Up in Smoke: When State-Legal Cannabis Is Not Legal Enough for Federal Courts

On September 10, the Sixth Circuit reversed a $31.8 million jury verdict in Hello Farms Licensing MI, LLC v. GR Vending MI, LLC, ruling that federal courts cannot enforce contracts based on marijuana sales, even in states where cannabis is legal. The decision offers three high-level takeaways: state licensure is not the same as federal enforceability, federal rescheduling (if successful) does not retroactively cure contracts that were illegal when made, and businesses in cannabis and other state-authorized, but federally constrained sectors, need to treat contract enforceability as a core regulatory-durability risk. 

We break down the decision and its implications below.

Background

Under federal law, marijuana is still illegal. The Controlled Substances Act (CSA), enacted in 1970, classifies marijuana as a Schedule I controlled substance. Manufacturing, distributing, or possessing marijuana with intent to sell is a federal felony.

Forty-one states have authorized some form of legal marijuana use. Michigan legalized medical marijuana in 2008 and recreational use in 2018 and issues separate licenses for each. The state further requires product testing and allows businesses with both license types to transfer inventory between markets.

In 2014, US Congress passed the Rohrabacher-Farr Amendment (RFA), which blocks the US Department of Justice (DOJ) from spending money to prosecute state-legal medical marijuana businesses. The RFA has been renewed every year since, but it does not legalize marijuana. The underlying activity remains a federal crime.

Then came the April 2026 rescheduling. Acting Attorney General Todd Blanche moved US Food and Drug Administration-approved cannabis products and state-licensed medical marijuana from Schedule I to Schedule III, effective April 28, 2026. We discussed this move at length in our previous alert here. While this was a significant shift, it came with two major limitations: (1) recreational cannabis stays Schedule I (and will remain so until the US Drug Enforcement Administration (DEA) completes its administrative process), and (2) medical marijuana operators must register with the DEA to operate lawfully under federal law.

The Hello Farms Case

In November 2020, Hello Farms, a Michigan cultivator with only medical growing licenses, signed a contract to sell its entire 2020 and 2021 harvests to GR Vending (a Curaleaf subsidiary). GR Vending held both medical and recreational licenses, so it could sell into either market. One detail proved critical: the contract required Hello Farms’ product to meet recreational cannabis testing standards, signaling the deal was not limited to medical sales.

GR Vending paid a $2.2 million deposit and took delivery of about 2,000 pounds of marijuana. Then, in early 2021, Michigan’s cannabis market crashed. GR Vending stopped accepting deliveries. Hello Farms had to sell its remaining harvest to another purchaser at much lower prices and ultimately sued GR Vending for breach of contract. A jury awarded Hello Farms $31.8 million.

GR Vending appealed, arguing that the contract was unenforceable because it was founded on conduct, namely marijuana trafficking, that violates federal law. The Sixth Circuit agreed and reversed the verdict.

The Court’s Reasoning

The Sixth Circuit started with a basic rule: federal courts will not enforce contracts that require illegal activity. This principle, rooted in US Supreme Court precedent, holds that courts will not aid a party whose claim is founded on an illegal act.

The contract covered recreational marijuana. The court found three facts that proved the deal was not limited to medical sales: the contract’s recreational testing requirement, GR Vending’s dual licensing, and Michigan law allowing inventory transfers between medical and recreational channels. The court concluded Hello Farms was supplying both markets.

The contract called for federal crimes. The court found that the parties had, on the face of the contract, promised to commit felonies. To perform the deal, Hello Farms had to possess marijuana with intent to distribute (a federal crime), and GR Vending would then distribute it to consumers (another federal crime). Enforcing the contract would mean enforcing exactly what the CSA prohibits.

The RFA does not legalize marijuana. Hello Farms argued that the RFA reflected a shift in federal policy toward tolerating state-legal medical marijuana markets and that courts should therefore enforce medical marijuana contracts. The Sixth Circuit rejected this argument. Even if the contract were limited to medical marijuana, the RFA would not change the analysis. The rider’s effect is limited both substantively and temporally: it restricts DOJ spending but does not decriminalize the underlying conduct. Congress could restore funding at any time, and prosecutions could follow.

