Antitrust Risks in Marijuana Trade Associations

Cannabis trade associationsLast week, we wrote about a new cannabis industry group in Oregon, the Craft Cannabis Alliance. In addition to national groups like the National Cannabis Industry Association, more and more regional, state, and local cannabis trade associations have been forming. Generally, they begin with political goals in mind. The national groups work toward marijuana legalization at the state level and on lifting restrictions at the federal level. State and local cannabis groups typically work for specific regulatory fixes or lobby local governments to resolve land use challenges. When cannabis trade associations go beyond run of the mill lobbying work, however, they can present legal risks to their members with potentially harsh consequences. Specifically, if trade association members take steps to limit their competition with one another, they can face massive civil penalties.

Competition law, referred to in the United States as antitrust law, has both federal and state components. Federally, antitrust law stems from the Sherman Act of 1890, the Federal Trade Commission Act of 1914, and the Clayton Act of 1914. The Sherman Act prohibits every “contract, combination, or conspiracy in restraint of trade.” The Sherman Act has been interpreted by courts over the years not to outlaw every restraint of trade — it specifically targets “unreasonable” restraints such as price fixing, dividing markets, and rigging bids. Most states also regulate unfair competition. In Washington State, we have the Consumer Protection Act, which largely mirrors the Sherman Act’s prohibitions in restraint of trade.

In most international jurisdictions, actions for violation of competition law are limited to governments. In the United States, however, both state and federal statutes provide for private rights of action. This means private parties that are damaged or potentially damaged by unreasonable restraints of trade may be able to collect treble damages, attorney’s fees, and injunctions against any company that is a party to the unreasonable restraint of trade.

Trade associations, then, provide an easy pathway to violations of state and federal competition law. Many of the smaller regional trade associations are focused on a specific sector of the industry. Retailer groups as well as cultivation groups have formed across the legal cannabis states in the western United States. Imagine this situation: a trade group made up of farmers meets to discuss lobbying on state pesticide rules. As the meeting winds down, conversation turns to talking about the glut of supply in the market, driving down prices. One producer says she has no plans whatsoever to sell below a certain price. Another producer says the same thing, and others nod in assent – agreeing it would be unprofitable for any of them to sell below that price.

That conversation can create huge liability problems for all its participants and for the trade group as a whole. Even if there isn’t a formal written agreement, an aggrieved party could still show an unreasonable restraint of trade. Actions of an association or actions of its members consistent with an unreasonable restraint of trade can be evidence of an agreement of the association’s members. Certain agreements, including price-fixing and market allocation agreements, can actually be crimes that include jail time. And though federally criminal conduct is nothing new for participants in the cannabis industry, those that violate competition law are not even granted the minimal protections of the Cole Memo.

Trade associations are particularly susceptible to certain types of anti-competitive behavior. Associations with codes of conduct, standard setting, and certification can unwittingly create anti-competitive behaviors. If a provision of the code of conduct is unreasonable and deemed to act as a restraint of trade — as opposed to a reasonable attempt to pursue a legitimate goal –could make association members that act pursuant to that code section liable for antitrust violations. Judges and juries have large amounts of discretion in determining whether a restraint on trade is unreasonable or not, so a legitimate safety standard to one person may be an illegal attempt to force a boycott of a competitor to another person.

Trade associations need to take steps to ensure their group does not create antitrust liability for its members. Anti-competitive agreements can be inferred if two or more market actors are taking parallel action and it can be shown that the competitors have engaged in illicit communications. So it makes sense for a trade association’s leadership to run tight meetings. All business should be formally proposed to an executive committee, which then limits discussion at broad group meetings to the specific business on the table. Agendas and presentations can be distributed in advance, and participants should be informed to stick to the specific issues at hand. Leadership can further inform the members that certain topics are completely off limits: pricing, whether to do business with certain market participants, decisions regarding company product output, and complaints about the business practices of other companies.

By taking these steps, an association can help prevent its meeting minutes from being used as proof of anticompetitive conduct. And if individual members engage in such conduct with one another, it is easier for other members to claim they were not involved in the anticompetitive acts.

There are many areas of law that the young cannabis industry hasn’t had major problems with yet. Products liability laws, antitrust laws, and others have seemed like distant problems, given that simple banking and taxation has been such a problem. But it is vital for industry members to remain proactive. Otherwise, public and private actors can upend the industry with a well-timed lawsuit.