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CanWell, LLC v. High Street Capital Partners, LLC

Superior Court of Rhode Island, Kent

December 16, 2019

CANWELL, LLC, CANWELL PROCESSING (RI), LLC and CANWELL PROCESSING (ME), LLC, Petitioners
v.
HIGH STREET CAPITAL PARTNERS, LLC, d/b/a ACREAGE HOLDINGS, INC., and as the Successor-in-interest to THE WELLNESS AND PAIN MANAGEMENT CONNECTION, LLC, and KEVIN MURPHY JOHN AND JANE DOES 1-20, Respondents. CANWELL, LLC, Petitioner
v.
THE WELLNESS AND PAIN MANAGEMENT CONNECTION, LLC and Its Successor in Interest, HIGH STREET CAPITAL PARTNERS, LLC d/b/a ACREAGE HOLDINGS, INC., NORTHEAST PATIENTS GROUP d/b/a WELLNESS CONNECTION OF MAINE LLC, KEVIN MURPHY, and JOHN DOES 1-20, Respondents.

          For Plaintiff: Vincent A. Indeglia, Esq. John C. Revens, Jr., Esq. William M. Russo, Esq. Thomas A. Tarro, III, Esq.

          For Defendant: Preston W. Halperin, Esq. Jeffrey S. Brenner, Esq.

          DECISION

          LICHT, J.

         Petitioners, see infra pp. 2-3, have filed two different Miscellaneous Petitions for Mandating Arbitration Pursuant to Contract seeking to compel Respondents, see infra pp. 3-4, to arbitrate certain claims in Rhode Island. Each of the Respondents has moved under various provisions of Super. R. Civ. P. 12 to dismiss the petitions. Since the facts and travel relating to each petition are so similar, there will be one opinion dealing with both petitions. The Court will, however, identify those areas where different facts apply.

         I

         Facts and Travel[1]

         A

         The Parties

         These matters involve a complicated collection of corporate entities that operate and/or invest in the State-authorized cannabis industry; therefore, the Court begins by delineating the various parties in turn.

         1. Petitioners: CanWell, LLC (CanWell), CanWell Processing (RI), LLC (CanWell RI), and CanWell Processing (ME), LLC (CanWell ME)

         CanWell, a Delaware limited liability company, formed on December 1, 2014. CanWell is headquartered in Rhode Island and is involved in the alternative dosage, otherwise referred to as "edibles," aspect of the cannabis industry. CanWell's state-specific subsidiaries, CanWell RI and CanWell ME, are also Delaware limited liability companies involved in the alternative dosage side of the cannabis industry. All three CanWell entities are registered and authorized to do business in Rhode Island and maintain business addresses within the state. The CanWell entities provide intellectual property and production services to state-licensed cannabis businesses in Rhode Island, Maine, and Massachusetts. The CanWell entities' operational expertise includes all aspects of the cannabis industry including cultivation, extraction, processing, alternative dosage development, and dispensing. CanWell owns the most significant interest in the CanWell Subsidiaries. The members of CanWell itself are "unknown" to the Court at this time.[2] Respondent The Wellness and Pain Management Connection, LLC (WPMC) owns a three-percent interest in both state-specific CanWell Subsidiaries, [3] and Wellness Connection Consulting, LLC (WCC) owns a four-percent interest in the same.

         2. Respondents

         a. High Street Capital Partners, LLC, d/b/a Acreage Holdings, Inc. (Acreage)[4]

         Acreage is a Delaware limited liability company formed on April 29, 2014. Its members include Kevin Murphy, the Chief Executive Officer, Acreage Holdings America, Inc., and various minority investors. By 2018, Acreage had become a high-growth cannabis operator with operations in at least nineteen states comprised of cultivation, processing, and dispensing.

         b. Kevin Murphy (Murphy)

         Murphy is the Chief Executive Officer of Acreage and the President of WPMC.

         c. Northeast Patients Group d/b/a Wellness Connection of Maine LLC (Northeast)

         Northeast[5] is a Maine nonprofit corporation formed on June 16, 2010. In 2010, Northeast was awarded license rights by the state of Maine to cultivate and dispense medical marijuana at four medical marijuana dispensaries that Northeast owns and operates. It was also allowed to develop and run facilities to accommodate such operations.

         d. The Wellness and Pain Management Connection, LLC (WPMC)

         WPMC is a Delaware limited liability company formed on August 3, 2011. Currently, WPMC is a Maine-based for-profit service provider for Northeast involved in the "flower" side of the cannabis industry. Acreage, Northeast, and CanWell are all members, or "Class A Shareholders," of WPMC. Acreage currently owns a 97.4% interest in WPMC; Northeast owns a 2% interest; and CanWell owns a 0.1% interest. [6] Petitioners allege that Acreage is WPMC's successor-in-interest and alter-ego.[7]

         3. Other Relevant Persons or Entities Not Parties

         a. Terrence Fracassa (Fracassa)

         Fracassa is CanWell's Chief Executive Officer.

         b. Wellness Connection Consulting, LLC (WCC).

