In Missouri, two cannabis manufacturing companies find themselves embroiled in a multimillion-dollar lawsuit stemming from a dispute over who bears liability for a mass recall of thousands of THC edibles and vape cartridges that took place nearly a year ago.
Prior to this recall, Delta Extraction (“Delta”) entered into a contract with SND Equipment Leasing (“SND”) to extract THC distillate for Delta. SND would then provide Delta with the extracted distillate for Delta to sell to other manufacturers in Missouri, who would use the distillate for their production of various THC products, including edibles and vape cartridges. Those products were ultimately subject to a recall by these manufacturers after the Missouri Division of Cannabis Regulation (“the Division”) discovered that SND, extracted the distillate oil not just from cannabis plants but also from hemp plants. Because hemp is not regulated by the Division, any products that may have been made from this distillate were automatically deemed unsafe and directed by the Division to be taken off the retail sales market.
This led the Division to revoke Delta’s manufacturing license in December 2023. Delta has appealed that revocation decision and the recall requirement by the Division. Specifically, Delta has sought to overturn the recall of 45,000 of the 60,000 products implicated last August. Delta noted that the remaining 15,000 products were put back on the market after the Division was able to verify that they were produced using oil extracted solely from regulated cannabis plants. Decisions from the Missouri Administrative Hearing Commission on both of these appeals by Delta are pending.
Meanwhile, SND has commenced a lawsuit against Delta and alleged that Delta refused to pay its invoices pursuant to the parties’ contract. SND’s claim for breach of contract against Delta totalled $13 million. Also, SND claimed that, despite its decision to incorporate hemp-derived oil into the distillate it produced, it did not bear responsibility for this distillate’s noncompliance with state regulations. In fact, as a company not licensed by the Division, SND argued it did not even have the authority to communicate with the Division in order to ensure compliance — this all rested with Delta Extraction. SND also sued Delta for a further $5 million, the value of SND’s extraction equipment, which was housed in Delta’s facilities and which was subsequently seized by state authorities after the recall decision was made last year by the Division.
Even though the litigation remains unresolved, these disputes underscore the importance of: 1) foresight of potential product recalls that may arise as a result of a regulatory decision that impacts the obligations of the parties pursuant to their contract; and 2) the delineation of each party’s liability for the risk of loss from the regulatory decisions
These enhanced contractual provisions could be further bolstered by the addition of mandatory arbitrations clauses that designate how the dispute over liability will be adjudicated. The requirement of the parties to engage in arbitration instead of litigation could allow for the nature of their dispute to kept private without the disclosure of sensitive commercial terms becoming publicly available All this can contribute toward ensuring that contracting parties do not have to incur enhanced legal costs for litigation on top of the lost revenue stemming from the regulatory offense(s) that led to the dispute in question.
(Justin is a second-year law student and summer student for CansultEd. CansultEd is an alternative dispute resolution company that operates exclusively in the US cannabis space.)