The monopoly problem: States’ efforts to limit a concentrated industry

The cannabis industry has been accused of a having a “monopoly problem” — and in some, but not all instances, the allegations may be justified.

For instance, in mid-July, multistate operator Acreage Holdings, Inc. (OTC:ACRGF) agreed to pay a $250,000 fine to the Massachusetts Cannabis Control Commission to settle charges that it had attempted to exceed the commonwealth’s cap on adult-use cannabis dispensary licenses. In Massachusetts, the law prohibits any person or entity from controlling or holding more than three adult-use cannabis licenses in any particular class.

Acreage, which went public in November 2018 and has former United States House Speaker John Boehner on its board of directors, already operates three dispensaries in Massachusetts through its subsidiary, The Botanist. Yet, the company flouted warnings from regulators and sought to submit applications for two additional dispensary licenses, listing itself as a management services provider, which would have effectively put it in control of those operations, giving it an unfairly large market share. Heavily criticized for its lack of transparency and deliberate disregard of the commonwealth’s licensing cap, Acreage has now purportedly terminated its management deals in Massachusetts. Notably, Acreage was also fined $300,000 in Ohio last October, for similar misconduct (Ohio precludes transfers of dispensary ownership within the first year of operations, yet Acreage sought to enter into a management services agreement with a dispensary licensee during its first year, which would have put Acreage in control of that operation).

The news about Acreage comes on the heels of reports that U.S. Attorney General William Barr seeks to review for anticompetitive and unlawful monopolistic practices 10 cannabis mergers that occurred in 2019 — accounting for 29% of the antitrust division’s total investigations. This action by Barr seems inspired by his “personal dislike” of cannabis businesses and reportedly prompted at least 30 members of Congress to back a resolution calling for Barr’s impeachment and resignation for abuse of power rooted in personal bias.

In fact, these mergers have largely been viewed as “highly competitive” — not “anticompetitive.”

In the United States, monopolies are not illegal, per se; there is nothing inherently unlawful when a company competes effectively and fairly, grows in size, dominates its market and, as a result, enjoys the ability to charge high prices. However, U.S. antitrust laws prohibit achieving such status through predatory or exclusionary conduct that is designed to thwart competitors.

Typically, when accused of predatory or exclusionary conduct, companies must demonstrate procompetitive business reasons in defense.

Examples of predatory and exclusionary misconduct include, for example, mergers that enable monopolistic and anticompetitive pressures on remaining firms, stifle innovation or preclude access to supplies; price discrimination (selling the same product at different prices to different buyers); exclusive dealings (intended to exclude smaller competitors); or “tying” arrangements, such as predicating the sale of one product on the condition that a consumer buy another. Violations of antitrust laws frequently result in divestment of assets.

There is an apparent concentration of power in the cannabis industry among multi-state operators, which have achieved meaningful advantages over smaller, locally based operators. And it is no secret that the state-legal cannabis industry lacks racial and gender diversity — the end result being that this power is concentrated in largely white and male-owned businesses (a particularly cruel result, considering that as Black Americans are four times more likely to be arrested for cannabis crimes than Caucasians, even though Blacks and Caucasians reportedly use cannabis in equal measure).

The dominance of multi-state operators can easily be viewed as a byproduct of state regulation — not necessarily anticompetitive behavior. When “merit-based” medical marijuana programs were first enacted, states that adopted such programs imposed — and continue to impose — strict caps on the total number of licenses awarded. States with merit-based medical marijuana programs include Connecticut, Florida, Illinois, Maryland, New Jersey, New York, Ohio, Pennsylvania and Rhode Island. Prospective operators that had the wherewithal to hire lobbyists, attorneys, accountants and technical experts to compete effectively in these programs were frequently capitalized in the tens of millions of dollars.

Black-owned businesses have traditionally faced more challenges securing funding than their Caucasian counterparts, and so tend to be less competitive in these programs. And the information and expertise gleaned from success in one merit-based medical marijuana program is easily transferrable to another, giving rise to the homogenous multi-state operator.

State regulators have been responsive to this growing homogenization of cannabis conglomerates and have begun imposing “diversity” and “community impact” requirements, such as in the medical cannabis programs in New Jersey and Pennsylvania, and the adult-use programs Illinois and Massachusetts.

The proposed adult-use program in New York takes several steps to restrain concentrations of ownership, including prohibiting vertical integration, installing caps on licenses awarded to any particular applicant (similar to the adult-use program in Massachusetts) and imposing restraints on transfers within a certain number of years (a measure also taken in Ohio’s medical program and Massachusetts’ adult-use program).

These restrictions and prohibitions are designed to remove barriers to entry, enable small-cap companies to compete with multi-state operators and, ultimately, increase diversity of ownership and spark healthy competition.

However, companies like Acreage that attempt to flout state-imposed restraints and transfers through purported “management services” agreements may be appropriately called out as predatory.

But in other instances, the market share that multi-state operators have achieved may be attributed in part to increasingly archaic state regulation and economic demands. And in any case, the pendulum is now shifting toward a more diverse and inclusive industry.

Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.

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