State Limitations on Early Stage Cannabis Business

A couple of recent events have us thinking about the different ways retailers and cultivators are doing business in the cannabis market. First, a few of our clients have asked us about situations involving groups of retailers banding together to negotiate with producers and vice versa ­— groups of producers teaming up to negotiate prices and supply contracts with retailers. Then, Washington’s Liquor Control Board released emergency rules that, among other things, severely limited the ability of Washington marijuana businesses to enter into standard sales agreements. How are these things connected?

Let’s examine the guild-like behavior of certain businesses. A group of producers, like six or seven, approach a retailer as a group. They negotiate a standard sales agreement where the retailer buys a few pounds per month for a few months from their producer group. The producer group does not specify responsibility for delivery; it just guarantees that at least one of them will deliver in accordance with the agreement. The same thing is happening on the opposite side, where groups of retailers are working together to negotiate prices with producers and to set up regular purchases.

Marijuana Pricing

It makes sense that new businesses would be tempted to enter into these arrangements. Competition is hard and survival is even harder when participating in a new market. Marijuana supply and demand is still trying to find their proper equilibria, and businesses that are on the brink of failure with large stocks of inventory or great need of inventory might be willing to do business at a loss. The slow deaths of those businesses affects everyone’s prices. It is tough to survive.

A guild that jointly agrees on prices and negotiates as a unit can help with some of these problems. It can keep prices manageable and decrease cut throat competition and maybe even prevent free falling prices.

The big problem with these arrangements is exactly what makes them enticing — they are anticompetitive. An even scarier term to apply to them is price fixing. Price fixing is an agreement among competitors to raise, lower, or otherwise stabilize the price range or any terms. It is also a per se violation of state and federal antitrust laws. In most sates, an antitrust lawsuit brought by an aggrieved party against the companies that worked together to “stabilize” prices could yield triple damages for the aggrieved party. The companies that are forming these groups are taking serious and potentially costly risks.

In response to all this, the State of Washington has put into place as an emergency rule (effective prior to public comment) WAC 314-55-018, which says that “No industry member or employee thereof shall sell to any retail licensee or solicit from any such licensee any order for any marijuana tied in with, or contingent upon, the retailer’s purchase of some other marijuana. . . .” This rule seems to bar any type of multi-delivery transactions. If I contract with you that says I will pay you $2,000 per pound for two deliveries, a plain reading of this new rule would render that contract in violation of the rules, as it is conditions my purchasing marijuana from you now on my purchasing marijuana from you later. What could Washington have been thinking? We do not know think it was necessary to use such a blunt force rule.

Both government and marijuana market participants are not yet ready to stop experimenting. Sometimes this is a good thing, but not always, as it can land some in hot water. Marijuana prices are starting to stabilize. In the meantime, just try not to violate the antitrust laws.