Federal Court Confirms Payment Processing Contracts with Cannabis Merchants Do Not Violate the Controlled Substance Act, and Are Therefore Enforceable

Background and History

Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970, commonly known as the Controlled Substances Act (“CSA”), divides controlled substances into five levels of “schedules,” which are based on the drug’s potential for abuse, whether the drug has a currently accepted medicinal use, and whether there is a lack of accepted safety for the use of the drug under medical supervision or the level of psychological or physical dependent that could result from abuse of the drug.

Currently, marijuana is classified as a Schedule I drug under the CSA, which means that it is treated as a “highly addictive” drug lacking medical value.[1] Under the CSA, it is illegal “for any person knowingly or intentionally (1) to manufacture, distribute, or dispense or possess with intent to manufacture, distribute or dispense, a controlled substance; or (2) to create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance” except as otherwise authorized under the statute.

The CSA defines “distribute” as “to deliver (other than by administering or dispensing) a controlled substance or a listed chemical,” and defines “deliver” as “the actual, constructive, or attempted transfer of a controlled substance.”

Recently, the Southern District of Florida addressed a critical question: Whether processing payments for cannabis dispensaries violates the CSA?

The Court answered no. In a pivotal decision for the payments industry, the Court confirmed that merchant processing agreements with state-legal cannabis businesses are enforceable under federal law as payment processors neither distribute nor deliver marijuana.

The core dispute arose when a cannabis merchant terminated its exclusive processing agreement with its payment processor and sought to avoid contractual penalties by arguing that the agreement violated the CSA. Specifically, the Defendant in the suit challenged the enforceability of an Early Termination Fee (“ETF”), which states:

“If [Defendant] breaches its exclusivity obligations prior to the end of the Term, [Defendant] shall pay an Early Termination Fee as liquidated damages in an amount equal to the average monthly processing fee charged by [Plaintiff] to [Defendant] for the previous six months multiplied by the number of months remaining in the Term of the Agreement.”

The Plaintiff argued, and the court agreed, that the Plaintiff did not deliver or distribute marijuana. Instead, the Plaintiff earned a transaction fee from each transaction the Defendant processed at its dispensary point of sale. For example, if a consumer walked into a dispensary, purchased $100.00 of cannabis, and swiped his or her debit card at checkout, the total charge would be $103.00, $100.00 for the cannabis and $3.00 as a processing fee. A payment processor then collects that $3.00 processing fee for processing the payment, not for selling marijuana.

Finally, the court held that even if the contract did violate the CSA, federal courts are coalescing around whether a court order would require ongoing or future violations of federal drug law to satisfy the terms of the agreement.[2] When no future violations are implicated, courts have found no CSA violation.

Here, based upon a plain reading of the merchant processing agreement, once the Defendant breached, the term of the contract was complete. The Defendant would no longer process transactions, and the amount the Defendant owed under the ETF would remain the same as when calculated, regardless of any future events. Accordingly, the court found that the merchant processing agreement did not implicate any future or ongoing CSA violation and therefore could enforce the agreement.

Implications for the Payments and Cannabis Industries

The Southern District of Florida’s decision marks a major milestone for payment processors, financial services companies, and fintech innovators operating in the cannabis space, both in Florida and nationwide, as it is the first case of its kind to address payment processors directly.

Now, payment processors can structure contracts with confidence, knowing they are not at risk of automatic invalidation under the CSA, because providing financial services is a separate, distinct, and independent act from actually participating in cannabis distribution or delivery. Finally, retrospective remedies, such as Early Termination Fees (ETFs), remain fully enforceable.

Conclusion

The Southern District of Florida’s ruling reaffirms what leading payment processors already know: facilitating financial transactions for state-legal cannabis businesses is both lawful and essential.

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This was drafted by Global Legal Law Firm attorneys:

Alex Glassman, Esq.
Partner
Global Legal Law Firm (Florida)

&

Matthew Luciani, Esq.
Associate
Global Legal Law Firm (California)

[1] Comparatively speaking, other drugs classified as Schedule I drugs include heroin and peyote.

[2] Bartch v. Barch, No. CV 23-0101-BAH, 2024 WL 5146010, at *4 n.10 (D. Md. Dec. 17, 2024)