A Regulated Competitive Market for Marijuana
In our previous post we provided a brief recap of the cannabis (or marijuana) industry in Canada and highlighted a key aspect of the government's rationale for the legalization of cannabis' recreational use. Here, we highlight the key impressions left by the recommendations made by the Canadian federal government's Task Force on Cannabis Legalization and Regulation (the "Task Force"), in their report titled "A Framework for the Legalization and Regulation of Cannabis in Canada" (the "Report"), relating to the production of medical and recreation cannabis in Canada.
Production will (still) be Federally Regulated
In the Report, the Task Force properly concedes that the distribution and retail of cannabis is within the purview of the provinces and territories of Canada. The production of cannabis, however, should be federally regulated according to the Task Force. Oversight of production at the federal level is seen as essential to ensuring effective quality control and minimizing the risk of Canadians being exposed to cannabis contaminated by harmful pesticides, fungi, heavy metals and other harmful substances. Regulating production federally would also allow a central authority to more efficiently implement a coherent, comprehensive set of rules on production by building upon the already existing system in place for the production of medical cannabis. Federal regulation will extend to all forms of cannabis and its derivatives, including cannabidiol ("CBD") and other compounds derived from hemp or other sources.
This means that licensed producers under the Access to Cannabis for Medical Purposes Regulations("ACMPR") can continue to participate in the medical market, and will also be well placed to capitalize on the demand for cannabis in the recreational market. Due to their familiarity with the quality controls in place for the medical market, their economies of scale and the Task Force's concerns about a lack of supply leaving space for illicit production, existing medical producers will almost certainly be heavily depended on to supply the recreational market.
The Government may Limit Supply
Just as the Task Force noted the risks of undersupplying a recreational market, it also expressed concerns about oversupplying it – namely, overconsumption. In the opinion of the Task Force, limiting the production of non-medical cannabis will:
(a) encourage market diversity by creating space for smaller-scale artisanal production;
(b) prevent an oversaturation of the market;
(c) allow the government to exercise a degree of control over cannabis prices by increasing or decreasing supply to the market; and
(d) create an administratively efficient regulatory program.
To be crystal clear, these production limits are recommended only in the context of recreational cannabis and only for the early period of implementation of a recreational regime. The Report presents two options for production controls: controlling the number of production licenses issued or imposing limits on the size of facilities (i.e. production limits) of producers. Given that many medical producers already have large facilities and/or easy access to capital, we expect that the government's approach to controlling production will, in practice, be a combination of both options.
Interestingly, the Task Force has proposed that the recreational cannabis scheme include a graduated licensing and fee structure as well as relaxed security requirements. In our experience and our discussions with industry participants, one of the most difficult regulatory hurdles to successfully becoming a licensed medical producer is satisfying the extremely stringent security requirements under the ACMPR. A graduated licensing and fee structure, together with relaxed security requirements, would aid in lowering the recreational market's barriers to entry and would further the Task Force's suggested goal of encouraging market diversity. Scaling down security requirements will also make outdoor production operations, another of the Task Force's recommendations, more achievable and realistic.
Quality Assurance Providers will be Busier
The increased relevance of quality assurance providers does not stem entirely from recommendations set out in the Report. Recalls, one as recent as November of 2016, by already licensed medical producers have highlighted the apparent need for more effective quality control checks. Still, the expansion of the market for cannabis products, not to mention the inevitable proliferation of different types of cannabis products, will necessarily require more comprehensive and effective quality assurance processes if the government chooses to require that packaging for all cannabis products clearly state, among other things, THC and CBD levels.
It remains to be seen whether the government's approach to quality assurance controls will require testing to be completed by arm's-length labs, or whether in-house testing will be an option.
Health Canada's Capacity will Increase
The Task Force has recommended that the government take a leadership role in ensuring that capacity is developed at all levels of government prior to the implementation of a recreational regime. This is welcome news for aspiring medical producers mired in the application process. Since the implementation of the Marihuana for Medical Purposes Regulations, many applicants have voiced frustrations over delays and an extremely drawn out approval process.
Lastly, the legalization of cannabis for recreational use will not eliminate the existing medical cannabis system. While the medical system may not look exactly as it does today, the Task Force has recommended that a separate medical access framework be kept in place even after recreational cannabis legalization. The report, however, does not explicitly state whether the government should assign oversight of both the medical and recreational markets to a single authority. In our view, oversight of both regimes will likely be assigned to a single entity, as doing so will reduce administration and enforcement costs. It would also allow all levels of government and industry to benefit from improved access to information and a reduction in duplicative efforts. If the government chooses to require a periodic review of the system, as is suggested by the Task Force, a single responsible authority would also facilitate faster and more efficient adjustments or reversals.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.