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Shrinking Pains: Industry Contraction May Lead To Litigation

The emerging cannabis industry has created exciting business opportunities at all levels of production, distribution, and retail across the country. Unfortunately, some companies expanded too quickly and aggressively and are now re-evaluating their business strategy, including selling assets, laying off employees and scaling back their operations. These efforts will undoubtedly have a negative impact on small business operators—even if they haven’t yet overextended their operations. For example, large interstate dispensary operator MedMen Enterprises (“MedMen”) recently fell behind on payments to its vendors and is working with a business advisory firm to settle its debts and restructure its existing vendor contracts. As such, the product manufacturers and distributors that work with MedMen must be prepared to re-evaluate their business relationship, and possibly accept losses on outstanding and aged invoices.


As has been widely reported, MedMen underwent some notable growing pains in the past several months. In 2018 and early 2019, with multiple states poised to legalize cannabis, several companies engaged in an initial “land grab” by purchasing existing cannabis businesses and licenses in an effort to gain scale in the emerging cannabis marketplace. Unfortunately, the industry was unable to match the early (and possibly over-optimistic) return projections, and companies are trimming the fat to remain competitive. In addition to renegotiating its vendor contracts, MedMen was forced to close a factory in Illinois, lay-off store and corporate level workers, hold off on pursuing a multi-million dollar acquisition of PharmaCann, and even sell all of its holdings in Arizona, a state that legalized medical-use cannabis in 2010 and is making a strong push for recreational legalization in 2020. Notably, some of MedMen’s negotiations included offers to pay vendors with stock in place of cash currently owed.


As the above demonstrates, readjustments by large operators such as MedMen can lead to unfortunate consequences for smaller businesses that have contracts with those operators, as well as ancillary businesses that rely on larger operators like MedMen for ongoing revenue streams. Companies attempting to build up their cash reserves and save costs may attempt to renegotiate financing agreements or payment terms with the manufacturers and distributors. Depending on the size of the vendors and the diversity of their customer base, a contract renegotiation with a large retailer like MedMen may be a significant business event. For example, accepting stock in lieu of cash payments may make sense for a well-established company that can afford to weather the current turbulence of the industry, but more cash-strapped businesses may find themselves unable to pay their bills as a result. Furthermore, if the parties are unable to reach a compromise, it could and will likely lead to costly and protracted legal battles. Business operators facing a potential contract renegotiation should seek the advice of an attorney experienced both in negotiating agreements and litigating breach of contract claims in order to ensure the best possible result. Attorneys at HK Cannabis Law - a Practice Group of Huguenin Kahn, LLP - have the necessary experience and industry wherewithal to guide any such affected cannabis business through these difficult times.

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