Will Anti-Monopoly Sentiment Shape State Cannabis Regs?

State

On Jan. 15, 2016, Kevin King sued the Town of Palisade, Colorado, complaining that a local ordinance that permits the establishment of only one medical marijuana dispensary in the town violates the Colorado Antitrust Act of 1992 and the Colorado Constitution. The recipient of the single license, Colorado Alternative Healthcare, was chosen without benefit of a competitive bidding process. Palisade does not permit recreational sales, so the single dispensary really is the only game in town.

It seems like a tempest in a teapot, local politics at its most local. Palisade, after all, had only 2,692 residents as of the 2010 census.

But the lawsuit strikes a theme, which has become more familiar since the failure of ResponsibleOhio’s attempt at a constitutionally protected oligopoly. At its spring 2016 Antitrust Section meeting, even the American Bar Association will turn its attention to the potential for federal antitrust action in the cannabis industry.

The eight enforcement priorities of the Cole memorandum are, in many ways, designed to protect the public from the dangers of legal marijuana. The growing awareness that reduced competition can also disadvantage the legal cannabis consumer may be the back swing of the pendulum. Does the consumer have a legally protected right to cannabis at a price and of a quality determined by free market forces? Will this idea play a role in shaping state licensing schemes?

 

King v. Town of Palisade

Palisade’s voters passed Ordinance 6-85 in 2011, subsequently amending it in 2014. Under its terms, the ordinance permits one medical marijuana store for populations of fewer than 4,000 people and no more than two medical marijuana licenses for populations between 4,000 and 8,000. Palisade has fewer than 4,000 residents and Colorado Alternative Healthcare was the only business permitted to apply for a license.

Thereafter in 2012, Colorado voters passed Amendment 64, which legalized recreational sales and is premised on the theory that cannabis should be regulated like alcohol. It also permits localities to opt out of cannabis commerce. Palisade has opted out of the recreational marijuana scheme.

The complaint argues that although Palisade can regulate marijuana, it cannot create a monopoly without violating Article XVIII of the Colorado Constitution and the Colorado Antitrust Act of 1992. Colorado Revised Statutes Section 6-4-102 provides that:

The general assembly hereby finds and determines that competition is fundamental to the free market system and that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality commodities and services, and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic, political, and social institutions.

The law also specifically declares, “It is illegal for any person to monopolize, attempt to monopolize, or combine or conspire with any other person to monopolize any part of trade or commerce.”

Further, King argues that Palisade does not limit the number of liquor licenses in accordance with population totals and so, in the spirit of Amendment 64, should not limit commercial cannabis licenses according to population, either.

 

The Dog that Hasn’t Barked

The Federal Trade Commission Act permits the FTC to investigate and address consumer complaints about a wide variety of practices that are anti-competitive or deceptive or unfair to consumers. The question is, of course, whether the agency will wade into an area where the basic transaction is illegal under federal law.

There is no reason that it could not. The Food and Drug Administration has issued warnings to companies that make medical claims for CBD-infused pet products. The IRS enforces the provisions of Section 280e against legal cannabusinesses.

But the FTC has been deafeningly silent so far, and the silence only fuels legal speculation.

 

Later Waves of State Regulation

The next new waves of state regulation will certainly include measures designed to protect the customer like contaminant and pesticide testing requirements. The narrower question is whether they will also include anti-monopoly measures as a form of consumer protection. What form these might take is limited only by the creativity of state regulators. Ownership restrictions or the requirement that a minimum, rather than a maximum, number of licenses be issued come immediately to mind.

States have an interest in keeping the market small enough to regulate effectively. The industry needs to maintain prices high enough to permit profitability. Law enforcement may want to see prices drop to drive out the black market. It is a festival of competing interests.

But a quixotic lawsuit in a tiny Colorado town may give greater voice to the consumer’s interest in a competitive marketplace. It is a voice that has only recently begun to be heard in the clamor.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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