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Washington Lawn: Beware of ‘Pay-to-Play’ Arrangements

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The Washington State Liquor and Hemp Board (“WSLCB”) has published a report Industry update On October 25, he details the recent increase in complaints from cannabis producers and processors over “pay-to-play” terms.

Apparently, some cannabis producers and processors have been paying retailers for shelf space for their cannabis products. These arrangements have become prominent enough that some retailers require processors to pay for shelf space as if it were a common practice.

Paying a retailer for shelf space is illegal

Like many of the other cannabis trading activities that Washington prohibits, this is something the average businessman might not think twice about. However, pay-to-play arrangements are illegal under state cannabis laws. Washington law prohibits producers and processors from having a direct or indirect financial interest in a licensed cannabis retailer.

WSLCB’s position is that a pay-to-play arrangement between a producer or processor and a retailer violates this rule. Furthermore, the WSLCB stated that these deals violate Washington law that prohibits a member of the cannabis industry from entering into an agreement that results in undue influence on another member. WSLCB’s position on pay-to-play arrangements is not outside the scope of the label based on the text of the rules.

Paying to play is very common

Unfortunately, we see issues like this in the cannabis space more than we’d like. Oftentimes, cannabis operators get their licenses but fail to keep up with the regulations or act in accordance with the regulations. Washington has some of the strictest laws governing cannabis operators in the country and many of them break the rules without ever knowing it.

To make matters more complicated, the WSLCB is understaffed and our experience is extraordinarily busy, so both education (WSLCB’s preference in most if not all cases of minor abuse) and breach enforcement often trump what’s going on in the market.

Ultimately, when licensees offer the assets or equity of the company for sale, regulatory violations almost always arise whether or not they are caught by the WSLCB. If licensees don’t stick to the WSLCB word, pay-to-play arrangements could become the latest Treasury skeleton to appear on the road to Washington’s cannabis acquisition.

WSLCB deserves some commendation here for keeping its ears to the ground and publishing a well-written article in an effort to curb this behavior by notifying the market. Given how busy WSLCB is, posting notices such as pay-to-play arrangements is exactly the right way to deal with emerging market trends that are breaking the rules.

Licensees are certainly in a difficult situation because the regulations are complex, change frequently, and in many cases are not clear about what they are asking or prohibiting. However, ignorance of the law is not a defense, and the burden of ensuring regulatory compliance always rests with licensees.

If a pay-to-play arrangement is memorialized in a written agreement, licensees should contact an attorney for advice on how to terminate it. In general, contracts usually contain a termination clause that allows the parties to terminate the contract if its substance is unlawful. In the absence of such a provision in the contract, common law contract defenses may also be available.

Life raft and pay warning for licensed play

Although the adult-use cannabis market in Washington has been around for many years, the WSLCB post notes that it is still somewhat of a Wild West. Licensees are advised to pay attention to WSLCB’s posts on regulatory issues occurring in the marketplace.

If you’re paying to play, WSLCB offers both a life raft and a warning – get out of these deals now, or otherwise. When the WSLCB gives a public warning about businesses it considers illegal, one can be sure that they will not sympathize with an unconfirmed infringement down the road.

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