Mann v. Gullickson

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
Decision Date02 November 2016
Docket NumberCase No. 15-cv-03630-MEJ



Case No. 15-cv-03630-MEJ


November 2, 2016


Re: Dkt. No. 36


At its core, this case consists of a simple breach of contract claim. But to decide whether the parties' business agreement is enforceable, the Court must navigate the conflict created by the prohibition of medical marijuana under federal law and the legalization medical marijuana under California law. Specifically, this Order addresses whether Defendant and Cross-Claimant Sara Gullickson is excused from performing her obligations under a contract formed in California because the contract relates to the medical marijuana industry. Pending before the Court is Gullickson's Motion for Summary Judgment, in which she asks the Court to invalidate the parties' agreement under the federal Controlled Substances Act, 21 U.S.C. §§ 801 et seq. Mot., Dkt. No. 36. Plaintiff and Cross-Defendant Dharminder Mann filed an Opposition (Opp'n, Dkt. No. 37), and Gullickson filed a Reply (Reply, Dkt. No. 38). The Court held a hearing on the matter on September 1, 2016 (Dkt. No. 41) and then ordered Supplemental Briefing (Dkt. No. 42). Having considered the parties' positions, relevant legal authority, and the record in this case, the Court DENIES Gullickson's Motion for the following reasons.

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Around March 2014, Mann sold two businesses to Gullickson through a Stock Purchase Agreement: (1) Illinois DP, LLC a/k/a Dispensary ("DP") a consulting business for state-regulated marijuana dispensary or cultivation licenses; and (2) weGrow Enterprises, Inc. ("weGrow") a franchise hydroponic retail operation (collectively, the "Companies"). Stock Agmt, Dkt. No. 36-3. Gullickson, as consideration, forgave a $10,000 loan to Mann and executed a Promissory Note ("Note") agreeing to pay Mann an additional $400,000 in three installments. Mann alleges Gullickson has failed to make payments as required under the Note. See Note, Dkt. No. 36-6 (included with the Complaint and a "Notice of Default of Promissory Note" sent to Gullickson).

The parties did not spend much time describing the nature of the Companies at issue or the precise nature of their business, but the parties' agreements provide some assistance. The Stock Agreement indicates weGrow is a franchisor and its franchisees agree to "operate a retail outlet . . . that sells hydroponic and related plant growing equipment and which provides seminars, information and assistance on plant growing techniques (including how to grow cannabis)." Stock Agmt., Ex. G-1 (attaching "Franchise Disclosure Agreement" of weGrow), available at ECF p.24. The "market" for franchisees' "products and services include "hydroponic farming operations, hydroponic hobbyists, and medical marijuana patients." Id. This agreement further recognizes that Mann "currently serves as President, the University of Cannabis (, the largest online University for medical marijuana in the world" and indicates weGrow also had a "hydroponic retail outlet" that "provides services to assist medical marijuana patients in creating their own cannabis gardens" including by offering "cannabis seminars" and "on-site doctors to recommend cannabis cards and on-site technicians to build [their] customers' grow rooms." Id. at ECF p.25-26. As to DP, a draft agreement entitled "Dispensary Permits Medical Marijuana Business Plan Development and Consulting Services Agreement" indicates DP's business is to help facilitate the "procurement" of a "medical marijuana dispensary license" for other entities and

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to those other entities to "apply[] for and prospectively open[] and operate[] a Medical Marijuana Dispensary facility." DP Consulting Agmt. at ECF p.3 & 11, Dkt. No. 36-4. A press release indicates DP was formed "to Assist Entrepreneurs with Opening a Medical Marijuana Dispensary in Illinois" by assisting them with "obtaining a dispensary licenses or cultivation license in Illinois" and providing "hands on support to medical marijuana entrepreneurs." Press Release, Dkt. No. 36-5. There is no indication in the record these Companies directly grew or sold marijuana.

