A $31.8 Million Cannabis Verdict Vanished in Federal Court. Some California Harvest Contracts Could Face the Same Test.

A licensed Michigan grower contracted to sell its harvest to a Curaleaf subsidiary, grew product that passed testing, and watched the buyer refuse further deliveries when prices fell. A jury awarded the grower $31.8 million. On September 10, the Sixth Circuit reversed, holding that “[f]ederal courts can’t enforce contract claims founded on an agreement to purchase marijuana illegally” (Hello Farms Licensing MI, LLC v. GR Vending MI, LLC, No. 25-1759 (6th Cir. Sept. 10, 2026)). Hello Farms has petitioned for rehearing, but the published opinion binds federal courts in Michigan, Ohio, Kentucky, and Tennessee in the meantime.

California operators should read Hello Farms as foreshadowing. This October’s outdoor harvest is arriving in a soft market, with outdoor wholesale prices down 11% since January. When soft markets send buyers looking for a way out of purchase commitments, the illegality defense to a breach of contract lawsuit has the best shot in federal court, and the Hello Farms decision shows how that defense can succeed.

Rescheduling will not rescue an adult-use contract

The Sixth Circuit also held that a contract illegal when made is not saved by a later change in law, and without DEA registration even a medical-only contract would still violate federal law. The April final rule moves only FDA-approved drug products and state-licensed medical marijuana to Schedule III, and its registrations “do not authorize the manufacture, distribution, dispensing, or use of marijuana… for non-medical purposes.” Adult-use contracts between A-licensees fall outside the rule.

California’s answer, and its limits

Civil Code § 1550.5(b) provides that commercial cannabis activity conducted in compliance with California law and applicable local standards is “[a] lawful object of a contract,” “[n]otwithstanding any law, including… federal law.” In superior court, an unpaid seller has a statutory answer to the illegality defense.

In JCCrandall LLC v. County of Santa Barbara, a Court of Appeal panel wrote that § 1550.5(b) “defies the Supremacy Clause,” while declining to decide its validity as between voluntary contracting parties. At the Department of Cannabis Control’s request, the California Supreme Court depublished the opinion in March 2025, so it cannot be cited. A defendant with enough at stake will try that reasoning again.

In federal court, the effect of federal illegality on a contract “is a matter of federal law, even in diversity actions” (Kelly v. Kosuga, 358 U.S. 516, 519 (1959)), and § 1550.5 cannot settle it. The Ninth Circuit has not decided whether federal illegality bars a cannabis contract. A seller would rely on Bassidji v. Goe, 413 F.3d 928 (9th Cir. 2005), which lets courts weigh forfeiture and relative fault “as long as the relief ordered does not mandate illegal conduct.” Hello Farms rejected that kind of balancing and held that a judgment that only transfers money still enforces the illegal bargain.

The removal problem

The Hello Farms defendants removed from Michigan state court on diversity grounds. A buyer can do the same to a California seller whenever no defendant shares the seller’s citizenship and more than $75,000 is at stake (28 U.S.C. § 1332(a)). The forum-defendant rule, 28 U.S.C. § 1441(b)(2), bars removal by a California-citizen defendant. But an LLC takes the citizenship of every member (Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006)). A California licensee owned entirely through out-of-state members may remove a case that looks local.

What a harvest contract needs this season

1. A mandatory California forum with an express removal waiver. Name a specific county’s superior court as the exclusive forum and state that each party waives removal. A clause naming “the courts in” a county allows any federal courthouse in that county (City of Albany v. CH2M Hill, Inc., 924 F.3d 1306 (9th Cir. 2019)).
2. Arbitration under the California Arbitration Act, Code of Civil Procedure § 1280 et seq., with confirmation reserved to superior court. Courts review whole-contract illegality claims at enforcement (Moncharsh v. Heily & Blase, 3 Cal.4th 1, 31–32 (1992)).
3. California choice of law that names § 1550.5, plus mutual acknowledgments of active state licenses and compliance with Business and Professions Code § 26053.
4. Payment security that does not depend on a lawsuit. Deposits structured as liquidated damages under Civil Code § 1671, staged deliveries, and no Metrc transfers while an invoice is past due.
5. The same forum and arbitration terms in every guaranty, consignment agreement, and side letter.
6. An audit of contracts already signed. Agreements signed before Hello Farms rarely address removal; amend them while relations are cooperative.

Bottom line

A California cannabis contract is generally enforceable in California state court and at serious risk in federal court. The forum clause should therefore be drafted as if the buyer will try to escape the deal, because in a soft market many will.

The Law Office of Shay Aaron Gilmore drafts and reviews cannabis commercial contracts, including supply, output, consignment, and distribution agreements, and represents licensees in payment and breach disputes in California courts and arbitration. Hemp operators face a different enforceability picture; see hemp commercial contracts.

Related: Cannabis and Hemp Law Blog · Cannabis Regulatory Practice · Corporate & Business Law

Legal commentary, not legal advice.