What's Market: High Standards for Marijuana Industry Executives | Practical Law

What's Market: High Standards for Marijuana Industry Executives | Practical Law

A comparison of cause provisions in certain marijuana industry executive employment agreements, including Canbiola, Inc., GrowLife, Inc., WEED, Inc., and General Cannabis Corp., using Practical Law's What's Market database that provides detailed analysis of executive employment agreements.

What's Market: High Standards for Marijuana Industry Executives

Practical Law Article w-018-6286 (Approx. 6 pages)

What's Market: High Standards for Marijuana Industry Executives

by Practical Law Employee Benefits & Executive Compensation
Law stated as of 11 Feb 2019USA (National/Federal)
A comparison of cause provisions in certain marijuana industry executive employment agreements, including Canbiola, Inc., GrowLife, Inc., WEED, Inc., and General Cannabis Corp., using Practical Law's What's Market database that provides detailed analysis of executive employment agreements.
Marijuana industry executives stand precariously at the crossroads between federal and state law where the use, possession, and distribution of marijuana places them at risk of prosecution. Surprisingly, these same acts may also leave marijuana executives vulnerable to termination without severance benefits due to the frequent inclusion of drug use and illegal act termination triggers in executive employment agreements.
Termination for Marijuana Use
Drug and alcohol-free workplace policies and termination triggers are broadly adopted to maintain safe and productive workplace environments. At the federal level, the Americans with Disabilities Act of 1990 (ADA) (42 U.S.C. §§ 12101-12113) limits these policies by prohibiting discrimination against employees based on disability and by requiring reasonable accommodation for the side effects of needed medication. A recovering or recovered drug addict who is not currently using drugs may be considered a person with a disability under the ADA (29 C.F.R. § 1630.3(b)). This means that alcoholism is treated as a disability and many legal opioids require accommodation.
However, because marijuana use remains illegal under federal law (42 U.S.C. § 12111(6)(B)), marijuana and current marijuana users are not protected. Accordingly, employers may:
  • Prohibit the use of marijuana in the workplace.
  • Prohibit employees from being under the influence of marijuana during work hours.
  • Test for marijuana.
  • Take adverse action against employees who test positive for marijuana, even if the employee has a medical marijuana prescription.
State law is split on marijuana legality, with 35 states and the District of Columbia currently permitting either or both medicinal or recreational marijuana use. Marijuana statutes allowing use vary between states, but generally parallel federal law in that marijuana is not entitled to any workplace accommodation for on the job intoxication. A greater state divide exists in the case law regarding off-duty marijuana use, with some states supporting an employer's right to terminate employees for positive marijuana drug test results, and some states:
  • Limiting the employer's ability to test for marijuana.
  • Prohibiting discrimination against individuals that have medical marijuana registration cards.
  • Requiring the employer to permit off-duty use of medical marijuana as a reasonable accommodation to the employer's drug-free workplace or drug testing policies.
Before taking any adverse action against an employee based on positive marijuana test results or any other drug test results, employers should make sure that they understand and are in compliance with state drug testing laws (see Practice Note, Drug and Alcohol Use, Abuse, and Testing in the Workplace: The Significance of State Law). In states that have enacted marijuana laws, employers may avoid ambiguity by modifying their employee drug testing policies to explicitly permit or prohibit the use of marijuana.
Employers may also consider specifying in their executive employment agreements whether legal recreational or medical marijuana use, either off-duty or on-the-job, triggers termination for cause and results in a forfeiture of severance pay and other benefits.
Termination for Illegal Conduct
Employment agreement termination provisions often include language permitting employers to terminate an executive's employment without severance if the executive is convicted of, or embroiled in litigation over, illegal conduct. In addition to negative press, these executives may be distracted, no longer trusted, or incarcerated and unable to perform their day-to-day duties. In the marijuana industry, where an executive's required duties may be criminal under the Controlled Substances Act (CSA) (21 U.S.C. §§ 801-904 and 951-971), illegal conduct termination triggers require careful drafting to adequately protect both parties.
Under the CSA, illegal conduct includes, among other things:
  • Knowing or intentional manufacturing, distributing, or dispensing, or possessing with the intent to manufacture, distribute, or dispense marijuana (21 U.S.C. § 841(a)).
  • Managing or controlling any place for the purpose of manufacturing, distributing, storing, or using marijuana (21 U.S.C. § 856(a)).
  • Continuing an illegal enterprise regarding marijuana as a principal administrator, organizer, or leader (21 U.S.C. § 848(b)).
To protect the interests of each party, the termination provisions of marijuana industry executive employment agreements may narrowly define which illegal acts trigger termination without severance or carve-out certain work-required activity. Use the chart below to compare cause definition and procedure provisions from select marijuana industry executive employment agreements. This comparison report was created using What's Market.
Chairman and Chief Executive Officer
November 1, 2018
Chief Executive Officer
October 15, 2018
President and Chief Executive Officer
February 1, 2018
Executive Chairman
December 8, 2017
Commission or conviction of, or a plea of guilty or no contest to, a felony that is not connected to the executive's employment duties or services and which is reasonably expected to have a material adverse impact on the employer.

