Why most cannabis companies should abandon their SOW model
Recently, when I was reviewing certain cannabis trading agreements, such as cannabis intellectual property (IP) licensing agreements, manufacturing agreements, and distribution agreements, I saw a large number of instructions for work (SOW) attached. When SOWs make sense, I am not against them. However, in marijuana, the SOW model is not needed in all likelihood, which can overly complicate the performance of the parties and cause conflicts between agreements. I think the reason I see a lot of SOW models is because licensees tend to tear their agreements from Google, or just follow the trend, regardless of the legal scaling style of equipment telling them about the necessity of the SOW system, regardless of industry, regulation or Nature of the work.
You will usually see SOW and Master Service Agreement (MSA) or a request for proposal between a supplier and its customer (such as a Microsoft or Apple supplier agreement, see here and here For a legal SOW example). MSA stipulates the main legal terms and conditions between the parties (such as the term of the agreement, the right of termination, confidentiality, representations and guarantees, etc.). SOW (or SOW) usually controls and enumerates the specific details of one or more given projects that will occur between the parties within the MSA period. SOW itself is an executable agreement, explained together with MSA. Efficiency is indeed the main goal of MSA/SOW, because when parties have multiple different projects together, they don’t have to go back to the negotiating table to negotiate the main legal terms of their agreement. On the contrary, these are set for the relationship period, and the SOW only reflects the performance obligations and expectations from a specific project to a project.
When does SOW work well? When the work to be completed by one party is project to project, and each project is so different that the deliverables, budget, deadline, and physical requirements have different parameter sets between each project. The most common things I see in marijuana are:
- When there is no specific project or project-to-project concept, the exact details of the SOW and the performance of the parties are always the same as the MSA.
- Global legal terms and conditions in SOW and MSA. Two examples of this redundancy that I have seen recently are (i) IP licensing agreements, where the licensor grants its IP use rights to distributors in the final agreement, but then the corresponding SOW details the IP, and (ii ) The fixed cost table of product production in MSA, and then this table is also packaged into SOW together with other clauses that are basically similar to MSA.
- SOW using global legal terms that are not in the MSA. Another recent example is an agreement I reviewed in which the production request process is in the SOW and not the MSA, but the production request process should be unified across all products, regardless of type or quantity.
- conflict. Worst of all, when the terms between MSA and SOW conflict between them, many of these arrangements ignore whether SOW or MSA controls the conflict. Conversely, a given SOW may unfortunately modify the MSA, rather than supplementing the MSA, rather than ignoring the parties.
- Both parties neglected to resolve the termination issue between MSA and SOW or between SOW.
- The SOW is not detailed at all, does not contain any standard SOW clauses that will help the parties to perform their performance, and misses profitable details, such as project description/overview, purpose and scope, resources involved, project methods, including phases and Milestones, who is responsible for each task, deliverables, payment terms, start and completion dates, approvals, costs, etc., are completely contrary to the purpose of SOW.
In most cases, cannabis licensees will not establish relationships that require SOW. For example, the services that California distributors can provide to other licensees will be very limited, so it makes little sense to distribute SOWs. The concept of project-to-project distribution is not realistic, and even a distribution MSA with a single SOW does not make much sense, because the cannabis regulations stipulate that the terms and conditions between the parties will be mainly global legal provisions to ensure compliance.
If a manufacturer produces various products with completely different compositions and specifications on behalf of the other party, while also participating in various marketing activities, customer outreach, etc., around all these products, but this is not the case. However, the typical situation of cannabis is that one party licenses its intellectual property to the manufacturer, produces a few products according to the limited specifications provided by the intellectual property licensor, and then the manufacturer transfers these products to distributors for testing and retail sales. All of these can (and should) be listed easily and simply in a single IP licensing and manufacturing service agreement.
When marijuana licensees participate in the MSA/SOW model, they often do not realize or care that they are preparing for failure or violation or both. Although SOW may be appropriate and very efficient under appropriate circumstances, at this point, the cannabis industry does not really serve them in terms of licensee-to-licensee transactions. On the contrary, if SOW is used improperly or hastily, it will actually cause various ambiguities and performance issues, so cannabis licensees should think twice before implementing them.