Unreported / Non-Citable
Background
Ctrl Alt Destroy, Inc., a California cannabis retailer, challenged state licensing rules that require certain retailers to enter, or agree to enter, a labor peace agreement with a bona fide labor organization. The retailer alleged that the requirements in California Business and Professions Code sections 26001(ac) and 26051.5(a)(5)(A) are unconstitutional and preempted by federal law.
California moved to dismiss in the Southern District of California. The district court granted the motion under the equitable doctrine of unclean hands, reasoning that relief would directly facilitate conduct prohibited by federal law. Unclean hands can deny equitable relief when a claimant has acted inequitably in connection with the matter before the court. The retailer appealed. The Ninth Circuit had jurisdiction under 28 U.S.C. section 1291 and reviewed the application of unclean hands for abuse of discretion.
The Court’s Holding
The Ninth Circuit vacated the dismissal and remanded. The panel did not decide whether the retailer ultimately has clean hands, whether California may invoke the doctrine, or whether the constitutional and preemption claims state a claim. It held only that the district court used an incomplete legal analysis by treating the federal illegality of the retailer’s business as categorically dispositive.
Under Northbay Wellness Group, Inc. v. Beyries, a court applying unclean hands must balance the plaintiff’s alleged wrongdoing against the defendant’s conduct and weigh the right asserted against the transgression said to foreclose that right. The district court did not conduct that balancing. The panel described the error as nearly identical to the error in Northbay Wellness, which also involved a marijuana dispensary.
The panel declined to perform the balance itself because both sides said additional factual development could help. California suggested that conduct unrelated to cannabis sales might independently support an unclean-hands defense, but the district court had not considered those possible grounds. The parties also disputed whether California’s own conduct prevents it from relying on the doctrine. On remand, the district court must consider the retailer’s contention that California legalized, facilitates, regulates, and profits from the same activity it calls unclean. After completing that inquiry, the court may, if appropriate, address other pending matters, including California’s Rule 12(b)(6) motion.
Key Takeaways
- Federal illegality in the cannabis industry does not automatically resolve an unclean-hands defense in the Ninth Circuit.
- The required inquiry compares both sides’ conduct and the asserted right with the misconduct alleged to defeat it.
- The panel left open whether other conduct by the retailer supplies an unclean-hands ground and whether California’s own cannabis policy affects its ability to invoke equity.
- The constitutional, labor-peace, and preemption merits remain undecided; vacatur returns the case for further proceedings.
- The memorandum is unpublished and nonprecedential except as Ninth Circuit Rule 36-3 permits.
Why It Matters
For California cannabis businesses, the disposition keeps federal prohibition from operating as a shortcut that ends every request for equitable relief. A party seeking an injunction still faces the unclean-hands doctrine, but the court must conduct the fact-sensitive balance required by circuit law rather than stop after identifying a federal-law violation.
For litigators, the opinion is equally important for what it does not decide. It does not validate the retailer’s challenge to labor peace agreements, order relief against state officials, or reject unclean hands altogether. The remand permits factual development and preserves California’s alternative arguments, while requiring the district court to evaluate the state’s role in licensing and benefiting from the regulated market.