A Michigan breach-of-contract dispute between cultivator Hello Farms and Curaleaf Holdings has cracked open a fault line that runs beneath every cannabis contract in the US, opening the door to a ‘mutually assured destruction’ defence that cannot be closed.
On September 10, the US Court of Appeals for the Sixth Circuit overturned a $31.8m verdict against Curaleaf, ruling that its subsidiaries’ supply contract with the cultivator was unenforceable because cannabis remains illegal under federal law.
The ruling has set a ‘dangerous precedent’ for the wider industry, founding partner of S Burns Legal PLLC Susan Burns told Business of Cannabis.
Writing on his Substack earlier this week, Marc Hauser, adjunct professor of cannabis law at the University of Nevada, Las Vegas, provided perhaps the simplest distillation of the case, evoking, of all things, nuclear deterrence.
“There’s been a sort-of détente amongst cannabis companies to not raise the defence in litigation, a mutually assured destruction doctrine that the industry couldn’t survive its use. The only way to win is not to play.”
How did a supply contract become a federal legal precedent?
Hello Farms, a Michigan-based cannabis cultivator, signed a two-year supply agreement with GR Vending MI, LLC and CURA MI, LLC, two Michigan subsidiaries of Curaleaf Holdings, Inc., on November 23, 2020.
Under the contract, Curaleaf’s subsidiaries agreed to purchase 100% of Hello Farms’ cannabis biomass from its 2020 and 2021 harvests, at prices tied to a sliding THC-potency scale. Curaleaf paid a $2.2m deposit and took an initial delivery.
This relationship soon broke down, seeing Curaleaf stop taking product or making payments by January 2021. Hello Farms was forced to resell its 2020 crop to a third party at comparable prices to those agreed with Curaleaf.
Hello Farms resold its 2020 crop to a third party at comparable prices. However, by 2021, wholesale cannabis prices in Michigan had plummeted, seeing the cultivator sell that year’s much larger harvest for roughly $60 a pound, a fraction of the $850 a pound it had agreed to in its contract.
In February 2021, Hello Farms filed a lawsuit in Arenac County Circuit Court, Michigan, against Curaleaf’s subsidiaries, alleging breach of contract and seeking to recoup $31m in damages.
The ‘illegality defence’
Curaleaf’s response to this lawsuit is critical. It underpins the next five years of litigation between the two parties. Most importantly, it establishes a tactic that could, in theory, be used by cannabis companies throughout the US to render contractual obligations unenforceable.
Invoking ‘diversity jurisdiction’, a legal route available because the parties were incorporated in different states and the amount in dispute exceeded the federal threshold, Curaleaf was able to move the case to the US District Court for the Eastern District of Michigan on March 4, 2021. This put the case in front of a federal judge rather than a Michigan state judge.
In doing so, Curaleaf’s legal team were able to raise the federal illegality of cannabis under the Controlled Substances Act as a defence, one that would ultimately pay off.
Hirsh Jain, the founder of US cannabis consultancy Ananda Strategy, explained: “The case epitomises the fundamental contradiction at the centre of American cannabis policy.
“States have spent more than a decade licensing businesses, collecting billions of dollars in taxes and constructing elaborate regulatory systems around conduct that federal law continues to prohibit. Businesses are expected to operate like ordinary regulated companies, but when they enter the federal legal system, they can discover that some of the basic protections ordinary businesses take for granted may not apply to them. That is not a sustainable foundation for a mature national industry.”
This defence was heard at a summary judgement hearing on July 29, 2024, by US District Judge Matthew F. Leitman, who rejected it outright.
“In my view, the position taken by the defendants in this case, given their business and what I understand of them, is really, it seems to me, to be hypocrisy and illegal gamesmanship,” Judge Leitman said.
Proceeding to trial on January 29, 2025, the jury found in favour of Hello Farms, awarding it $31.8m. Post trial, Curaleaf’s subsidiaries raised the defence a second time but was again rejected by Leitman.
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The reversal
Despite Leitman’s second rejection, the ruling was appealed, and on September 10, 2026, the US Court of Appeals for the Sixth Circuit ruled in favour of Curaleaf’s subsidiaries.
Ultimately, the panel ruled that ‘the parties’ agreement was itself illegal. And that’s enough.’
Despite numerous and legitimate arguments from Hello Farms’ legal team that the court could still recognise the contract as ‘an intelligible economic transaction’ distinct from the illegal conduct, fundamentally the contract’s purpose was still the distribution of a federally controlled substance, and therefore, illegal.
