No Cannabis Empire in Washington State?

Washington CannabisIn the early 20th century, Teddy Roosevelt and William Howard Taft both saw something fundamentally wrong with the American economy. Rail, oil, coal, whiskey, and many other American industries were governed by “pools” or “trusts,” small numbers of companies that controlled all of the resources and worked together to split the market and fix prices. Using the Sherman Act, Roosevelt and Taft busted almost 150 of these trusts, breaking them up into component companies that had to compete with one another. Things have changed today, as the U.S. has tended to allow many of its largest industries — high tech, finance, communications, etc. — to again become incredibly concentrated, with industry players buying up competition as soon as it arises.

Not so with cannabis, at least in Washington. Last week, the Washington State Liquor and Cannabis Board emailed to its listserve a report it had commissioned from the University of Washington on the market effects of medical patients entering the Washington recreational market. This quote was buried late in the WSLCB email: “Since February 2014, as an interim policy, the LCB has restricted marijuana producers to a single license. That decision will later be put into rule.”

There are a couple of things to unwind with that quote. First, the WSLCB’s rules have always held that an individual or entity could have an ownership interest in no more than three marijuana licensees. In February 2013, after the WSLCB realized that many more people had applied for multiple producer licenses than they originally thought would happen, the WSLCB issued an “interim board policy” that reduced the cap for producer licenses from three to one. That same “interim” policy remains in place today. It’s likely the case that the WSLCB should have followed the standard notice and comment procedure for this adjustment to its rules, or at least passed it as an emergency rule with a comment period to follow, but that’s not the point. The point is that the WSLCB, at least through today, has been sticking with its guns that an individual or company can’t have more than one production license. In a May 12 email to licensed producers, the LCB did indicate that it was at least considering allowing current producers to acquire other producers beginning in 2017, but that would require withdrawal of the interim policy.

This would be a change in policy in a short amount of time. On April 20, the WSLCB denied a petition to change its rules to allow one active producer the right to acquire another active producer. Note that had the WSLCB allowed this takeover no more cannabis would be grown in the state — just the owners of the companies would change. The WSLCB denied the petition, with staff stating in meeting minutes that: “there are a lot of logistical considerations to account for as far as how existing licenses available for consumption would be allocated.” This implies that even if the WSLCB were to allow producers to own up to three licenses, it would reserve the right to play a role in choosing who could and could not acquire the other existing licenses. We will see how the LCB rolls out any new program that does allow producer-producer acquisitions.

But the main issue is still that state law for now greatly limits the ability of companies to conglomerate. Companies that are capped out on license ownership have tried novel ways of expanding the scope of their businesses — having friends or family members acquire new licenses and agree to use the same branding, entering into quasi-franchise agreements without direct ownership or profit-sharing, and entering into finance and option agreements so that the company interested in expanding locks down its opportunity to make new acquisitions if the rules ever allow for it. On its part, the WSCLB has started pushing back against some of these agreements, test-driving a new reading of WAC 314-55-018 that bars contracts between retail licensees that cause “undue influence.”

The WSLCB’s policies aren’t entirely without merit here. More diverse business ownership means that the threat of “big marijuana” and its potentially corrosive political and cultural influence is held at bay. The market is incredibly competitive, which should be good for consumers. Finally, there are more opportunities for small business owners to be involved in the industry — they aren’t squeezed about by big companies.

The policy does have consequences, though. Competition is high, but the market suffers from high transaction costs of dealing with many more businesses and owners. The WSLCB has to spend more time and money on enforcement, as the number of people it directly regulates is higher. And costs are higher due to small businesses tending to be more inefficient. Though competition helps lower prices versus monopoly or oligopoly rule, the negative price effects of industry concentration don’t tend to crop up until the number of market players severely decreases. Basically, marijuana could be cheaper in Washington if the WSLCB relaxed its cap on license ownership.

Fundamentally, the WSLCB, and the industry as a whole, have to consider competing values. U.S.-style capitalism values a free, open, and competitive market, but it also values the ability to contract freely in the business world, without government interference. Most other legal marijuana states don’t have the same level of ownership restrictions as Washington and over time we will see what effects those restrictions have on Washington’s market.