Mann filed this action in California Superior Court on June 4, 2015, which Gullickson removed to this Court on August 7, 2015. Not. of Removal, Dkt. No. 1; id., Ex. A (Compl.). Mann asserts a breach of contract claim, alleging Gullickson defaulted on the Note and requests relief in the form of the alleged remaining principal and other remedies permitted by the parties' contracts, including interest and attorneys' fees. Compl. ¶¶ 7, 9-10. Gullickson filed a cross-complaint on August 7, 2015, asserting claims for breach of contract, breach of the covenant of good faith and fair dealing, conversion, fraud, negligent misrepresentation, and intentional interference with prospective economic relations. Not. of Removal, Ex. C (Cross-Compl.). Gullickson asserts that, in April 2015, at the direction of Mann, the Companies' website manager took the and websites offline, allegedly resulting in substantial missed business opportunities for the Companies. Id. ¶ 11.

Gullickson filed this summary judgment motion on July 21, 2016. See Mot. She contends the parties' agreement is void ab initio because it relates to medical marijuana, which is still a prohibited substance under the federal Controlled Substances Act ("CSA"), even if legal in the states where the Companies operate and the parties' contracts were formed. See 21 U.S.C. §§ 841(a), 844(a) (prohibiting the use, distribution, possession, or cultivation of any marijuana). At the hearing on this matter, Gullickson conceded that her counterclaims would be subject to dismissal if the Court granted her summary judgment on the basis asserted in her motion.

Following the hearing, the Court permitted the parties to address three cases that might impact the Court's analysis in this matter: Bassidji v. Goe, 413 F.3d 928 (9th Cir. 2005); Green Earth Wellness Center, LLC v. Atain Specialty Insurance Co. (Green Earth), 163 F. Supp. 3d 821

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(D. Colo. 2016); and United States v. McIntosh, 833 F.3d 1163 (9th Cir. 2016). The Court also allowed the parties to submit supplemental evidence concerning the nature of the Companies' businesses sold through the parties' agreements and the status of the parties' performance under those agreements. See Order, Dkt. No. 42.

In a newly-filed declaration, Mann explains the "business of WeGrow [] dba, was to provide consulting and information services to persons desiring to engage in hydroponic farming" and to "provide consulting and documentation preparation services to persons or entities desiring to establish medical cannabis dispensaries and related businesses in states where such activities were legal." Mann Decl. at 2, Dkt. No. 43-1. He contends that "[a]t no time did these companies possess, cultivate or distribute cannabis plants." Id. Instead, he states "[o]ur income was derived solely from the sale of our consulting services and information packs and document preparation." Id. Mann contends Gullickson still owes him $225,000, the balance due on the Note and asserts she continues to own and operate the Companies. Id. at 3.

For her part, Gullickson now declares the "intent of the parties" was that Gullickson would make payments promised under the promissory note "with revenue derived from operating the marijuana businesses" Mann sold her and that Mann "was aware [she] could not pay for the businesses without such businesses generating revenue[.]" Suppl. Gullickson Decl. ¶ 2, Dkt. No. 44-1. She explains she "had no other means to pay for the businesses." Id. Gullickson also contends she "did not receive what Mann purports to have sold to [her,]" noting that Mann "represented to [her] that the businesses he was selling complied with all applicable laws." Id. ¶¶ 4, 8; see also Def.'s Suppl. Reply at 4 (Gullickson "clearly states that she did not get what she paid for") & 4-5 (arguing the "relief requested by Mann cannot be granted because it would 'mandate illegal conduct'" as Gullickson has "no other means by which to pay Mann" other than with revenue from the businesses), Dkt. No. 47. Gullickson does not say whether she plans to continue operating the Companies. She contends "[t]here is no evidence in the record that Gullickson knew or should have known of this federal prohibition. The evidence is actually the opposite and undisputed; Gullickson relied on Mann and his attorneys in performing such legal analysis." Def.'s Suppl. Reply at 6; Suppl. Gullickson Decl. ¶¶ 7-8.

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Summary judgment is proper where the pleadings, discovery and affidavits demonstrate that there is "no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery and affidavits that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Material facts are those that may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id.

Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). On an issue where the nonmoving party will bear the burden of proof at trial, the moving party can prevail merely by pointing out to the district court that there is an...

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