This is precisely why this case has caused such concern for the US cannabis industry. Whatever their thoughts on the conduct of either party, federal illegality is inescapable.
Burns explained: “In my view, the Sixth Circuit reached the legally correct result under existing federal law. The contract required the production and sale of marijuana, conduct that remains prohibited by the Controlled Substances Act. The court did not create that conflict; Congress did.
“What makes the case so troubling is how Curaleaf used that conflict. Hello Farms sued in Michigan state court. The Curaleaf defendants removed the case to federal court and then used federal illegality to escape a $31.8 million verdict arising from their own state-regulated marijuana contract. Curaleaf may have won the case, but it created dangerous precedent for the rest of the industry.”
Jain mirrored this sentiment, stating, “This decision has the potential to be extremely destabilising for the cannabis industry. I would not go so far as to say that every cannabis contract in America is suddenly unenforceable, but the Sixth Circuit has created a very serious precedent.
“If a sophisticated party can enter into a state-legal cannabis contract, breach that agreement when market conditions change, and then invoke federal prohibition as a defence to paying what it owes, that puts a meaningful category of cannabis contracts at legal risk.”
This, he adds, is particularly concerning for an industry that ‘already has a significant problem with nonpayment and counterparties failing to honour contractual obligations’.
“Even if other courts ultimately take a narrower view of this decision, the existence of this precedent creates another potential avenue for parties looking to avoid obligations they willingly undertook. That introduces additional uncertainty into lending, supply agreements, acquisitions and other commercial relationships, and potentially rewards exactly the kind of behaviour that contract law is supposed to discourage.”
What does this mean for cannabis companies?
This does not mean that the decades of contracts on which the world’s most valuable cannabis industry are built are no longer worth the paper they are written on.
It does, however, mean that operators now need to consider how, and crucially where, potential disputes can be heard.
Burns continued: “For cannabis businesses and their advisors, Hello Farms is both a contract-audit moment and a flashing yellow light for future transactions. Existing agreements should be reviewed, with an eye toward possible amendment and identification of risk to (1) identify obligations that require federally prohibited conduct, (2) determine whether lawful portions can be separated, and (3) assess what remedies are available.
“Going forward, additional due diligence is mandatory before an agreement is signed. That includes examining the proposed performance, the parties’ ownership and citizenship, applicable licensing and regulatory compliance, available remedies, and where a dispute could ultimately be heard. The contract should then be drafted with those risks in mind.”
“After Hello Farms, forum selection may be the most consequential provision in a US marijuana contract. It can determine whether the parties remain in a state court operating within the state’s regulated cannabis market or land in federal court, where a contract requiring federally prohibited conduct may be unenforceable from the outset. A generic governing-law clause or consent to ‘courts located in’ the state may not be enough. Forum selection is no longer boilerplate.”
Cannabis policy analyst and former Head of Legal and Policy Research at NuggMD, Deb Tharp, echoed this, telling Business of Cannabis that contracts need to have a ‘clear and unequivocal waiver’ to ensure cases are heard in states where there are laws explicitly making cannabis contracts enforceable.
This, she says, ‘could have changed the entire procedural history’ of the Hello Farms dispute. While she is clear that this ‘doesn’t guarantee Michigan or other states will enforce contracts’, forcing litigation into the forum whose legislature expressly declared cannabis contracts enforceable is a much safer option than leaving the door open for parties to remove the case straight to federal courts, where no such protections exist.
“The lesson we learned from Hello Farms is that without those protections, a sophisticated multistate buyer may know when it signs the contract that diversity jurisdiction plus federal illegality potentially gives it an escape hatch that its smaller supplier does not realise exists.”
Ultimately, without congressional intervention, this option will remain open. As Jain points out, even rescheduling does not meaningfully alter the equation.
“Moving cannabis to Schedule III does not automatically legalise state cannabis markets under federal law, and the Sixth Circuit expressly recognised that distinction. Ultimately, Congress will need to address the legal status of state-regulated cannabis activity more directly.
“Until that happens, cases like this are a reminder that the gap between state legalisation and federal prohibition has very real consequences for businesses, investors, employees and anyone else relying on the enforceability of agreements in this industry.”
Burns concluded, “Nothing, aside from congressional action, can make federally prohibited conduct lawful, and there is no guarantee on how a state court will enforce an agreement.
“The lesson is not to stop using contracts. It is to stop treating cannabis contracts like ordinary commercial agreements. After Hello Farms, where and how a contract can be enforced matters just as much as what the contract says.”
Business of Cannabis contacted Curaleaf for comment on the case but received no response at the time of publication.