Antitrust Law Daily $3.9m arbitration award upheld against CBD oil product distributor
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Thursday, April 16, 2020

$3.9m arbitration award upheld against CBD oil product distributor

By Nicole D. Prysby, J.D.

The distributor and supplier clearly agreed to arbitrate their disputes and there was no evidence that the arbitration panel made a material mistake in calculating damages.

A distributor of cannabidoil (CBD) products clearly agreed to arbitrate tort claims against a supplier and the resulting arbitration damages award should not be modified, the U.S. Court of Appeals in Atlanta has decided. The parties’ incorporation of the United Nations Commission on International Trade Law (UNCITRAL) rules in the distribution agreement constituted clear and unmistakable evidence that the parties agreed to arbitrate the issue of arbitrability. The $3.99 million damages award was upheld over the distributor’s argument that it should be invalidated as mistake—the Federal Arbitration Act (FAA) provision the distributor relied on was not applicable to the parties’ agreement, which was governed by the Panama Convention. And there was no evidence that the arbitration tribunal made a mistake in calculating damages. Finally, federal law did not prohibit the damages award. Even if the CBD oil products were prohibited by federal law at the time of the distribution agreement, the 2018 Farm Bill mooted any argument of illegality by removing hemp-derived CBD from the group of Schedule I substances (Earth Science Tech, Inc. v. Impact UA, Inc., April 14, 2020, per curiam).

Earth Science Tech, Inc. is a Florida-based company that distributes CBD-rich hemp-oil products. Cromogen Biotechnology Corporation is an El Salvador-based company that supplies hemp-based biotechnology. In 2014, Cromogen entered into a distribution agreement with Earth Science allowing Earth Science to exclusively distribute Cromogen’s CBD oil. Four months after executing the agreement, Cromogen served Earth Science with a demand for arbitration and asserted breach of contract, conversion, and tortious interference. Earth Science responded with its own state-court breach-of-contract claim. The federal district court stayed the action pending the completion of arbitration.

Three years later, an arbitration panel ruled in Cromogen’s favor on all issues. Cromogen moved the district court to confirm the award, and Earth Science moved to vacate or modify the award, arguing that the tort claims were not arbitrable, and even if they were, the damages awarded on those counts were excessive. The district court rejected Earth Science’s arguments and affirmed the arbitration award. Earth Science appealed.

Arbitrability. The tort claims were subject to arbitration, the Eleventh Circuit held. Earth Science argued that it was entitled to relief under section 10(a)(4) of the Federal Arbitration Act (FAA), but because the commercial relationship was not purely domestic, the parties’ agreement is governed by the Panama Convention. The court went on to hold that even if it could have reached Earth Science’s section 10(a)(4) challenge, it would have rejected it because the parties clearly agreed to have arbitrators resolve the question of arbitrability by agreeing to proceed under UNCITRAL rules: UNCITRAL rules provide that an arbitral tribunal has the power to rule on its own jurisdiction.

Damages. Earth Science also invoked the FAA in an attempt to modify the damages award based on material mistake. Again, the court rejected the argument as the FAA does not apply. And even if it could have reached the issue of modification, it would not have modified the damages award because the FAA section 11(a) modification provision raised by Earth Science embraces only mistakes by the arbitration panel that appear in the description of the award. Earth Science argued the tribunal erred by relying on the wrong cost of goods sold. But that was neither a "material mistake" nor a miscalculation of figures evident on the face of the final award. At best, Earth Science challenged the tribunal’s methodology in arriving at the arbitration award. At worst, it challenged the tribunal’s factual findings. Either way, section 11(a) would not authorize modification.

Other issues. The court rejected Earth Science’s argument that confirming the arbitration award would be inconsistent with federal law, because at the time the parties executed the agreement, Schedule 1 of 21 U.S.C. section 812 proscribed all products containing any tetrahydrocannabinols (THC), including CBD oil. It is unclear that Earth Science’s CBD oil was proscribed by section 812, the court noted. Earth Science’s own website touted that its products were derived from the "federally legal industrial hemp plant" and that its product was legal to purchase anywhere in the U.S. Regardless, the 2018 Farm Bill (Agriculture Improvement Act of 2018) mooted any argument of illegality. The Act removed hemp-derived CBD from the group of Schedule I substances unless the product contains a greater than 0.3 percent concentration of THC, and the parties’ purchase order calls for CBD oil with 0.03 percent THC or less. So, even if the CBD oil at issue once fell within Schedule I’s list of controlled substances, it did not after the 2018 Act.

This case is No. 19-10118.

Attorneys: Melissa Damian Visconti (Damian & Valori LLP) for Earth Science Tech, Inc. M. Derek Harris (Carlton Fields Jorden Burt PA) for Impact UA, Inc. and Cromogen Biotechnology Corp.

Companies: Earth Science Tech, Inc.; Impact UA, Inc.; Cromogen Biotechnology Corp.

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