Marijuana Dispensaries Subject to Law of Unenforceable Contracts

A potentially controversial ruling was rendered by Hon. Raymond Cadei in the Superior Court of California, County of Sacramento on September 6, 2013, that should draw concern for those involved in medical marijuana and cannabis businesses and dispensaries.
As you may know, California’s medical cannabis program was established when state voters approved Proposition 215 (also known as the Compassionate Use Act of 1996) on the November 5, 1996 ballot with a 55% majority. The proposition added Section 11362.5 to the California Health and Safety Code, modifying state law to allow people with cancer, anorexia, AIDS, spasticity, glaucoma, arthritis, migraines or other chronic illnesses the “legal right to obtain or grow, and use marijuana for medical purposes when recommended by a doctor.” The law also mandated that doctors not be punished for recommending the drug, and required that federal and state governments work together “to implement a plan to provide for the safe and affordable distribution of marijuana to all patients in medical need.” Proposition 215, however, does not affect federal law, which still prohibits the cultivation and possession of marijuana.
On January 7, 2013, plaintiff Christopher Garcia filed a complaint against defendant Daniel Reid Thomas alleging six (6) causes of action, all arising under an alleged written contract that called for plaintiff to invest into defendant’s medical cannabis dispensary in exchange for profits. In response, on April 22, 2013, defendant filed a Demurrer to complaint for failure to state an enforceable claim. The argument on demurrer: the alleged contract between plaintiff and defendant was unenforceable because the purpose of the contract is illegal under federal law. This issue has actually not been explored in California.
In Judge Cadei’s ruling, he writes, “there can be no legitimate dispute that the possession, production and distribution of marijuana are prohibited under federal law, specifically the Controlled Substances Act (“CSA”).” Thus, he said, “the critical question here is whether the contract alleged to exist between plaintiff and defendant has as its fundamental purpose a matter which is illegal under federal law, the sole legal basis for the present demurrer.”
Then the following precedential decision was issued:

Based on the foregoing, this Court has no doubt that the subject agreement between plaintiff and defendant has as its ultimate object the acquisition of an interest in and the operation of a marijuana dispensary. Because the possession, production and/or distribution of marijuana is clearly prohibited under federal law notwithstanding California state law (which is preempted by the Supremacy Clause of the United States Constitution), this Court concludes for the same reasons set forth in both the Arizona and Colorado decisions cited by defendant that the contract at the heart of the present lawsuit has a purpose which is illegal under applicable federal law. Accordingly, under well established California state law, the contract identified in plaintiff’s verified complaint is unenforceable. Since all of the COA [causes of action] asserted in the complaint fundamentally arise from that illegal and unenforceable contract, the present demurrer must be and hereby is sustained.

Currently in California, there is an extensive and coordinated crackdown on California’s dispensaries by the chief prosecutors of the state’s four Federal districts, leading to concerns among advocates and patients that a de facto nullification of state medical marijuana laws was in the forecast. This ruling appears to further give little or no legal rights to dispensaries or those who do business with them—so what incentive would a building owner have to rent their space to a dispensary or what incentive would co-owners of a dispensaries have to enter into business together? Essentially, this ruling makes any relationship potentially void as the purpose is illegal under federal law. Fascinating from a legal perspective. But worrisome for medical cannabis dispensaries and advocates.