The Next Hemp Problem May Be Contractual: What Companies Should Review Before the Hemp Rules Change
For hemp brands, distributors, manufacturers and retailers, the regulatory changes may determine what business is still lawful—but existing contracts may determine who can exit, who can pivot, and who bears the cost.
For much of the hemp industry’s recent history, companies structured commercial relationships around an important premise: qualifying hemp was excluded from the federal Controlled Substances Act’s definition of marijuana.
That premise is changing.
Section 781 of Public Law 119-37 substantially rewrites the federal definition of hemp. Among other changes, the statute excludes final hemp-derived cannabinoid products containing more than 0.4 milligrams combined total per container of total THC, including THCA, together with certain other cannabinoids identified in the statute. It also addresses cannabinoids that can’t be naturally produced by Cannabis sativa L. and cannabinoids manufactured outside the plant.
Congress subsequently enacted Public Law 119-103. Until December 11, 2026, the Section 781 amendments apply only to two specified categories involving cannabinoids that aren’t capable of being naturally produced by the cannabis plant. The broader amendments, including the new per-container threshold, have a later December 11 transition point under current federal law.
What happens when the law changes in the middle of an existing commercial relationship isn’t a new problem. More than a century ago, Prohibition and local alcohol restrictions forced businesses and courts to confront similar questions: whether continued performance had become unlawful, whether another lawful path remained available, and who had agreed to bear the risk of a regulatory change.
For hemp businesses, most of the discussion understandably focuses on hemp rules and the regulatory question: What products can we legally sell after the new definition takes effect?
But there’s another question companies should be asking now: What happens to all of the contracts built around products, channels, and relationships that may no longer work under the new rules?
For some companies, that question may be just as consequential as the regulatory change itself.
And companies deciding whether to wind down, reformulate, launch replacement products or enter different channels should understand their contractual position before making that strategic decision.
A Regulatory Change Doesn’t Answer Every Contract Question
At a high level, the contract issues tend to fall into three buckets: whether future performance is excused, whether the agreement can be terminated without economic consequences, and whether a pivot to a new product or sales channel keeps the existing contractual relationship alive.
It’s tempting to assume that if performance becomes unlawful, the contract simply goes away.
Contract law generally isn’t that simple.
For contracts for the sale of goods, UCC Section 2-615 can excuse a seller’s delay or non-delivery when agreed performance becomes impracticable because of an unexpected contingency or good-faith compliance with a governmental regulation or order. But the rule also recognizes that the parties may allocate that risk differently by contract.
Common-law doctrines such as impossibility, impracticability and frustration may also apply, depending on the agreement, governing law and circumstances.
Illinois law provides a useful example. Illinois courts recognize that performance may be excused when it becomes objectively impossible by operation of law, but the doctrine is applied narrowly, in part because contracts exist to allocate business risks. Courts also look at foreseeability and the practical alternatives available to the party seeking to be excused from performance.
Excuse from future performance, termination of the contract and discharge of existing financial obligations are different questions. A well-drafted agreement should address each one.
If it doesn’t, the parties may find themselves relying on default legal doctrines at exactly the moment when significant money is at stake.
If the Brand Plans to Wind Down
Consider a hemp beverage brand with a multiyear exclusive distribution agreement.
The distributor has exclusive rights within a territory. The brand is required to supply product. The distributor may have minimum-purchase obligations. Perhaps one or both parties owe an early termination fee if the agreement ends before the end of its term.
Now assume the principal product no longer qualifies as hemp under the new federal framework and the brand intends to discontinue it.
Does Performance Stop, or Does the Contract End?
The first question is future performance.
If continuing to supply or distribute the product would violate applicable law, the affected party may have contractual or common-law grounds to stop performing that obligation.
But that doesn’t necessarily answer the second question: Is the agreement itself terminated?
A brand could stop supplying a product because supplying it is unlawful without necessarily invoking a contractual termination provision. A distributor could likewise stop distributing it.
If both sides are content to let the relationship end, that may be enough as a practical matter.
But many distribution agreements include obligations that still matter even when product stops moving: exclusivity, territorial restrictions, minimums, intellectual-property licenses, inventory obligations, customer-transition provisions, renewal mechanics, outstanding purchase orders and post-termination rights.
