If a licensed cannabis business agrees to buy a grower’s harvest and then backs out when prices fall, it is hard to see why the buyer should escape its purchase commitment by pointing out that both sides were engaged in the very business Michigan licensed them to conduct. Yet that is the practical result of Hello Farms Licensing MI, LLC v. GR Vending MI, LLC, No. 25-1759 (6th Cir. Sept. 10, 2026), in which the Sixth Circuit allowed a buyer and its guarantor to avoid a $31.8 million jury award by invoking the federal illegality of their own supply agreement.
The court did more than decline to hear a cannabis dispute. It decided that federal law defeated the seller’s right to recover under the contract, even though Michigan permitted the underlying business and the relief sought was money for a broken purchase commitment. For businesses trying to operate within a state’s cannabis licensing system, that is a troubling use of federal policy, particularly when the party invoking it was perfectly willing to enter the transaction in the first place.
The agreement called for GR Vending to purchase Hello Farms’ 2020 and 2021 marijuana harvests, with CURA MI guaranteeing payment. After paying a $2.2 million deposit and accepting approximately 2,000 pounds from the first harvest, GR Vending refused further deliveries as, in the court’s words, “the price of marijuana was in freefall.” Hello Farms sold the remaining production to another buyer at lower prices and sued for its lost profits. The $31.8 million therefore represented the jury’s assessment of damages from the broken purchase commitment; it was not an unpaid invoice for $31.8 million of cannabis the defendants had received and kept. (Opinion at 5–6.)
There was also an awkward feature to the defense. After removing Hello Farms’ state-court action to federal court, the defendants sought affirmative relief under the same agreement they maintained was too illegal to enforce. Judge Matthew Leitman noted in his September 2024 order that “Defendants filed a counterclaim seeking damages for alleged breaches of the same contract.” His summary-judgment ruling from the bench was more direct, describing their position as “hypocrisy and illegal gamesmanship.” (Order at 2; Transcript at 11, ECF No. 147, PageID.8328.) You can understand the frustration: a contract apparently worth enforcing when it supports the buyer’s claims becomes an offense against federal policy when the seller asks to enforce it.
The Sixth Circuit acknowledged the resulting windfall but concluded that “our task isn’t to weigh the equities as we might perceive them.” (Opinion at 20.) For my part, I find that answer unsatisfying because the question is precisely what civil consequence should follow from the federal prohibition. The parties’ conduct can violate federal law without making every possible remedy between them equally objectionable, and deciding whether a damages judgment would itself enforce illegal conduct requires more than observing that the underlying business involves marijuana.
The panel’s starting point was the federal illegality doctrine developed in Kelly v. Kosuga, 358 U.S. 516 (1959), and Kaiser Steel Corp. v. Mullins, 455 U.S. 72 (1982). It asked whether a judgment “would itself be enforcing the precise conduct made unlawful” and recognized that a lawful, separable obligation can remain enforceable despite illegality elsewhere in a transaction. Applying that distinction, however, the court treated Hello Farms’ lost profits as inseparable from the promised distribution of marijuana and therefore beyond recovery. Its explanation was emphatic: “We must not enforce illegal conduct, not just refrain from commanding illegal conduct.” (Opinion at 7–8, 11.) Under that reasoning, the fact that a money judgment would require no further delivery of marijuana did not help Hello Farms.
There is an argument for treating expectation damages that way: protecting the economic value of a prohibited bargain can give effect to the bargain even without ordering its performance. But Congress’s choice of language still deserves attention. The labor statute at issue in Kaiser Steel expressly made the prohibited agreements “unenforcible and void.” 29 U.S.C. § 158(e). Section 841 of the Controlled Substances Act contains criminal prohibitions and penalties without a comparable express direction voiding private supply contracts. Federal illegality doctrine supplies a defense despite that difference, but the difference matters when a court presents avoidance of the contract as the inevitable consequence of the statute.
