Unreported / Non-Citable
Background
DNA CA, Inc., a California subsidiary of a Dutch cannabis company that lacked a California commercial cannabis license during the relevant period, supplied proprietary cannabis strains to licensed cultivator Pacific Reserve Nursery, Inc. On January 25, 2019, the parties entered offtake and licensing agreements under which Pacific Reserve agreed to produce 6,000 pounds of bucked cannabis, manufacture prerolls, and deliver trim to DNA. DNA paid a $1.95 million initial deposit in March 2019 and an additional $500,000 in April 2019, totaling $2.45 million, and arranged for licensed third party Moxie to pick up products on its behalf. Pacific Reserve delivered none of the contracted bucked cannabis, prerolls, or trim during the June 1 to December 31, 2019 delivery period. The parties later substituted fresh frozen cannabis, which Moxie picked up between April and November 2020, but December 2020 testing by two laboratories found pesticides and heavy metals, and DNA rejected the product in a January 8, 2021 letter.
The companies sued each other. The superior court sustained Pacific Reserve's demurrer to DNA's federal trade-secret misappropriation claim without leave to amend. After a bench trial, the court found Pacific Reserve breached both agreements, rejected its defense that DNA's unlicensed status excused performance, and awarded DNA only the $2.45 million already paid, declining additional expectation damages and prejudgment interest. The court also awarded Pacific Reserve $678,004.93 on its common count for goods and services. Both parties appealed different portions of the judgment.
The Court’s Holding
The Court of Appeal affirmed liability on DNA's breach-of-contract claims. Although the Medicinal and Adult-Use Cannabis Regulation and Safety Act requires commercial cannabis activity to occur between licensees, its enforcement provisions impose civil and criminal penalties but do not expressly or impliedly invalidate contracts between licensed and unlicensed parties. Equitable considerations also supported enforcement: DNA performed its obligations, the agreements did not require DNA to hold a license, and licensed Pacific Reserve accepted DNA's strains and $2.45 million before failing to perform. Any error in the trial court's alternative reliance on Civil Code section 1550.5 was harmless because that statute was not the sole or primary basis for the ruling.
The court reversed the damages award and remanded for a de novo review of the trial evidence and a new calculation that includes DNA's lost expectation interest. It upheld the finding that DNA's forensic accountant was significantly undermined by admitted calculation errors and conflicting trim-valuation testimony, but held those defects did not prove DNA suffered no loss beyond its deposit; the contract terms and testimony about trim's wholesale value supplied at least some reasonable basis for a reduced estimate. The court also reversed the denial of prejudgment interest, remanding for the trial court to determine whether the accrual dates for the $1.95 million and $500,000 payments are undisputed and, if so, to award interest on those amounts.
The court reversed the common-count award because the trial court applied the wrong legal standard, asking whether DNA 'stood to benefit' rather than whether it actually benefited, and remanded for de novo review of whether Pacific Reserve's goods and services conferred an actual benefit on DNA before any damages are recalculated. It affirmed the demurrer order: DNA did not allege its trade secrets were related to products used in or intended for interstate commerce as the federal DTSA requires, and the incomplete appellate record prevented review of its proposed state-law amendment.
Key Takeaways
- California's cannabis licensing penalties do not, by themselves, render contracts between licensed and unlicensed parties unenforceable.
- Discrediting an expert's precise lost-profits calculation does not justify awarding no expectation damages where other record evidence permits a reasonable, reduced estimate.
- Undisputed payment amounts may support prejudgment interest, but the trial court must first determine whether the dates on which interest begins accruing are disputed.
- A quantum meruit claimant must show that the requested goods or services actually benefited the defendant, not merely that the defendant stood to benefit.
- An appellant challenging denial of leave to amend must supply an adequate record of the demurrer proceedings to show what amendment was sought and why denial was an abuse of discretion.
Why It Matters
The decision separates cannabis regulatory violations from the additional judicial penalty of contract invalidation, grounding enforceability in the statute's text and the parties' conduct. It also illustrates that appellate courts may defer to credibility findings yet still require compensation where the record supports a reasonable, smaller damages calculation.
The remand leaves the principal monetary issues unresolved: the trial court must reassess DNA's expectation damages, Pacific Reserve's proof of actual benefit, and prejudgment-interest accrual dates using the existing trial evidence. Liability on the contract claims and the dismissal of the trade-secret claim remain intact, the judgment is affirmed in all other respects, and each side bears its own appellate costs.