So a company may need an actual contractual off-ramp, not simply an excuse for stopping one category of performance.
Does an Early Termination Fee Still Apply?
Then comes the third question: If the agreement is formally terminated, does an ordinary early termination fee apply?
That’s where drafting matters.
A termination fee designed for a voluntary commercial breakup may never have been intended to apply when the law prohibits the underlying business. But if the agreement simply says that termination during the initial term triggers a specified payment, the parties may disagree over whether an illegality-based termination falls within that language.
One party may argue that it isn’t voluntarily exiting the bargain at all—the law has made continued performance impossible.
The counterparty may respond that, regardless of whether future performance is excused, the agreement expressly imposes a financial consequence if the relationship ends early.
The takeaway is straightforward:
A carefully drafted agreement should avoid that fight by distinguishing regulatory termination from ordinary early termination or termination for convenience. It can excuse affected performance, create an express termination right if the legal impediment continues, and state clearly whether the ordinary termination payment applies.
What Happens to Accrued Obligations?
A change in law doesn’t necessarily wipe the financial slate clean.
Suppose a distributor received $300,000 of product before the change takes effect and owes the invoice thirty days later.
Its inability to lawfully distribute additional product in the future is analytically different from its existing obligation to pay for product it already received.
The act of paying the outstanding invoice hasn’t itself become unlawful.
The same issue can arise with accrued rebates, chargebacks, expense reimbursements, indemnification obligations, commissions and other amounts earned or incurred before termination.
That’s why termination provisions in this industry often work best when they distinguish between prospective performance that has become unlawful and liabilities that accrued while the agreement remained in effect.
Put differently: a company may be entitled to stop doing tomorrow’s prohibited business without being entitled to erase yesterday’s bill.
What If the Product Can Still Be Sold, Just Not Through the Existing Channel?
There’s another scenario that makes the contract analysis even more complicated: the product may not disappear from the market at all.
Instead, state law may move it into a different regulatory channel.
Take Illinois, for example. Come November 12, 2026, intoxicating hemp products will be treated as cannabis and regulated under the state’s Cannabis Regulation and Tax Act, while qualifying non-intoxicating hemp products can remain outside the licensed medical and adult-use cannabis market.
That creates a very different problem for a brand with an existing distribution agreement that wishes to pivot from traditional retailers to licensed dispensaries.
Assume a beverage brand currently sells a 5 mg hemp-derived THC beverage through a distributor serving liquor stores, restaurants, convenience stores and other general retail accounts.
After the regulatory change, that product can no longer be sold through those channels. But the brand may still be able to preserve the underlying THC business through the licensed cannabis market, subject to sourcing, manufacturing, distribution and licensing requirements of that market.
The commercial opportunity hasn't necessarily disappeared, but the product, supply chain and counterparties needed to pursue it may look very different.
The permitted route to market has changed.
Now suppose, as is likely in many cases, that the existing distributor isn’t licensed to participate in that market.
Who Bears the Licensing Risk?
One of the first questions the parties should ask is who the contract made responsible for maintaining—or obtaining—the licenses, permits and regulatory approvals necessary to perform.
That allocation can matter a great deal.
There’s an important difference between a party agreeing to maintain the licenses it already holds and agreeing to obtain and maintain whatever licenses may later become necessary to continue performing.
If the distributor expressly agreed to obtain and maintain all licenses required to distribute the products, the brand may argue that the distributor assumed some of that licensing risk. But that argument becomes less straightforward if continued performance would require the distributor to enter an entirely different regulated market rather than simply obtain an additional permit.
Conversely, if the brand assumed responsibility for ensuring that the products and contemplated distribution model remained lawful, the distributor may have a stronger argument that the regulatory change gives it a contractual termination right or other remedy.
But broad licensing language may still not answer the entire question.
Cannabis licenses aren’t freely available. Depending on the jurisdiction and license type, they may be capped, awarded through lotteries, available only during limited application windows, or subject to ownership, location or other eligibility requirements.
That raises another issue: Did the party actually assume an obligation to obtain the newly required license, and was that license realistically available to it?
A distributor that could have obtained a required license but chose not to may be in a very different contractual position from a distributor that was legally ineligible, missed no available application window, or participated in a licensing process but didn’t receive a license.
