijuana. As Supreme Court Justice Clarence Thomas wrote in 2021 in response to the Court’s denial of a writ of certiorari relating to a marijuana case: “The federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.” His observation presciently preceded federal courts’ development of rationales for intervening in marijuana cases.

Particularly in the wake of President Donald Trump’s recent order for the attorney general to move marijuana to Schedule III under the Controlled Substances Act, the momentum has shifted for Congress to at least clarify its recognition of state laws so courts have clearer guidance. Proposals such as the STATES Act 2.0 or the States Reform Act would do so by federally legalizing any marijuana products grown in compliance with state law.

Failure to clarify this issue could force federal courts to render decisions that are either massively destabilizing for existing state markets or that effectively go around Congress to enshrine those markets.

The post Cannabusiness lawsuit highlights need for Congress to clarify federal treatment of marijuana appeared first on Reason Foundation.

Source: https://reason.org/commentary/cannabusiness-lawsuit-highlights-need-for-congress-to-clarify-federal-treatment-of-marijuana/