         WCC is a for-profit affiliate of Respondents, established by the Northeast Board Members as a for-profit entity to house Northeast's intellectual property.

         B

         The Agreements

         There are several agreements which are central to the issues involved in these cases.

         1. The Alternative Dosage Services Agreement (ADA)

         On October 1, 2015, CanWell entered into the ADA with Northeast, WCC, and WPMC to sublicense the edible side of the Maine cannabis industry, specifically, by providing proprietary extraction equipment, processing best practice, intellectual property, and production facilities by and through WPMC for the benefit of Northeast. See ADA §§ 2, 3. In consideration of CanWell's obligations under the ADA, CanWell secured a significant royalty stream: Northeast would remit royalty payments to WPMC, and WPMC would retain a percentage and remit the balance payment to CanWell. Id. § 4.1. The initial term of the ADA was eight years from its effective date (October 1, 2015); the Agreement was to be automatically renewed for a succeeding second term of eight years, then automatically renewed for a third term of seven years, subject to termination by either written mutual consent of the parties or upon material breach by Northeast or CanWell, provided certain conditions were met in the instance of breach (e.g., the opportunity to cure). Id. § 4.2.

         The ADA also contained a noncompete covenant, providing that Northeast, WPMC, WCC, "and their respective successors or assigns shall not pursue contracts or operations similar to that which is contemplated herein within Maine or other States within New England without the prior written consent of Canwell." Id. § 5.2. The noncompete covenant was to remain in effect during the term of the agreement and for two years after termination. In recognition of the noncompete covenant, WPMC and WCC would receive three-percent and four-percent equity interests, respectively, in each of the state-specific CanWell Subsidiaries (CanWell RI and CanWell ME).[8] The ADA also contained a forum-selection clause, which provides that the ADA is "governed by and construed in accordance with the laws of Maine," and that "[e]ach of the parties hereby submits to the exclusive jurisdiction of the courts of Maine, with respect to any dispute between the parties pertaining to [the ADA]."[9] Id. § 13.7.

         On January 1, 2018, CanWell assigned its entire interest in the ADA to CanWell ME. On that same day, all of the parties to the ADA reaffirmed that all "terms and conditions of the [ADA] remain in effect and unchanged." Resp't Acreage, WPMC, and Murphy's Mot. to Dismiss Ex. D (Assignment and Assumption of Agreement).

         2. WPMC Operating Agreements

         As of May 3, 2012, WPMC was formed pursuant to an Operating Agreement (the 2012 WPMC OA). Included as Class A Shareholders or members were Northeast, Murphy, and Fracassa. As of October 26, 2015, WPMC, Northeast, CanWell, Acreage, and others executed an Amended and Restated Operating Agreement (the 2015 WPMC OA). For purposes of this litigation, the only significant difference between the 2012 WPMC OA and the 2015 WPMC OA is that the latter agreement changed the forum for arbitration pursuant to the clause discussed below from Portland, Maine to Providence, Rhode Island and that CanWell replaced Fracassa as a Shareholder. In KM-2019-1047, CanWell cites the Arbitration Clause in the 2015 WPMC OA as the basis why WPMC, Northeast, Acreage, and Murphy must submit to arbitration in Rhode Island, which provides:

"The parties hereby agree that unless otherwise specifically required by law, any and all disputes, and legal and equitable claims arising between or among the Shareholders, the Directors, the officers, the Company, or any of them or any combination of them, which relate to the rights and obligations of such Persons under the terms of this Agreement, any agreement contemplated hereby, or any future agreement, understanding or instrument to which two or more such Persons may be parties, shall be submitted to binding arbitration in Providence, Rhode Island in accordance with the commercial rules of the American Arbitration Association." The 2015 WPMC OA, Art. 17. (emphasis added).

         The 2015 WPMC OA makes no specific mention of the ADA. Further, the Court has already referred a dispute arising under the 2015 WPMC OA to arbitration in Rhode Island in accordance with Article 17 of the 2015 WPMC OA; namely, WPMC's alleged redemption of CanWell's interest in WPMC.

