A recent decision of the U.S. Court of Appeals for the Third Circuit serves as a stark reminder to companies and individuals in the state-legal cannabis industry that the federal illegality of cannabis can jeopardize their ability to enforce contracts in federal court.
Background
In Apical Biotek, LLC et al. v. Maitri Holdings, LLC et al., the Third Circuit heard an appeal from a district court’s order granting summary judgment to the defendants, which operate a tissue culture lab and medical cannabis dispensaries in Pennsylvania, on the plaintiffs’ claims for breach of contract and unjust enrichment.
Underlying their dispute was an alleged contract for the plaintiffs to provide cannabis consulting services to the defendants, including consulting on the operation of a tissue culture lab. Although the defendants paid the plaintiffs for their products, services, and expenses, the plaintiffs later contended that they had contracted to be compensated with equity in one of the defendant companies but had received none.
Ruling for the defendants on summary judgment, the district court concluded that, although genuine issues of material fact remained regarding the formation of a contract, the plaintiffs did not cite sufficient evidence of damages from breach of contract. Regarding unjust enrichment, the court reasoned that the plaintiffs had been paid for their services, and no documentary evidence showed that they were paid at a discounted rate.
Third Circuit Ruling and Reasoning
On appeal, the Third Circuit directed the parties to brief an issue that the district court had not addressed and that neither side had raised: whether a federal court “may grant relief on claims based on an agreement that contemplates distribution of a controlled substance in violation of federal law.” Federal courts may not assist parties in “carrying out the terms of an illegal contract,” and they will not enforce a contract by entering a judgment that would order a violation of federal law, the court said.
Here, the breach of contract claim involved the defendants’ alleged failure to pay the plaintiffs all that they were owed for services provided to the defendants’ medical cannabis business. “If that business cultivates, manufactures, or distributes a federally controlled substance,” the court said, “then claims based on a contract to provide such a business services should be dismissed because enforcement would require this Court to ‘stamp its approval on the parties’ unlawful activities,’ namely, violations of the federal drug laws.”
Responding to the court’s order for supplemental briefing, the plaintiffs argued that the “plant genetics provided under the agreement” fall within the federal definition of “hemp,” so the contract does not involve a federally controlled substance. Both parties also argued that resolving their dispute by requiring payment of additional compensation to the plaintiffs would not require entry of an order to violate federal law.
Citing decisions by several federal district courts that contracts adjacent to the marijuana trade are unenforceable, however, the Third Circuit concluded in its unpublished opinion that additional factual development was necessary to determine whether the parties’ contract “provided for a transaction that would be illegal under federal law.” The appeals court consequently remanded the case to the district court to conduct further “factfinding on that issue and evaluate the consequences thereof, namely, whether this contract is unenforceable by federal courts.”
Judge Matey issued a concurring opinion casting doubt on the medical benefits of cannabis and stating that the plaintiffs appear to have “conspired” with the defendants to violate the federal Controlled Substances Act (CSA), notwithstanding their asserted compliance with Pennsylvania’s medical cannabis laws. According to Judge Matey, the panel’s decision confirms “what should have always been obvious: Litigants seeking relief related to drug distribution conspiracies can expect a rigorous inquiry by the district courts. And if, as is likely, the case and controversy turns on controlled substances, a prompt dismissal.”
Effect of Forthcoming Rescheduling
Looming in the background of this litigation is the proposed rescheduling of marijuana under the CSA from Schedule I to Schedule III. SeeSchedules of Controlled Substances: Rescheduling of Marijuana, 89 Fed. Reg. 44597 (May 21, 2024); Exec. Order No. 14370, 90 Fed. Reg. 60541 (Dec. 18, 2025). Although the Third Circuit did not address what impact rescheduling would have on its analysis, it is not likely that rescheduling would have any immediate impact on the court’s conclusion.
Rescheduling would allow a pathway for federally legal medical marijuana but would not automatically bless existing state regulatory regimes. Following rescheduling, dealing in marijuana and marijuana-derived products would still be subject to requirements under the CSA and requirements applicable to “new drugs” under the Federal Food, Drug, and Cosmetic Act (FDCA). For instance, under the FDCA, drugs containing a substance within the CSA’s definition of marijuana generally would require approval by the Food and Drug Administration (FDA) before they can be lawfully introduced or delivered for introduction into interstate commerce.
Essentially, the current state-legal marijuana trade would nonetheless fall outside the bounds of federal law if marijuana were a Schedule III substance. And after rescheduling, substantial efforts would still be necessary on the part of industry, the federal government, and state governments to align medical marijuana regimes with the newly established federal paradigms.
Why It Matters
Despite the pervasiveness of state-legal marijuana markets, this recent ruling by the Third Circuit highlights the continued importance of federal cannabis restrictions nationwide. Relatedly, we recently covered a decision by the Ninth Circuit that the federal illegality of marijuana renders Dormant Commerce Clause protections inapplicable in cases challenging states’ residency requirements for marijuana business licenses.
Practically speaking, if federal courts may not grant relief for breaches of marijuana-related contracts that would violate the CSA, the choice of venue between state and federal court becomes outcome determinative in these disputes. In other words, if only state courts will enforce contractual obligations arising out of state-legal cannabis business activities, litigants will likely respond by bringing these actions exclusively in state courts, and defendants in some cases may attempt removal to federal court to then secure dismissal.
Our Cannabis Practice provides advice on issues related to applicable federal and state law. Cannabis remains an illegal controlled substance under federal law.