Cannabusiness Advisory

Is your SaaS Agreement Cannabis Compliant?

June 28, 2023



What is a SaaS agreement?  “SaaS” stands for Software as a Service. SaaS agreements are legal contracts for software licensing of software applications or services managed by or for the SaaS provider and shared by multiple customers of the provider.


How does this relate to cannabis?  As more and more states open their doors across the United States to legalizing medicinal and adult use marijuana, there are a rising number of third-party service providers in the software space interested in providing services to cannabis operators, including data analytics, customer management systems platforms, and HR or payroll software services to name a few. And many of these third parties do so via SaaS Agreements, linkable terms and conditions, or terms of service.


How can your SaaS agreement be cannabis compliant?  On the operator side, these may seem like boilerplate terms of service. But many can require onerous terms and conditions that simply just don’t hold water to the complex regulatory environment that the cannabis industry brings. To ensure full compliance with your state’s cannabis laws, it’s prudent to send these terms and conditions over to your legal counsel for confirmation.


Below are the top five legal issues that you should look out for in your software services agreements.


  1. Governing law – As an operator, it is important to make sure that your contract is compliant with the cannabis regulations of the state that you are operating in. Although the service providers will prefer to have their state’s law govern the terms of the contract for uniformity across all legal terms with their customers, this approach may not comply with the state you are operating in. For example, many state cannabis regulations have specific rules and regulations around third-party technology platform providers, and legal terms of service relating to the use of such software and technology needs to be tailored to ensure compliance with such rules and regulations.


  1. Representations, Warranties, and Covenants – It’s also critical to carefully review your business’s representations, warranties, and covenants that are provided in the legal terms and conditions. Such representations and warranties should always be limited to compliance with local laws in the state which you operate and should explicitly exclude federal U.S. laws under which cannabis is illegal. Otherwise, you risk being in default of such representations and warranties due to the federal illegality of your cannabis business.


  1. Default Terms – If your legal agreement requires you to certify that you are in good standing under your licenses and cannabis permits, make sure there are cure periods baked into these acknowledgments and certifications to allow you to work with your regulator to get your license in good standing without breaching or defaulting under your SaaS agreement.


  1. Fees – Often, SaaS agreements provide that the customer will pay a set fee on a monthly or quarterly basis for access to the software and services of the provider. It’s important to read the legal terms and conditions to ensure they only refer to the types of fees you agreed to in your respective purchase order or Statement of Work with the provider. Many times, the legal terms are blanket for all customers and will include fee types that are not related or tailored to the types of fees agreed to by a specific customer in a Statement of Work. Also, the standard terms often require that the customer pay all fees when due. In such instances, you may want to ensure that you have the flexibility to hold back payment of any disputed fees and specifically provide for that in your SaaS agreement. Without such a provision, there is the risk that a customer would be in breach of contract for withholding payment if the agreement does not specifically allow for such a recourse mechanism.


  1. Termination and Wind-Down – It is common for SaaS agreements to provide an early termination fee that the customer pays for terminating the contract prior to the initial term set forth in the contract. Carefully read your legal terms and conditions to ensure you know of any early termination fees. Also, in cases of termination by the service provider, it is often critical for the operator to have access to the software for a wind-down period to allow the operator to transition to a new software provider. Operators often negotiate this in cases where the type of software being licensed is critical to the operator’s business operations.

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