Transactions between cannabis companies in Washington State are more heavily regulated than in just about any other state with a legal cannabis regime. The intent of I-502, which legalized recreational cannabis in the state, was to create a regulatory regime for cannabis that was similar to that of alcohol. But unfortunately, many of the restrictions imposed on the alcohol industry are extremely onerous and mean that some types of common business transactions constitute serious rules violations for cannabis licensees.
“Tied-house” regulations were implemented for the alcohol industry following prohibition in an attempt to regulate the marketing and cross-ownership of licensed alcohol companies. These regulations sought to prohibit vertical integration or a monopoly by a single alcohol producer within the marketplace, and to discourage bribery, certain marketing practices, and overconsumption of alcohol. The reasoning behind tied-house rules was that if things were sufficiently difficult for the companies involved, it would lead to less alcohol on the market and less consumption by the populace.
“The reasoning behind tied-house rules was that if things were sufficiently difficult for the companies involved, it would lead to less alcohol on the market and less consumption by the populace.”
The Washington State Liquor and Cannabis Board (WSLCB) recently issued an update letter that addresses Washington’s implementation and enforcement of tied-house rules in the marketplace under RCW 69.50.328 and WAC 314-55-018, with the rules under the WAC being issued directly by the WSLCB and having the greatest bearing on cannabis licensees. WAC 314-55-018 prohibits a wide range of practices, including the following:
- Agreements that would cause one industry member to have “undue influence” over another industry member;
- Advances, discounts, gifts, loans, etc. from any producer or processor to a retailer; and
- Contracts for the sale of cannabis that make the sale of cannabis tied to or contingent upon the sale of something else, including cannabis.
Practically speaking, these prohibitions can have wide sweeping effects. For example, they prohibit an agreement between two licensees for the sale of more than one shipment of product, meaning that a retail licensee cannot set up recurring monthly orders from a producer or processor, a practice that is common in other industries. Furthermore, the WSLCB has maintained that producers and processors cannot loan or lease display equipment, including branded display cases, to retailers, because it would constitute a “loan” in violation of WAC 314-55-018.
Although WAC 314-55-018(1) contains the statement that “This rule shall not be construed as prohibiting the placing and accepting of orders for the purchase and delivery of marijuana that are made in accordance with usual and common business practices and that are otherwise in compliance with the rules,” this caveat only applies to agreements that create “undue influence,” and not the other prohibited practices referenced above. Meaning that, in fact, many business practices that are indeed in accordance with usual and common business practices constitute a violation of the rules.
The biggest issue with the provisions contained in WAC 314-55-018 is that they are broad enough and vague enough to be extremely difficult to interpret. The best bet for licensees is to either consult with a regulatory attorney, or obtain an official rules interpretation from the WSLCB whenever contemplating a transaction that may implicate these tied-house provisions.