ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Wednesday, September 27, 2023

Reefer Brief: Arbitration, After Joint Venture Goes up in Smoke

Marijuana budIn 2019 Blue Roots, LLC (Blue Roots) attempted to purchase the assets of Biochron, Inc. (Biochron).  Both are licensed commercial cannabis growers located in Spokane, Washington.  The terms of the parties' Memorandum of Understanding (MOU) provided that Blue Roots would pay ten percent of its net profits for ten years to Biochron in exchange for all of the latter's assets except for the business entity itself.  Biochron's President, Mr. Bennett would become a manager at Blue Roots and would be paid a monthly salary of $5000.  The agreement included a clause providing for dispute resolution through the American Arbitration Association.

The parties began to proceed under their MOU and undertook a joint venture.  On the advice of an attorney and accountant, the parties modified the MOU to comply with guidelines of the liquor and cannabis board.  The MOU was now reconfigured as a purchase and option agreement.  That agreement governed the parties' relations for the first four months of 2020.   In February, Blue Roots required all Biochron employees to sign a non disclosure agreement, which they all did.  

But in April 2020, Biochron retained counsel to help finalize the deal, and this joint venture went up in smoke.  Seems kinda inevitable when you think about it.  The issue was the pricing, and Biochron, accusing Blue Roots of bogarting, started selling some of its product to third parties.  By this point, Biochron had acquired intellectual property, including Blue Roots' grow process.  Upon request, it refused to return Blue Roots' plants that were how housed in its facility, and it continued to use Blue Roots' grow process.

Incomplete Joint Venture (filtered)

Blue Roots sought to initiate an arbitration pursuant to the MOU, but Biochron ran to court to enjoin the action.  The trial court denied Blue Roots' motion to compel, finding that the MOU was an unenforceable agreement to agree.  Blue Roots moved for a temporary injunction to protect its trade secrets.  It also renewed its motion to compel arbitration, now citing conduct as well as the MOU as a basis for enforcement of the parties' agreement.  After an inexplicable one-year delay, the trial court denied that motion and granted partial summary judgment to Biochron, citing Blue Roots' failure to take reasonable measures to protect its trade secrets.  Blue Roots appealed both the denial of its renewed motion to compel arbitration and the grant of the partial motion for summary judgment.  

In Biochron, Inc. v. Blue Roots, LLC, a Washington State appeals court reversed a grant of partial summary judgment for Biochron on Blue Roots' misappropriate of trade secrets claim.  It granted Blue Roots' motion to compel arbitration, notwithstanding the parties extended litigation.  

The legal analysis begins with the finding that the trial court erred in deciding the enforceability of the MOU.  A long line of cases provides that where the issue is to the enforceability of the entire agreement, not just the arbitration clause, the matter is to be determined by the arbiter.  Nor could there be any serious question that this matter was within the scope of the arbitration clause, given that the clause provided that any dispute relating to their agreement was to be arbitrated.

The most interesting issue was whether Blue Roots had waived its right to arbitration by participating in over a year of litigation.  Waiver of a right to arbitrate requires an act inconsistent with any intention other than to forego the right to arbitrate.  SCOTUS addressed this very issue two terms ago in Morgan v. SundanceBut the opinion does not reference that case.  This may be because the case seems to be governed by Washington state's arbitration act rather than the Federal Arbitration Act -- or so I presume given the lack of reference to the FAA and reliance on state law.  

Here, the court found no waiver.  Blue Roots immediately attempted to compel arbitration.  When that motion was denied, it just played defense, as Biochron filed dispositive motions.  Its only other motions were for a return of its property and trade secrets and for a continuance.  Blue Roots did fail to appeal the denial of its motion to compel, and it participated in discovery, but that is not enough.  Biochron claims prejudice by the delay, but the court reasons that, because of its decision to reverse partial summary judgment, the parties would have to start over anyway, and they can do so in an arbitration just as efficiently as in a court.  

Turning to the trade secrets issue, the appeals court found that the trial court erred, largely because it inappropriately used its discretionary powers to exclude Blue Roots evidence under its Local Rules.  The appeals court proceeded to explain why there were disputed material issues of fact relating to trade secrets, rendering the grant of partial summary judgment on that issue erroneous.  The trial court stated that something that is disclosed cannot be a trade secret.  The appeals court disagreed: "This oversimplified statement does not accurately reflect Washington law."

Chief Judge Fearing wrote a short concurring opinion, lamenting the conflation of the legal concepts of waiver and estoppel.  Such conflation is common, according to Chief Judge Fearing but nonetheless regrettable.  Here, the only issue was waiver, and so there was no need to consider whether that alleged waiver had been relied on.

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