By Amin Danai
The Mediation Group
A friend who is a cannabis attorney here in Massachusetts reached out recently to discuss community impact fees. For those who are unfamiliar, community impact fees have been a controversial aspect of Massachusetts law for years. Since 2017, municipalities have been allowed to charge fees to cannabis businesses to compensate the municipality for the costs imposed by the cannabis business. In 2022, significant reforms were enacted, and my friend was anticipating a potential increase in disputes relating to community impact fees under the new reforms. He wanted to know if he should be proposing mediation clauses in Host Community Agreements on behalf of his cannabis clients going forward.
Before the reforms, the law allowed a municipality to charge an impact fee of up to 3% of the cannabis business’s gross sales, so long as the fee was reasonably related to the costs imposed by the business on the municipality. Instead of citing specific costs and charging fees accordingly, most municipalities would just charge the maximum rate. The cannabis industry resented the fees, arguing that a fee of 3% of gross sales was not reasonably related to the actual costs imposed on the municipality and that municipalities often placed the fee revenue into their general accounts rather than spending it on anything related to the cannabis operation. Under the 2022 reforms, impact fees can no longer simply be a percentage of sales. Instead, the municipality must document the actual costs imposed by the cannabis business and provide that documentation to the business to substantiate the fee. Importantly, the law says that a cannabis business can sue a municipality for breach of contract if it believes that the supporting documentation from the municipality is not reasonably related to the actual costs imposed on the municipality. In such lawsuits, the cannabis business is entitled to recover damages, attorneys’ fees and other costs encompassed in the community impact fee that are not reasonably related to the actual costs imposed upon the municipality.
Let’s fast forward to when a cannabis business receives the fee demand from the municipality. If the business disagrees with the supporting documentation, there is not much stopping it from bringing suit. Not only does the cannabis business want to avoid paying the fees it views as unreasonable, but it probably also wants to signal to the municipality that it is not willing to accept unreasonable fees year after year without a fight. The fee shifting provision of the statute provides a further incentive.
Now here’s why that dispute should go to mediation:
As with almost all civil disputes, there is risk for both sides in going to trial. From the perspective of the municipality, losing at trial would mean not only paying the cannabis business its damages, attorneys’ fees, and other costs, but also exposing the municipality to similar claims by other cannabis businesses. The private nature of mediation can help here. Confidentiality is often negotiated as part of a mediation settlement, whereas trial outcomes become public. From the perspective of the cannabis business, losing at trial would put the business on the hook for all the community impact fees documented by the municipality as well as the business’s attorneys’ fees in bringing the claim. Depending on the financial agreement between the cannabis business and its counsel, such attorneys’ fees could be very substantial, not to mention the routine costs associated with litigation (including filing fees, process servers, court reports, and expert fees). A loss for the cannabis business could also cause the municipality to be more aggressive in its community impact fee requests in future years. Resolving the dispute at mediation allows both sides to maintain control of the outcome rather than rolling the dice at trial.
Mediation can provide valuable time and cost savings for both sides. Litigation can take years, during which staff at the cannabis business and the municipality would need to assist the litigation teams with document requests, interviews, fact investigation, etc. Regardless of the outcome, that staff time and energy will never be recovered. Litigation is also hugely expensive, as noted above. Mediation, especially early mediation, spares both sides from incurring those costs and saves countless hours of attorney and staff time. After a successful mediation, the staff of the cannabis business and the municipality can shift their focus back to more productive endeavors.
The relationship matters. There are plenty of disputes where the relationship is irrelevant, but this is not one of them. It is in the interest of both the cannabis business and the municipality to maintain a decent relationship, for a number of reasons. From the perspective of the municipality, a damaged relationship could cause the cannabis business to move its operations elsewhere, which would result in a loss of tax revenue and economic development for the municipality. The relocation of the cannabis business could also create an impression that the municipality is an unwelcome place for new businesses. From the perspective of the cannabis business, a damaged relationship could make the municipality more likely to initiate enforcement actions against the business. A fractured relationship would also make future negotiations with the municipality more adversarial. While litigation tends to leave parties holding grudges, I have seen countless successful mediations end with the relationship intact.
So given that mediation is ideal for these disputes, should Host Community Agreements include mediation clauses? My view is that they can only help. A benefit of mediation clauses is that they mitigate the common scenario in which a party would like to mediate the claim but is hesitant to propose mediation out of fear of signaling weakness or lack of confidence in its case. This does not happen as much as it used to, because mediation has become such a standard way to resolve disputes, but it still happens plenty. A mediation clause can make it easier to propose mediation, because the proposing party is just adhering to a provision that the parties agreed to when signing the Host Community Agreement. Another potential benefit of mediation clauses is that they tend to get everyone thinking about negotiating a reasonable solution early in the dispute. I sometimes mediate disputes that seem like they could have been resolved long ago, perhaps even before lawyers became involved. If the parties think that their case is eventually headed to mediation due to the mediation clause, that can jump start negotiations.
And what about the downsides of including a mediation clause? Given that the clause does not limit either party’s rights, I do not see any downsides. If the parties do not reach agreement during mediation, the litigation proceeds, often with a greater likelihood of settlement later on.
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