Other federal courts have given more weight to what the requested remedy would actually require. In Mann v. Gullickson, No. 15-cv-03630-MEJ (N.D. Cal. Nov. 2, 2016), the court rejected an illegality argument at summary judgment concerning payment for cannabis-related consulting and equipment businesses, explaining that “[m]andating that payment does not require Gullickson to possess, cultivate, or distribute marijuana.” (Order at 14.) Similarly, Ginsburg v. ICC Holdings, LLC, No. 3:16-CV-2311-D (N.D. Tex. Nov. 13, 2017), allowed loan-repayment claims to proceed because “[o]btaining this relief does not require that ICC manufacture, distribute, dispense, or possess marijuana.” (Opinion at 18.) Neither case involved the same direct crop-purchase obligation presented here, but both demonstrate why cannabis involvement alone does not answer the enforcement question.
The appellate comparison is Bartch v. Barch, 111 F.4th 1043 (10th Cir. 2024), where a $6.4 million cannabis-business judgment survived a Rule 60(b)(4) attack, although the court vacated a separate enforcement order and remanded for closer scrutiny. The majority explained that relief which does not directly command unlawful conduct can “leave room for balancing equitable considerations.” Id. at 1063 n.23. The finality of the judgment and the particular enforcement mechanism mattered to that result, so Bartch cannot fairly be treated as a direct appellate endorsement of marijuana supply contracts. It nevertheless offers a more attentive examination of the relationship between the underlying illegality and the relief a court is being asked to provide.
Hello Farms expressly cited Bartch and rejected the suggestion that a transfer of money necessarily resolves the illegality problem. The disagreement, then, is over how much work the nature of the remedy should do in the analysis. The Sixth Circuit gave controlling weight to the marijuana-distribution agreement underlying the damages claim, reinforcing its conclusion with district-court decisions denying recovery. That approach provides considerable assistance to a breaching cannabis buyer, but the decisions allowing other cannabis-related claims to proceed remain relevant to any broader claim that federal courts simply cannot enforce agreements connected with this industry. (Opinion at 11–12.)
The treatment of medical marijuana makes the policy question more difficult. Hello Farms held only medical growing licenses when it signed the agreement, yet the majority read the contract to encompass recreational marijuana because of its testing provision and the buyer’s ability to transfer inventory into the recreational market. Judge Hermandorfer declined to join that portion of the opinion, although she joined the alternative reasoning under which Hello Farms would lose even if the agreement were confined to medical marijuana. As the court put it, “even if we interpreted the contract as limited to medical-use marijuana, we would still reverse the district court.” (Opinion at 8–9, 12.)
That alternative reasoning discounted the significance Judge Leitman had assigned to Congress’s recurring restriction on DOJ spending against state medical-marijuana programs. The panel explained that the restriction “doesn’t legalize marijuana or provide immunity from prosecution,” drawing a distinction between a funding limitation and substantive legality. (Opinion at 16.) The court consequently did not need to establish that DOJ presently had the funds to prosecute these parties before considering their conduct federally illegal. Even so, Congress’s repeated protection of state medical-marijuana programs is part of the federal policy being applied, and it is fair to ask why it should carry so little weight when the immediate question is whether one licensed participant should compensate another for breach.
The court also questioned whether its Jackson Purchase balancing precedent survived Kaiser Steel, while concluding that balancing would not assist Hello Farms even if the earlier test remained available. It stopped short of definitively overruling that precedent, but its treatment of agreements to commit serious felonies left little room for an assessment of the practical consequences: “Unenforceability is plain.” (Opinion at 13–17.) That is where I part company with the decision. The felony classification explains the prohibition; it does considerably less to explain why eliminating this damages remedy advances federal policy in a market Congress has repeatedly taken steps to protect from federal prosecutorial interference.
Nor did the April 2026 medical-marijuana rescheduling rule change the outcome. The panel emphasized that the rule “didn’t purport to have retroactive effect” and that federal registration requirements remained relevant, so the move to Schedule III did not validate the parties’ 2020 agreement. (Opinion at 17.) The court thus acknowledged the change in federal policy but gave it no effect on the enforceability of this contract.