         3. CanWell RI and CanWell ME Subsidiary Operating Agreements (CanWell OAs)

         On January 1, 2018, CanWell, CanWell RI, CanWell ME, WPMC, and WCC executed the CanWell OAs for CanWell RI and CanWell ME.[10] Northeast is not a party to these agreements. The CanWell OAs memorialized WPMC's three-percent interest and WCC's four-percent interest in both the state-specific CanWell Subsidiaries. CanWell maintained the remaining ninety-three-percent membership interests. Article III of the CanWell OAs governs Members, Article IV governs Managers, and Article V governs Officers; each of these Articles references the noncompete covenant in the ADA and expressly incorporates it by reference into the CanWell OAs. See CanWell OAs §§ 3.9, 4.16, 5.8. The CanWell OAs list "Alternative Dosage Agreement" as a defined term meaning "that certain Alternative Dosage Agreement effective as of October 1, 2015 by and among Northeast [], CanWell, LLC or its designee, [WCC], and [WPCM]. Id. § 1.1. Pertinent here, Section 3.9 of the CanWell OAs provides:

"Notwithstanding anything in here to the contrary, all Members and parties hereto and their respective successors or assigns shall be and hereby are at all times bound and restricted by, and shall at all times adhere to and comply with, the last sentence of Section 5.2 of the Alternative Dosage Agreement, which sentence is hereby incorporated herein by reference and which provision and Alternative Dosage Agreement the Members and parties hereto hereby acknowledge and agree was the basis for, and was detrimentally relied upon by, Canwell, LLC and Company in their expenditure of time, resources and energy, incurring of opportunity costs, and formation of this Agreement and all of the rights, covenants, duties, obligations and other provisions contained herein. The Members and parties hereto acknowledge and agree, and covenant, to make their respective successors or assigns aware of and agree to the provisions of this Agreement as such applies by reference or otherwise to such Persons and their obligations with respect thereto, and in particular the provisions of this Section 3.9. The Members and parties hereto hereby acknowledge and agree that they shall be liable to the Company with respect to any violations of Section 3.9 by any of their respective successors or assigns." [11] Id. § 3.9.

         Also, the CanWell OAs each contain identical arbitration provisions, which CanWell cites in its First Petition as a basis for Respondents to submit to arbitration in Rhode Island, providing:

"The parties hereby agree that unless . . . required by law, any and all disputes, and legal and equitable claims arising between or among the Members, the Managers, the officers, the Company, or any of them or any combination of them, which relate to the rights and obligations of such Persons under the terms of this Agreement, any agreement contemplated hereby, or referenced herein, or any future agreement, understanding or instrument to which two or more such Persons may be parties, shall be submitted to binding arbitration in . . . Rhode Island . . ." Id. at Art. 17 (emphasis added).

         The Court has already referred a dispute arising under the CanWell OAs to arbitration in Rhode Island in accordance with Article 17 of the CanWell OAs; namely, WPMC's alleged withdrawal from CanWell RI and CanWell ME.

         C

         The Litigation

         The Court pauses to note that the complicated web of transactions and occurrences underlying these Petitions have voyaged into five different forums: (1) Petitioners' two Petitions Demanding Arbitration pending before this Court; (2) this Court referred WPMC's alleged withdrawal from CanWell to arbitration before retired Rhode Island Supreme Court Chief Justice Frank Williams; (3) this Court referred WPMC's alleged redemption of CanWell's membership in WPMC to arbitration before the American Arbitration Association (AAA); (4) Northeast filed a Complaint in Maine alleging CanWell breached its obligations under the ADA; (5) and, most recently, Respondents filed suit in Delaware seeking declaratory judgment.[12]

         Beyond the two issues already referred to arbitration, there are two events that triggered the pending litigation in these consolidated cases. First, in 2018, Acreage entered into an agreement to acquire ownership interest in Greenleaf Compassion Care Center in Portsmouth, Rhode Island. Second, on July 12, 2019, Northeast and WPMC served a "Termination Notice," attempting to terminate the ADA because CanWell and CanWell ME allegedly breached their obligations under the ADA. See ADA § 4.2.

         1. KM-2019-0948 (First Petition)

         On August 21, 2019, Petitioners CanWell, CanWell RI, and CanWell ME filed a Miscellaneous Petition for Mandating Arbitration Pursuant to Contract and Request for a Stay of Proceedings in Aid of Arbitration (the First Petition). Petitioners base their argument for arbitration on the two CanWell OAs and/or the ADA. Although Acreage is not a signatory to the ADA or CanWell OAs, the First Petition alleges that Acreage is a successor-in-interest or alter-ego of WPMC and is therefore bound by the noncompete covenant and other restrictions therein. See First Pet. at 4, ¶ 3. Notably, Northeast is not a named Respondent in the First Petition nor a party to the CanWell OAs. In their Demand for Arbitration, Petitioners request arbitration in Rhode Island regarding Respondents' alleged breach of the ADA's noncompete covenant, First Pet. Ex. D at 26-32, and Respondents' alleged wrongful termination of the ADA, id. at 34-41. Petitioners allege that if Respondents are not enjoined from competing with CanWell in Rhode Island and the other New England states and from successfully terminating the ADA, CanWell will face significant irreparable harm in the form of economic and reputational damage. Petitioners assert causes of action for Breach of ...


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