Updated - Cannabis Standards Clarify Inducement Rules In Ontario: What You Need To Know

Co-author: Marco Agostini (Articling Student)

Overview

Following industry-wide consultations, the Alcohol and Gaming Commission of Ontario ("AGCO") recently announced updates to the Registrar's Standards for Cannabis Retail Stores (the "Standards"), which clarify the Standards relating to inducements. These updates will take effect on June 30, 2022.

The Standards:

In Ontario, the Cannabis License Act, 2018 ("Act") and Regulation 468/18 authorize the Registrar to establish standards and requirements affecting retail operator licensees ("Licensees"), licensed producers ("LPs"), and their representatives. The Standards affect several aspects of cannabis retail operations including advertising, promotions, and record-keeping practices.

With respect to advertising and promotional activities, section 36 of the Act creates a general prohibition on "material inducement[s]" for the purpose of increasing the sale of a particular type of cannabis. Standards 6.3 and 6.4 supplement this general prohibition by barring Licensees from inducing the purchase of cannabis or cannabis accessories from customers, as well as accepting inducements from LPs, their suppliers, or other representatives. The Standards are intended to prohibit practices such as: selling advertising space or product features to LPs, offering discounts, rebate/rewards programs, or offering free cannabis and cannabis accessories to customers. However, the terms "material" and "inducement" are not defined in the Act. In addition, the AGCO's flexible case-by-case approach to enforcement has created further confusion by frequently changing enforcement thresholds.

The Updated Standards:

To address the issues with the current Standards, the update adds an annotation to Standard 6.4, which explains that "inducements are items, benefits, payments, or services that are offered or given with the purpose to promote or increase the sale of a particular brand or product by the licensee or their employees".

The newly added Standard 6.5 provides that Licensees and their representatives may accept items from LPs of nominal value, or those exclusively for training/education related to cannabis. In the supporting Guidance Document (the "Guidance Document"), the AGCO states that "nominal value" is contextual and based on whether:

1. A licensee is likely to change its behaviour toward an LP or the LP's product after receiving the inducement;
2. The inducement is valued at an amount that covers operational costs; and
3. The Licensee has received many inducements over a period of time.

Notwithstanding these contextual factors, inducements such as apparel, inexpensive cannabis accessories, and gift bags of inexpensive items, will generally fall under the definition of "nominal value".

Standard 6.5 will also allow LPs to engage with Licensees by purchasing data for business intelligence purposes, entering into franchise agreements, or entering financing and/or lease agreements if the LP has an ownership interest in the Licensee.

Any inducement received and/or agreement entered into between an LP and a Licensee will need to comply with new recordkeeping requirements in Standard 8.1.10. Licensees will be required to maintain a copy of the complete agreement, including appraising the fair market value of any inducement received. Over time, these recording practices are likely to create useful benchmarks for what does/does not constitute a violation of the Standards and ensure some consistency in enforcement.

Finally, the newly added Standard 6.6 acts as a companion to Standard 6.5 by providing clear limits on permitted agreements between Licensees and LPs. Licensees are prohibited from entering into agreements with LPs that:

1. define the amount of product that must be offered for sale at the retail store from the LP or its affiliates;
2. require a defined amount of display space in the retail store to be dedicated to products from the LP or its affiliates;
3. provide merchandising, marketing or promotional activities to the LP or its affiliates; or
4. restrict the ability of the LP or its affiliates to sell products at other retail stores, or the ability of the Licensee to sell products from other LPs or their affiliates.

Takeaways:

The AGCO has taken steps to address the loopholes identified by stakeholders during its industry-wide consultation. In practice, the updated Standards merely clarify what the AGCO had always intended to prohibit. The AGCO's goal continues to be levelling the playing field between small and large businesses by alleviating pressures on Licensees from stakeholders at the upper levels of the supply chain.

LPs and Licensees should closely review these upcoming changes to ensure compliance. As a reminder, Licensees are responsible for compliance with these Standards, which are enforced by the AGCO. Penalties for violations of the Act include fines of up to $250,000 for corporations, and a fine of up to $100,000, and/or imprisonment for up to one year for individuals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.