Willful material breach of a fiduciary duty owed to the employer.

A knowing and material violation of any employer policy pertaining to legal compliance or conflicts of interest.

Section 7(C)
Conviction of, or a plea of no contest to, any felony or gross misdemeanor involving fraud, dishonesty, or moral turpitude as a result of the executive's commission of any act during the term, which conviction or plea prevents the executive from performing his employment duties or other obligations to the employer or has an adverse effect on the employer's reputation or business activities.

Fraud, embezzlement, theft, or willful deception, or other dishonest acts, which are detrimental to the employer's business.

Breach of the employment agreement's non-solicitation or non-competition covenants, willful diversion of any corporate opportunity, or other similar, serious conflict of interest or self-dealing that benefits the executive and injures the employer.

Excessive use of alcohol or the use of illegal drugs, which substantially and materially interferes with the executive's performance of employment duties, subject to written notice and a reasonable cure period of at least 30 days.

Violation of state, federal, or local laws and ordinances requiring equal employment opportunity and prohibiting discrimination and harassment based on race, creed, color, national origin, sex, honorably discharged veteran, military status, sexual orientation, or the presence of any sensory, mental, or physical disability, or any other category protected by law.

Section 13
Subject to notice procedures:

Material breach of any provision of the employment agreement that has a substantial negative impact on the employer's profitability, subject to written notice and a 30-day cure period (or longer if the breach cannot reasonably be cured within 30 days).

Conviction of a felony involving moral turpitude.

An act of fraud, embezzlement, or material dishonesty against the employer, or any act that would foreseeably materially harm the employer's reputation or business, or its officers, directors, and shareholders.

Notice procedures require the employer to provide 30 days' prior written notice.

Section 5.1(b)
Subject to notice and cure procedures:

Formal admission by the executive to, including a plea of guilty or no contest to, or conviction of, a felony or any criminal offense involving moral turpitude.

Gross negligence or willful misconduct in the performance of the executive's employment duties.

Any fraud, misappropriation, or misconduct by the executive that causes demonstrable material injury to the employer's business, monetary or otherwise.

Material breach of the employment agreement. 

Notice and cure procedures require the employer to provide written notice and a ten-day cure period, if curable.
The What's Market database: Executive Employment Agreements: Detailed Analysis includes detailed summaries of executive employment agreements for a variety of executive positions and a diverse group of employers, based on size, industry, and location. The summaries cover terms that are typically heavily negotiated, such as compensation, severance, and non-competition provisions, and often reflect emerging trends.
The What's Market database: What's Market, Executive Employment Agreements, provides a broader sampling of publicly filed executive employment agreements summarized at a higher level. Each summary contains a link to the underlying publicly filed executive employment agreement.