Austin Ownbey is an antitrust regulatory partner in Akerman’s Corporate Practice where his work includes representing cannabis clients through the licensing processes as well as compliance matters.
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If there is one thing that advocates and opponents of legalized cannabis should be able to agree on, it is that everyone would be better off if there was no illicit market for cannabis. Whether current illicit market purveyors or legacy operators are welcomed into a legitimate market or pushed out of the business entirely, minimizing the criminal element of the cannabis industry provides better health and safety outcomes and decreases the harms associated with criminal activities. An unregulated, criminal cannabis business will also be worse for society than a regulated, legitimate business and negatively impacts all the progress made by the legitimate or regulated market over the past 10 years. Unfortunately, despite good intentions, the current regulatory regime creates significant burdens on legitimate cannabis businesses, and incentives remain for consumers to acquire their cannabis from criminals. If it is cheaper and easier to buy unregulated cannabis than it is to buy regulated cannabis, consumers will continue to buy from the illicit market.
Reducing Regulatory Restrictions to Combat the Illicit Market
It may seem counterintuitive, but at this point in the development of the cannabis industry, effectively pushing criminals out of the cannabis business requires reducing the regulatory restrictions that make cannabis more expensive and more difficult to acquire legitimately as compared to the illicit market. To encourage further growth and development of the regulated cannabis industry, cannabis regulators should focus on encouraging additional participants in all aspects of the business (both plant-touching and non-plant-touching), reducing barriers to their entry into markets and access to consumers, and ramping up enforcement against bad actors. As long as legitimate companies continue to face onerous restrictions that prevent them from achieving their full potential, the illicit market will continue to offer lower prices and easier purchasing processes that encourage consumers to purchase from outside the legal market. An unfortunate consequence is the consumption of products that have not been lab tested, which in and of itself can cause harm not only to individual consumers, but to the industry as a whole.
The Role of Regulators and Industry Participants
However, cannabis regulators cannot, and should not, be expected to solve the problem of crime in the cannabis industry on their own. Many cannabis regulators are restricted in their ability to eliminate the current hurdles that are imposed by legislators or local governments. In some cases, the cannabis regulators may be willing to reduce the burdens but need input from market participants on how to balance reduced regulatory obstacles against other considerations, including health and safety outcomes, social justice reforms, and tax revenues. To do their part, industry participants should do everything possible, within the current regulatory frameworks, to make the legal market more competitive, more accessible, and more affordable. Retailers, manufacturers, and cultivators should be working hard to drive down prices, increase yields, and ensure they are producing the highest quality products. Investors should be seeking opportunities to support operators in developing novel and innovative products, services, and business models. Service providers should strive to provide operators with ways to streamline their businesses and eliminate unnecessary and wasteful administrative processes that destroy the value of cannabis businesses.
However, there is also a limit to how much can be achieved through becoming more competitive, and excessive competition could have the undesirable side effect of tearing the fledging cannabis industry apart. While competition is the bedrock on which successful industries are built, vicious competition can result in a race to the bottom and can cause markets to collapse. Unchecked competition could destroy everything that distinguishes cannabis commodity and could undermine many of the social equity values and ethics that are currently built in. Instead of relying on extreme competition to drive the industry forward, the cannabis industry should be looking for ways to work together to protect what is working and reform what is not working, and to encourage consumers to forswear the illegitimate market.
The Power of Trade Associations
A simplistic understanding of antitrust laws might lead one to believe that competitors can never work together, but there are legitimate ways in which competitors can work together for the better of their industry and to achieve benefits for society as a whole without violating the antitrust laws. One of the most effective ways for competitors to work together is through a trade association. Trade associations serve as a bridge between businesses, encouraging collaboration and mutual support. Still, they also serve as a collective voice for businesses in discussions with the public, with legislators, and, perhaps more importantly, with regulators. Trade associations provide the platform for competitors to come together, address collective challenges, and present a unified proposal to regulators on how to move forward. Businesses can simplify and amplify their message to regulators and policymakers instead of fighting with each other to have their voices heard. Best of all, with careful compliance, trade associations can facilitate this collaboration without creating unnecessary antitrust risk.
This is not to suggest that the industry needs new trade associations; the cannabis industry already has a number of capable and effective trade associations, but far too few industry participants are members of a cannabis-focused trade association, and the industry needs to consider the best way to raise engagement. Regardless of whether increased membership comes through the creation of new trade associations, through boosting the membership of existing organizations, or through consolidating groups to make them more effective, the cannabis industry needs stronger trade associations to continue making progress and to ensure that the industry is not buried under unnecessary regulations.
Overcoming Individualism for Industry Success
Currently, too many industry participants take the view that they have built their business on their own, without anyone else’s help, so why should they band together with their competitors for help now? This individualistic perspective may have served them when they were starting their businesses, but if the cannabis industry is going to achieve anything close to its potential, it is going to require cooperation and collaboration in addition to competition. The industry is on the verge of nationwide legitimacy, but the most recent election demonstrated that significant setbacks are still possible. The only way to succeed as an industry is to work together as an industry. Regulators, legislators, and the general public need to hear from industry participants loud and clear, in a way that individual voices will not be able to achieve. Trade associations will provide advocates of legalized cannabis an opportunity to come together and amplify their advocacy for more effective regulations. Otherwise, under the current regulatory landscape, consumers will continue to favor the illicit market, and criminals will continue to reap the profits that belong in the pockets of legitimate, regulated entrepreneurs.
Austin Ownbey is based in Washington, D.C. where he is a partner in Akerman LLP’s Corporate Practice.
