Article by Kirk Tousaw, Tousaw Law
As you know, the Ontario government recently released its plans for retail cannabis distribution in the province. In effect, that plan sets up a government monopoly on all retail sales. Ontario intends to open 150 cannabis stores throughout the province and to implement an in-province mail order system separate and apart from the existing LP direct-to-consumer mail order system that is currently in place.
The choice of a government monopoly largely though not completely (alcohol can and is sold by private stores in the province) mirrors Ontario’s approach to alcohol. It is also decidedly unlike virtually all other jurisdictions that has legalized cannabis for adult recreational consumption.
In addition, the Ontario government threatened to crack down on those operating outside its monopolistic system. It is unclear whether this crackdown will come by way of law-enforcement utilizing the CDSA or the criminal law power retained in the upcoming Cannabis Act to raid, arrest, and prosecute those operating, for example, private cannabis dispensaries.
Another tool at the Province’s disposal is the use of the civil courts, and the city of Toronto and Hamilton are already attempting to use the court system to shut down dispensaries. Tousaw Law Corporation is actively defending cases in both jurisdictions on Charter grounds as well as arguing that doing so is outside the jurisdiction of the municipal governments. We have had one success and were able, in Hamilton, to rebuff the city government’s attempt to obtain an interlocutory injunction (an injunction granted prior to the end of a trial) against a medical cannabis dispensary.
I believe that Ontario’s plan is misguided and doomed to fail for a variety of reasons. This memorandum attempts to illustrate some of the problems with a monopoly approach in the context of an existing and vibrant cannabis industry coupled with existing lawful supply chains by licensed producers who sell currently via mail order direct to medical consumers in Ontario.
First, it is decidedly unlikely that there will be sufficient supply in the lawful production system to meet consumer demand when legalization is implemented. Even if every licensed producer in the country, including those licensed between now and July 1, 2018, were to devote its entire production capacity to servicing only the government of Ontario, there would still be insufficient amounts of cannabis on the shelves. Several of the larger licensed producers have already indicated that they will prioritize their existing medical consumers over the recreational market. Two of the largest (Canopy Growth and Organigram) have signed Memorandums of Understanding promising to supply New Brunswick with cannabis post-legalization. This dramatically limits the possible supply available to Ontario residents.
Related to these chronic supply shortages is a simple economic reality. It is clear that Ontario seeks to cash in on the upcoming recreational cannabis market. This is likely because Ontario has one of the largest sub-sovereign government debts in the entire world. Putting aside questions about how that debt was accrued and whether the Ontario government is even capable of running a recreational cannabis industry profitably, if it does seek to increase its revenue, it will of necessity use its purchasing power to attempt to obtain cannabis at significantly lower prices than retail. It will then tax and markup that product before sale to the consumer.
There appears to be no real financial incentive for existing licensed producers to sell cannabis to the Ontario government at wholesale pricing when they currently have enough customers in the medical side to sell every gram produced at a retail price point. Furthermore, the federal government has signaled that in provinces that do not implement their own retail distribution systems, the licensed producers will be permitted to sell direct-to-consumer via mail order as they have been doing for medical patients. Again, there appears to be little economic incentive for licensed producers to sell at wholesale pricing to the Ontario government when they are at capacity meeting the demand at retail pricing to their mail order clientele.
Another significant issue is the potential that residents of Ontario will be faced with higher price points for the purchase of cannabis in Ontario’s monopoly stores than they would if they were medical patients obtaining from licensed producers directly. This could lead to a situation, such as that alleged to be occurring in California and elsewhere, in which there is widespread participation in the medical system by persons who are not necessarily consuming cannabis for medical purposes. If insurance begins to cover medical cannabis this problem will be exacerbated. An individual consumer able to find a supportive physician might be able to access cannabis at significantly reduced cost via mail order instead of purchasing from Ontario’s stores.
Another significant problem with the Ontario model is it simply does not contemplate enough stores. At the height of the dispensary boom in Toronto there were in excess of 100 dispensaries operating and they had lines out the door. That was just one city. Granted, the largest city in Canada, but that demand is not going to decrease after legalization. If anything, it will increase. The idea that 150 stores are sufficient in a province as vast and populous as Ontario is absolutely ludicrous. By comparison, there are 650 LCBO operated alcohol stores in the province of Ontario.
Ontario may respond to the criticism of not enough physical storefronts by pointing to its mail order system. However, there are currently dozens if not a hundred or more online dispensaries operating in Canada. There are 50 licensed producers selling via mail order direct-to-consumer today. With this range of choices available to the consumer, there appears to be no reason why any consumer would purchase from the Ontario mail order system, particularly when that system is likely to be charging the highest prices.