And some agreements may expressly provide a termination right if a party loses, fails to obtain or can no longer maintain a license required to perform.
So the analysis shouldn’t stop at whether the law changed.
It should also ask: Which party assumed the risk that the licenses necessary to perform might change?
And there may be an even more basic question: is this really a matter of obtaining a new license, or has the law changed the nature of the business relationship so significantly that continued performance now requires an entirely different regulated supply chain?
The Fight May Be About Economics, Not Continued Performance
The existing distributor, of course, isn’t likely to insist that the brand continue supplying product that the distributor can no longer lawfully sell.
The more likely dispute is over what happens economically when the relationship ends.
The distributor may say:
“We agree the existing distribution model no longer works. But if you’re going to move the business into another lawful channel, that doesn’t necessarily mean you get to terminate this agreement without consequence.”
That position can have real commercial force.
The distributor may have spent money building the brand, securing accounts, hiring personnel, dedicating warehouse capacity, giving up competing products or otherwise relying on a multiyear exclusive relationship.
If the regulatory change cuts the distributor out of the supply chain but allows the brand to preserve the value of the business through a different channel, the distributor may have every incentive to seek compensation on the way out.
That could mean insisting that an existing early termination fee applies.
It could mean refusing to agree to a clean amendment or mutual termination unless the brand pays a negotiated buyout.
Or it could mean asserting other contractual rights tied to exclusivity, minimum commitments, inventory or transition obligations.
The brand may respond that the regulatory change made the existing distribution arrangement unlawful and therefore excuses future performance.
But that still leaves a separate question: Does excuse from future performance also eliminate the economic consequences of ending the contract?
Not necessarily. That distinction is important.
The issue isn’t whether the distributor can force the parties to continue an unlawful distribution relationship.
The issue is whether the contract gives the brand a cost-free exit when the existing channel becomes unlawful but the brand intends to preserve the value of the business through a different regulated channel.
That analysis may turn on several provisions:
which party is responsible for maintaining or obtaining licenses and regulatory approvals necessary to perform;
whether that obligation extends to newly required licenses or only existing ones;
whether the newly required license is actually available to the party obligated to obtain it;
whether loss, failure to obtain or inability to maintain a required license creates a termination right;
whether the agreement contains a specific change-in-law or illegality termination right;
whether a termination fee applies to regulatory termination or only voluntary termination;
whether the agreement distinguishes suspension of performance from termination;
whether the brand assumed regulatory or licensing risk;
whether exclusivity is defined by product, territory or sales channel;
whether the brand can move products into a differently licensed channel;
whether termination rights apply only when the underlying business becomes unlawful, rather than when the existing route to market becomes unlawful; and
whether the parties have any obligation to renegotiate or transition the relationship following a regulatory change.
This is one reason the distinction between excused performance and termination matters so much.
Both parties may agree that the existing distributor can no longer lawfully perform.
They may still disagree sharply over why performance became impossible, whether either party contractually assumed that risk, and whether the brand has to pay to end the relationship and take its business somewhere else.
For companies planning to move products into a state-licensed cannabis channel, those questions should be addressed before the transition is underway—not after the new route to market has already been built.
If The Brand Pivots to a New Product
The analysis gets more complicated for brands that don’t intend to exit their current channels.
Some hemp companies are already developing or marketing replacement products designed to remain at or below the new federal 0.4 mg-per-container threshold.
That may solve one federal hemp-definition problem. But it can create a contract problem.
Assume the company’s current product is a 5 mg hemp-derived THC beverage sold through an exclusive distributor. The brand replaces it with a new beverage designed to fit within the new federal threshold.
Does the Existing Agreement Cover the New SKU?
One of the first things the company should review is the agreement’s definition of “Products.”
Does it cover only specifically identified SKUs? Does it include future products? Replacement products? Line extensions? Products sold under specified trademarks? All beverages manufactured or marketed by the brand? All products within a particular category?
Those differences could determine whether the incumbent distributor has contractual rights to the replacement product.
A brand may believe that discontinuing its legacy product effectively ends the commercial relationship. Its distributor may take the position that the new SKU is simply the next “Product” covered by the existing exclusive appointment.
That disagreement can affect whether the brand can appoint a new distributor, sell directly, enter a new channel or otherwise restructure its route to market.