There is a separate question about how this dispute reached federal court, and the opinion’s brief statement that the defendants removed on diversity grounds leaves the reader without the underlying citizenship analysis. All three named parties are LLCs, for which the governing rule is that “a limited liability company has the citizenship of each of its members.” Delay v. Rosenthal Collins Group, LLC, 585 F.3d 1003, 1005 (6th Cir. 2009). That inquiry follows ownership through any members that are themselves unincorporated entities. A Michigan license and predominantly Michigan operations therefore do not, on their own, establish Michigan citizenship, however local the business may appear.
If that chain reaches a corporation, its incorporation and principal place of business matter under 28 U.S.C. § 1332(c)(1). The latter requires attention to actual management: Hertz Corp. v. Friend, 559 U.S. 77, 97 (2010), rejects a sham headquarters in favor of “the place of actual direction, control, and coordination.” There is room to investigate the corporate structure and where decisions were actually made, but describing a local operating entity as a shell does not resolve its citizenship. The defendants’ appellate brief asserts complete diversity and cites the removal notice at ECF No. 1, PageID.3; neither that brief nor the opinion supplies the complete ownership chain. (Brief at 6.) The removal record would need closer examination before concluding that diversity was lacking.
As another matter, the wholly intrastate nature of the business does not remove it from the CSA. Under Gonzales v. Raich, 545 U.S. 1, 18–19 (2005), “Congress can regulate purely intrastate activity” as part of the broader regulatory scheme. The panel therefore did not need evidence that this crop crossed Michigan’s borders, and it identified possession with intent to distribute and distribution under § 841 as the prohibited conduct, explaining that “the agreement was founded on each party’s promise to commit crimes.” (Opinion at 10.) The local character of the transaction remains relevant to the policy objection, however: Michigan established a regulated market for this activity, and the federal civil remedy now turns on a prohibition that coexists with that market.
Calling the result preemption does not explain much unless we identify what state law is being displaced. The panel did not invalidate a particular Michigan licensing provision; it used federal illegality doctrine to defeat recovery on a state-law contract claim. The CSA’s savings clause, 21 U.S.C. § 903, rejects field preemption and speaks of a “positive conflict” in which “the two cannot consistently stand together.” Federal supremacy may require denial of a remedy that would enforce prohibited conduct, but deciding whether this money judgment falls into that category is the disputed step. The word preemption cannot do that analysis for us.
For anyone drafting these agreements, the forum consequences deserve attention before a dispute develops. We raised the arbitration question on this blog back in 2019, and Hello Farms gives businesses another reason to take it seriously. Under Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–46 (2006), where the illegality challenge attacks the contract as a whole rather than the arbitration provision itself, “the issue of the contract’s validity is considered by the arbitrator in the first instance.” A properly drafted arbitration clause can change who initially decides enforceability, although it cannot guarantee that an eventual award will survive judicial review or be collectible.
Businesses choosing litigation should likewise consider an exclusive state-court forum provision with an express removal waiver that binds the guarantor as well as the buyer, rather than relying on a generic Michigan choice-of-law clause. State court does not eliminate the federal-law issue, but the agreement should at least reflect a considered choice about where disputes will be heard. Otherwise, a decision like this invites an expensive contest over removal and party citizenship, with sellers examining whether another liable party would defeat diversity and buyers seeking the benefit of the federal defense. Adding a nominal defendant without a viable claim is no solution, and joinder after removal requires the court’s permission under § 1447(e).
Hello Farms does not declare every agreement involving a multistate cannabis operator unenforceable; the opinion preserves the distinction for lawful, separable obligations. Nor does it establish that the entire $31.8 million verdict would otherwise have survived, because the panel did not reach the defendants’ separate challenge to the damages evidence. (Opinion at 6–8.) What it does is give a buyer resisting damages under a direct cannabis supply agreement powerful authority for avoiding the bargain altogether. I do not think that is sound policy for a licensed commercial market, and the court’s refusal to weigh the resulting windfall is particularly hard to accept when the party receiving it also sought to enforce the same contract. A federal policy that permits that result ought to require a more persuasive account of what denying the seller a remedy actually accomplishes.
The post A $31.8 Million Exit: Sixth Circuit Lets a Cannabis Buyer Avoid Its Intra-State Supply Contract Verdict appeared first on Libation Law Blog.