Equitable arguments did not save the contract. Hello Farms asked the court to weigh factors like the parties’ expectations and the unfairness of letting GR Vending walk away from the deal. The court refused: when a contract involves serious crimes with penalties up to life in prison, there is nothing to balance. Hello Farms also argued it was only seeking money damages, not asking the court to force GR Vending to engage in more illegal activity. The court rejected this too, holding that federal courts cannot award lost profits from an illegal agreement simply because a money transfer, standing alone, is not illegal.

Low enforcement does not mean it is legal. Hello Farms pointed out that federal marijuana prosecutions have declined. The court was unmoved, holding that marijuana’s legality does not turn on the executive branch’s enforcement priorities. Congress makes the laws, and Congress has kept marijuana distribution a federal crime.

Why Federal Rescheduling Did Not Save the Contract

Hello Farms pointed to the DOJ’s April 2026 rescheduling of medical marijuana from Schedule I to Schedule III as a reason to enforce the contract. The Sixth Circuit rejected this argument for two independent reasons.

First, illegality is assessed at the time of contracting. An agreement that was illegal when made cannot be cured by a subsequent change in the law. The Hello Farms contract was signed in November 2020, more than five years before the April 2026 rescheduling. The court concluded that the rescheduling had no bearing on the contract’s enforceability.

Second, rescheduling alone does not make medical marijuana-touching businesses legal. Even under the new rules, medical marijuana operators must register with the DEA before they can lawfully handle Schedule III substances. The court noted that if Hello Farms and GR Vending signed the same contract today without DEA registration, they would still be violating federal law. Rescheduling added a new federal compliance step that most operators have not completed.

This aspect of the ruling carries particular significance for the industry: even as federal cannabis policy evolves, contracts signed under prior legal regimes remain subject to the law as it existed at the time of formation. Businesses cannot retroactively cure a contract’s illegality simply because the regulatory environment has shifted.

Broader Implications for Regulated Industries

While the Hello Farms decision is a cannabis case, its reasoning applies to any industry where state and federal law diverge. The core lesson is one of regulatory durability: a state license does not necessarily provide the legal foundation needed to enforce contracts in federal court. This pattern appears across many sectors, including cryptocurrency, artificial intelligence, autonomous vehicles, psychedelics, fintech, and sports betting.

In each of these industries, the Hello Farms framework poses the same question: would a federal court conclude that enforcing the contract requires conduct that violates federal law? The illegality defense allows a counterparty to escape a bad deal by invoking federal law, regardless of the parties’ expectations at the time of contracting. As the court put it, it leaves the parties where it finds them.

Key Takeaways

Affected businesses and their counsel may want to consider the following.

• All cannabis operators should be aware that state licensure does not insulate commercial agreements from federal illegality challenges. Contracts for the sale, purchase, or distribution of marijuana remain vulnerable in federal court regardless of how mature the state’s regulatory program is, and the Sixth Circuit’s reasoning is likely to be persuasive in other circuits.

• Medical marijuana businesses may want to evaluate whether registration under the DEA’s April 2026 expedited registration pathway could help mitigate certain federal law risks. The Sixth Circuit’s decision suggests that federal registration status may remain relevant to contract enforceability considerations.

• Recreational and adult-use operators should be aware that they may face greater exposure. Recreational marijuana remains a Schedule I substance with no federal registration pathway, and the Sixth Circuit’s categorical approach leaves little room for equitable arguments.

• Businesses in other emerging regulated industries should consider whether similar arguments could be raised where state and federal regulatory frameworks diverge. The Hello Farms framework applies wherever a contract’s performance would require conduct that violates explicit and well-defined federal policy.

• Transaction counsel may want to consider whether additional contractual protections may be appropriate in light of the decision, including forum-selection clauses, choice-of-law provisions, severability clauses, representations addressing federal compliance status, and termination rights tied to changes in federal enforcement policy.

• Investors and acquirers should consider the extent to which potential enforceability issues affect the risk profile of a target company’s material contracts.

For cannabis businesses, the decision highlights several areas that may warrant closer attention, including DEA registration where available, the enforceability of existing contracts, and the potential impact of federal illegality challenges on future transactions.

ArentFox Schiff’s Cannabis group will continue to track developments. For further information on this decision or related regulatory changes, contact one of the authors or the AFS attorney with whom you normally work.