A Successful Regulatory Pivot Can Weaken an Exit Argument
There’s another, subtler problem.
Suppose continuing to sell the old product would be unlawful. The brand may have a serious impossibility or impracticability argument as to that product.
Then the brand successfully develops a replacement product designed to remain within the new federal hemp definition. If the existing agreement is broad enough to require that replacement product to be supplied through the incumbent distributor, the brand may have preserved its ability to perform the agreement.
That matters if the new product turns out to be commercially unattractive, but it can also matter because the brand may have weakened—or potentially lost—a contractual or common-law argument that it can stop performing or terminate because the underlying business has become unlawful.
The argument “We can’t perform because the law prohibits the business” is materially different from “We can perform, but the compliant product isn’t selling.”
Commercial frustration doctrines generally set a much higher bar than ordinary deterioration in the economics of a deal. Illinois courts, for example, require a frustrating event that wasn’t reasonably foreseeable and that totally or nearly totally destroys the value of the counterparty’s performance.
So a company could conceivably move from a relatively strong regulatory-exit position into a much weaker commercial position:
The legacy SKU becomes unlawful.
The company introduces a replacement product.
The distribution agreement reaches the replacement product.
The replacement performs poorly.
The company then discovers that poor sales don’t themselves create a termination right.
A compliant pivot resolved the regulatory issue and preserved the contractual relationship.
For some companies, that makes reviewing—and potentially renegotiating—commercial agreements before launching the replacement product especially important.
The Contract Issues Extend Across the Supply Chain
These questions don’t belong only to brands. Distributors, manufacturers, retailers and other counterparties may all have significant contractual exposure as the regulatory landscape changes.
Distributors
Distributors sit on the other side of the same questions.
A distributor may have spent considerable money launching a brand: hiring personnel, securing accounts, dedicating warehouse capacity, running promotions or giving up competing products in exchange for exclusivity.
If the brand’s original products disappear, the distributor will want to know whether the brand can simply exit.
If the brand develops replacement products, the distributor will want to know whether its exclusivity extends to them.
The distributor should also examine its own licensing obligations. Did it agree only to maintain existing licenses, or to obtain whatever approvals might later become necessary to continue performing? If a new license is required, is that license actually available, or is it capped, lottery-based or otherwise inaccessible?
A distributor may also need to evaluate minimum-purchase requirements, remaining inventory, sell-through rights, credits, returns and whether amounts invested in launching the brand are recoverable under the agreement.
The important point is that neither side should assume the regulatory fate of one SKU determines the fate of the overall relationship.
Manufacturers and Co-Packers
Contract manufacturers and co-packers may have substantial exposure even though they don’t own the consumer brand.
Imagine that a manufacturer has already ordered ingredients, printed 500,000 cans, reserved production capacity or purchased specialized equipment based on forecasts from a hemp-beverage customer.
The customer’s existing formulation will no longer work under its post-transition strategy.
Who bears those stranded costs? Can the brand cancel future production runs? Are forecasts binding? Are ingredient orders noncancelable? Who owns obsolete packaging? Does a change in law permit cancellation without payment? Does the manufacturer have to cooperate with reformulation? Who pays for R&D, new testing, new packaging and the production changes required to launch a replacement product?
The manufacturer should also determine what its licensing covenant actually requires. Does it merely have to maintain its current manufacturing approvals, or did it agree to obtain any additional licenses necessary to continue producing the products?
That distinction may matter significantly if continued production requires a cannabis manufacturing license that’s capped, subject to a limited application window or tied to a different facility or ownership structure.
The regulatory change itself doesn’t answer those questions. The manufacturing and supply agreements may.
Retailers, Suppliers and Other Counterparties
Retailers may face inventory-return and credit issues.
They should also examine whether their agreements require them merely to maintain existing retail permits or to obtain any new license necessary to continue selling the products. A retailer that would need a cannabis retail license may have no realistic ability to obtain one, depending on the jurisdiction.
Ingredient suppliers may have committed inventory or minimum-purchase arrangements.
Brokers and sales representatives may have commission rights tied to accounts that continue after product changes.
Licensors may have royalties, minimum guarantees or category restrictions that survive the discontinuation of particular products.
Lenders and investors may need to examine covenants, material-contract provisions and collateral value.
