- within Law Department Performance and Accounting and Audit topic(s)
- in United Kingdom
The Ohio attorney general recently filed an unprecedented state antitrust enforcement action against nine of the nation's largest multistate cannabis operators. The complaint alleges these defendants formed illegal cartels through reciprocal supply agreements, competitively sensitive information exchanges and discriminatory distribution practices designed to exclude independent Ohio cannabis operators from the market and artificially inflate consumer prices. The complaint seeks injunctive relief, civil forfeitures of $500 per day per defendant for each day the alleged combinations were in effect, and attorneys' fees.
Key Takeaways
- Though targeted at multistate cannabis operators, this action marks a watershed moment for all cannabis and hemp businesses and the trade associations promoting their interests. Casual business arrangements that proliferate in both sectors create significant antitrust exposure.
- This action represents the first state attorney general enforcement action targeting alleged anticompetitive conduct in the cannabis industry and follows theories advanced in private litigation currently pending in federal court in Illinois.
- The Ohio case demonstrates state willingness to pursue enforcement theories developed in private litigation, potentially validating and lending government credibility to those claims. We expect more antitrust enforcement activity from other states, and federal antitrust interest cannot be ruled out.
- Cannabis and hemp companies of all sizes and their associations should take immediate steps to assess their commercial arrangements and implement robust antitrust compliance programs.
Legal Claims and Theories
The Ohio attorney general brings claims under Ohio's Valentine Act (Ohio Revised Code Sections 1331.01 et seq.), alleging unlawful trusts and conspiracies against trade. The complaint identifies three primary categories of anticompetitive conduct:
Reciprocal Supply Agreements and Shelf Space Allocations
The complaint alleges that defendants entered into national "trade balance" agreements through which they committed to reciprocal purchasing quotas across multiple states and allocated dispensary shelf space to one another's products. For example, corporate executives allegedly met quarterly to establish state-by-state purchasing commitments, with documented agreements showing shelf space allocations of up to 25 percent for competitor multistate cannabis operator products. The complaint alleges these arrangements were designed to exclude independent cultivators and processors from retail channels, citing internal communications describing the strategy as a "distribution game" where vendors not reciprocating purchases were eliminated.
Exchange of Competitively Sensitive Information
The complaint alleges the defendants regularly shared promotional plans, pricing information, costs paid to nonmultistate cannabis operator suppliers and discount-terms information that would typically be closely guarded in a competitive market. According to the complaint, this information sharing facilitated coordination on pricing and allowed defendants to monitor compliance with their reciprocal dealing arrangements.
Discriminatory Supply and Promotional Terms
The complaint alleges that defendants offered each other preferential pricing, including "frontload discounts," rebates and split co-promotion arrangements not available to independent dispensaries. These arrangements allegedly placed nonmultistate cannabis operator dispensaries at a structural competitive disadvantage, forcing them to either maintain higher retail prices or absorb margin losses.
Practical Considerations for Cannabis and Hemp Companies and Trade Associations
From the outset, cannabis and hemp businesses have banded together to promote cannabis and hemp legalization. Once legalized, they have worked together to create state-specific regulatory structures. These companies have for the last decade worked together to promote their common interests in well-regulated and economically viable state markets. The informal and often collegial practices of these nascent industries has been a strength, but also creates significant antitrust exposure.
All such companies and associations should take action to mitigate risk. Experienced legal counsel can assist by conducting privileged antitrust compliance audits of existing commercial arrangements, including supply agreements, shelf space allocations and promotional programs across all operating states. Companies and associations should consider reviewing and revising information-sharing protocols to ensure no competitively sensitive information is exchanged with competitors. Companies should implement or strengthen antitrust compliance training programs for all personnel involved in purchasing, wholesale and retail operations. Companies should also work with counsel to develop document retention policies that balance legal obligations with risk management considerations. Counsel can assist with coordinating regulatory and defense strategy across jurisdictions, engaging with state regulators proactively and assessing proactive steps that may mitigate penalties or inform settlement negotiations.
For More Information
If you have any questions about thisAlert, please contact Sean P. McConnell, Wayne A. Mack, Christopher H. Casey, any of the attorneys in our Antitrust and Competition, Paul P. Josephson, Tracy Gallegos, Michael D. Schwamm, James Hearon, any of theattorneysin ourCannabis Group, any of the attorneys in our State Attorneys General Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
