Reefer Brief: Fallout from Alternative Payment Partnership Collapse

It is an exceedingly rare thing that I read a case for our Reefer Brief feature, and I think, “That’s a really good idea!” But that is the case here. As regular Reefer Brief readers (if there are any) already know, even though states have relaxed regulation of marijuana, the federal government has not done so. As the American Bankers Association puts it:

Currently, thirty-seven states, the District of Columbia, Guam and Puerto Rico have all legalized the use of marijuana to some degree. Yet the possession, distribution or sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk.

As a result marijuana businesses face challenges when it comes to financial transactions. It is hard for them to maintain bank accounts, and so a lot of the business operates on a cash basis. 

Christopher Rentner saw an opportunity. He founded a cannabis financial technology startup, Plaintiff Emerging Industry Technologies, Inc., called “Spence” in the opinion, which aimed to provide “compliant [cash] payment alternatives to legal dispensaries and merchants through secure and transparent electronic payment platforms.” The idea was to work with banks to allow for electronic transfers and thus to enable marijuana businesses to keep less cash on hand.  Spence also introduced a Buy Now Pay Later feature unique in the marijuana industry.

Enter defendant Fidelity National Information Services (FNIS). Just as Spence was getting off the ground, FNIS, through its $43 billion acquisition of Worldpay, became the world’s largest processing and payment company. FNIS at first wanted to acquire Spence, but instead the parties negotiated a collaboration. FNIS drafted a purported Partnership Agreement. FNIS was to invest $4.5 million in Spence, and Spence was to facilitate the use of Worldpay in the marijuana industry, working exclusively with FNIS and setting up its systems to coordinate with the Worldpay platform. The partnership was to have an initial five-year duration after which it was renewable in two-year increments.  FNIS promised to “take care” of Spence, but it also demanded a great deal from Spence, including a large equity stake. Spence spent millions of dollars on recruiting fees, legal fees, development fees, salaries, and hardware purchases to comply with FIS’s requirements.

“We’ll take care of you” seems have become a magical phrase that well-resourced parties know will induce weaker parties into cooperation but courts find too vague to be enforceable.  It worked for David Chase; it worked for the L.A. Clippers. Would it work here as well?  FNIS kept its investment in Spence on the down-low, preferring to characterize the parties’ relationship as a partnership, but it also gave Spence private assurances, leading it down the old primrose path.

Meanwhile, FNIS was having difficulties. It sold a majority stake in Worldpay to a private equity firm. The story is complicated, but cutting to the chase, FNIS backed out of its partnership with Spence and then proceeded with its own cannabis financing scheme. Having lost its partner, Spence also lost all that it had invested, in terms of personnel and resources, in the partnership. It soon shuttered its operations. It looked like an FNIS subsidiary was going to purchase Spence’s assets, but FNIS then told Spence that it would vote against the deal unless Spence agreed to waive all its legal claims against FNIS. When Spence refused to do so, FNIS made sure that nobody could purchase Spence’s assets and compete with FNIS in the marijuana financing space. It’s diabolical!

Spence sued for breach of contract, fraud, unjust enrichment, and promissory estoppel. FNIS moved to dismiss. In August, the U.S. District Court for the Northern District of Illinois issued its ruling on that motion in Emerging Industries Technology, Inc. v. Fidelity National Information Services, Inc. The court begins by assessing whether the purported Partnership Agreement mentioned above is in fact an enforceable agreement. The court spends some time highlighting the gaps in the document and concludes, “The so-called partnership agreement created an outline for a potential business deal. But that’s about it.” Too many material terms are left to be determined. FNIS’s public announcements of a partnership are also insufficient. There must actually be a partnership, and here there is no evidence that one was formed. The court dismissed Spence’s claim for breach of contract.

Spence’s fraudulent concealment claim at first seemed to fair no better. On one theory, the claim required  a special relationship giving rise to a duty disclose, and here Spence’s claim of a special relationship seemed to turn on the parties’ disparities in sophistication and bargaining power. The court, which is given in this opinion to drifting into casual formulations sums up Illinois law on the subject as follows: “A special relationship does not exist merely because Joe Schmo enters into an agreement with Big Company.” Moreover, Mr. Rentner, Spence’s principal was no inexperienced rube. However, Spence had made sufficient allegations, just barely, to support its claim of fraudulent concealment. It had alleged that FNIS had failed to correct some of its misleading statements.

Spence’s promissory estoppel claim also barely remained alive. Spence had alleged just enough so that the court was unable to rule out the possibility that it had reasonably relied on FNIS’s statements, including representations about sharing future profits and FNIS’s public announcement of a partnership. For the same reasons, Spence’s claim for fraudulent inducement survives. The unjust enrichment claim also survives, pending Spence’s ability to make out a claim for either promissory estoppel or fraudulent inducement.