Antitrust Litigation & Investigations

Cannabis Competitors Engage in Anticompetitive Conduct to Protect Territory, More Cases Likely

Antitrust litigation in this industry almost a certainty.

The global cannabis market is on track to triple in size in the next three years, expecting to hit $32 billion, with two-thirds of that coming from the U.S. market. It is a highly regulated and inherently regional and local business: dispensaries must have a highly-sought after government-issued license and product cannot be purchased online so customers must travel to local dispensaries to buy. With these conditions in place it should come as a surprise to no one that licensed dispensaries are attempting to prevent competitors from entering their geographic radius, making the industry ripe for competition litigation.

One such cannabis antitrust claim has emerged and made its way to California’s First Appellate Division. Last month the court struck part of the complaint on free speech grounds but allowed the core antitrust case to continue. Richmond Compassionate Care Collective (RCCC) v. 7 Stars Holistic Foundation, et al., A154581, Contra Costa County Super. Ct., Calif., No. MSC1601426.

The first medical marijuana collective permit issued under the City of Richmond, California’s Marijuana Ordinance was to Richmond Compassionate Care Collective (RCCC)’s dispensary. Later, when the ordinance was amended to reduce the number of dispensary permits, RCCC lost its permit. RCCC sued under the Cartwright Act, California’s state antitrust law, claiming its competitors worked together to generate community opposition to RCCC’s applications being considered by the Richmond City Council.

California also has a law curbing “Strategic Lawsuits Against Public Participation” (an “anti-SLAPP” statute). A group of the competitor defendants filed a special anti-SLAPP motion to strike certain allegations of RCCC’s suit, later granted by Superior Court Judge Barry P. Goode on the grounds that the complaint was attacking protected free speech activity; that is, efforts to mobilize public opposition and efforts to voice that opposition with City Council. However, Judge Goode preserved RCCC’s claims that its competitors conspired to purchase and tie up code-complaint properties and to fix prices, which are not activities protected by anti-SLAPP provisions.

In so ruling, Judge Goode noted that while it is possible that the defendants’ activities might be protected, they failed to show how, and much of the alleged conduct was “incidental” to RCCC’s antitrust claims.

More anticompetitive conduct like this is likely in the cannabis market.

The profit potential is enormous for dispensaries, growers, distributors and investors: they want to protect their territory and limit licenses issued to competitors.

In a report last year from Arcview Market Research and BDS Analytics, the U.S. cannabis market is expected to hit $23.3 billion in the next three years. In California, with nearly 40 million residents and more than a million medical marijuana patients, the state’s market is expected to exceed $5.1 billion this year, or about one-third of the business in North America.

Should we see a change in marijuana law at the federal level the market will accelerate even faster. With all of that in play, we can expect competition to be fierce. Inevitably some cannabis companies will find themselves blocked from the market or squeezed out by competitors’ exclusionary behavior. Antitrust litigation in this industry is almost a certainty.

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