The details vary by relationship, but the analytical framework is similar: What performance is becoming unlawful? What performance remains possible? What contractual obligations continue? And who bears the economic consequences of the transition?
The Timing Matters Because Regulatory Change Is No Longer Hypothetical; Hemp Rules are Changing
There’s another reason to review agreements now: foreseeability.
For older contracts, parties may plausibly argue that today’s specific regulatory change wasn’t contemplated when they signed.
For contracts being negotiated or amended today, that argument becomes much harder.
The federal statute exists. The transition date exists. Industry participants are already restructuring their businesses around it.
And foreseeability can matter to doctrines such as impossibility and commercial frustration. Illinois courts, for example, consider whether the circumstances asserted as excusing performance were reasonably foreseeable when the contract was made.
For transactions being documented now, the regulatory transition should therefore be treated less like an unknowable force majeure event and more like an affirmative part of deal architecture.
What a Hemp Contract Audit Should Cover Now
At minimum, companies planning for the federal transition should review material distribution, manufacturing, supply, brokerage, licensing, retail and other long-term commercial agreements for:
the definition of “Products,” including future, replacement and line-extension products;
exclusivity by product, brand, territory and sales channel;
supply and purchase obligations;
minimum purchases, minimum sales and take-or-pay provisions;
change-in-law, illegality, impossibility and force-majeure provisions;
suspension rights and the distinction between suspension and termination;
termination rights, cure periods and early termination fees;
responsibility for obtaining and maintaining licenses, permits and regulatory approvals;
whether licensing obligations extend to newly required licenses or only existing ones;
what happens if a required license is capped, lottery-based, unavailable or otherwise not reasonably obtainable;
termination rights tied to loss, suspension, nonrenewal or failure to obtain a required license;
treatment of discontinued or reformulated products;
accepted purchase orders and forecasts;
inventory repurchase, returns, credits and sell-through rights;
stranded packaging, ingredients and manufacturing commitments;
intellectual-property licenses and continuing trademark rights;
accrued payment obligations and survival provisions; and
amendment provisions, notice requirements and timing mechanics that could affect a negotiated transition.
For multistage agreements, companies should also consider whether the regulatory change affects the entire relationship or only particular states, products, or channels.
The goal shouldn’t simply be to identify legal risk.
It should be to determine which business strategies the existing contracts actually permit.
Review the Contract Before Choosing the Strategy
For a company planning to wind down, the critical question may be how to exit commercial relationships without creating unnecessary termination exposure.
For a company planning to pivot, the more important question may be whether its existing agreements automatically attach to the replacement business.
For a distributor, the issue may be preserving rights to a brand’s next generation of products—or protecting investments if the relationship disappears.
For a manufacturer, the issue may be determining who bears the physical cost of the transition.
For distributors, manufacturers and retailers alike, the licensing provisions may also determine whether a regulatory change excuses performance, creates a termination right or instead places responsibility on one party to pursue a newly required license.
Those aren’t questions companies should be answering after inventory has been ordered, a new SKU has launched or a termination notice has already been delivered.
The sequencing matters.
A company considering a major pivot should first understand its contracts, then determine where amendments or negotiated exits make sense, and only then structure the post-transition business.
In some cases, renegotiating now may be substantially easier than negotiating after each side knows exactly which contractual provisions give it leverage.
The Bottom Line
The hemp industry’s immediate challenge is regulatory, but its next challenge may be contractual.
The federal transition can create very different outcomes depending on whether a company shuts down a product line, develops replacement products, continues operating through different channels or restructures its relationships entirely.
And one important point is easy to overlook:
A company that successfully develops a replacement product may face different—and sometimes more difficult—contract issues than a company that simply stops performing because its existing product has become unlawful.
Before deciding whether to wind down, reformulate or pivot, hemp businesses should understand what their material contracts say about that decision.
A good starting point is a contract audit focused not just on whether performance can stop, but on what happens next:
What is excused? What terminates? What survives? What rights does the counterparty retain? Who assumed the regulatory and licensing risk? And does the proposed strategy preserve—or give up—contractual leverage?
Those are questions worth answering before the regulatory deadline arrives.
This article is for general informational purposes only and does not constitute legal advice. The application of contract and regulatory law depends on the relevant agreement, products, jurisdictions and specific facts.
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