Budding Antitrust Activity in the Cannabis Industry: Lessons from Richmond Compassionate Care Collective v. Koziol
As the cannabis industry continues to blossom from the backwoods into a multi-billion dollar bonanza, the antitrust spotlight is poised to increasingly shine on the industry’s many players.
A California state court jury’s recent verdict awarding treble damages of $15 million to a medical marijuana collective could be an early harbinger of future activity in the cannabis space. The verdict was returned on September 23, 2021, in the California Superior Court case of Richmond Compassionate Care Collective v. Koziol, Case No. MSC16-01426 (September 23, 2021).
Plaintiff Richmond Compassionate Care Collective (RCCC), the first licensed medical marijuana collective in Richmond, CA, alleged that defendants, three other licensed cooperatives, conspired to exclude RCCC and others from the medical marijuana dispensary market, and prevent RCCC from purchasing or leasing a compliant property in Richmond. RCCC alleged that defendants violated California’s Cartwright Act by engaging in a horizontal restraint of trade to monopolize the medical marijuana dispensary market, which resulted in supra-competitive prices for consumers.
RCCC claimed that the defendants met and strategized how best to tie up potential properties where a dispensary could legally operate, for at least six months—the time period California gives a licensed collective to open a compliant dispensary or risk losing its permit. For example, the defendants allegedly gave property owners letters of intent to lease or purchase available property simply to tie up the process, went door-to-door to landlords to convince them not to rent their properties to RCCC, and demanded non-compete clauses in their own contracts with landlords to block them from making their properties available to RCCC.
Following the trial in August 2021, the jury found that defendants did indeed conspire to prevent RCCC from acquiring suitable property, causing RCCC’s permit to expire and harming RCCC to the tune of $5 million. And, since damages under the Cartwright Act are trebled, defendants are liable for $15 million, plus attorney fees.
Players in the burgeoning cannabis industry, both large and small, should think of the RCCC case as an early warning sign. While the facts of the case are unique and defendants’ actions were particularly questionable, the case clearly shows that the nascency of the cannabis industry is not a shield against antitrust exposure. Indeed, much of the early consensus was that cannabis markets, recreational and medicinal, are new, fragmented markets that are experiencing rapid growth and intense competition. Such facts do not present a typical antitrust scenario. The characteristics of the industry, however, are slowly changing.
Consider the obvious: the cannabis industry is experiencing unprecedented consolidation and scale, giving larger companies power to dictate cannabis price and quality. Some of these companies stretch across geographies, a scale which enables them to impact cannabis production on a local level. The increasing consolidation has attracted scrutiny from the United States Department of Justice since 2019 (many have critiqued the DOJ’s involvement as animus from then Attorney General William Barr). Even now, the FTC continues to challenge anticompetitive activity in the cannabis industry, with the Altria Group’s acquisition of Juul Labs in the spotlight.
But it is not just the activity of obvious, large-brand players that raise antitrust risks. The cannabis industry continues to operate on a primarily local level. Laws, licensing, zoning, and other restrictions are local in nature. Dispensaries operate under local restrictions, and consumers primarily purchase locally. There is limited space to legally grow cannabis and to legally dispense it. Additionally, limitations on permits create a small number of players and high barriers to entry. In such small, exclusive spaces, seemingly innocuous actions under the guise of edging past the competition can suddenly expose a business to antitrust lawsuits.
Moreover, considering the idiosyncrasies of the cannabis market, one in which few players typically operate who share a common activism in providing cannabis to consumers, dispensary collectives often have close relationships with each other. But therein lies the danger. Seemingly legal cooperation among suppliers can run afoul of antitrust laws. And cooperation might not even be required. Single-firm conduct can also be actionable under state and federal antitrust law. It can be a problem for a big fish in a small pond.
Importantly, it was not just the conspicuously illegal actions by the defendants in the RCCC case that invited cries of anticompetitive activity. Even defendants’ attempts at inserting non-compete clauses in their commercial leases with landlords to prevent leasing to RCCC counted as an anticompetitive act. Non-compete clauses, which are commonly employed in a variety of contracts, can have anticompetitive effects, especially in labor markets. It is no surprise that they have recently been thrust into the anticompetitive spotlight. Here, defendants’ attempts to ensure that their landlords would not also lease to defendants’ competitors, was impermissible. In economic terms, it served to decrease supply of real estate upstream to foreclose a competitor and enable power over price to the end consumer. But a cannabis co-op, for example, might not realize that non-compete clauses have antitrust implications.
As the cannabis industry continues to mature, and as profitability continues to remain high, we can expect to see more lawsuits alleging activity in this industry that skirts antitrust law. And, given the shifting regulatory landscape governing cannabis, the threat of government enforcement looms in the long-term.
Players in the cannabis fields would be wise to stay abreast of antitrust developments because more litigation and enforcement is certain.
Written by Kristian Soltes
Edited by Gary J. Malone