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The AGCO Updates Cannabis Inducement Standards

Following the completion of industry-wide consultations, the Alcohol and Gaming Commission of Ontario (the “AGCO”) has implemented certain updates to the Registrar's Standards for Ontario’s Cannabis Retail Stores  (the “Standards”) that clarify the AGCO’s limitations on “inducements” between licensed producers (“LPs”) and licensed cannabis retailers (such updated Standards being the “Updated Standards”).

An inducement refers to any activity that is geared towards inducing or encouraging the supply or purchase of cannabis, accessories, or particular cannabis products or accessories. While the existing Standards have always prohibited licensed cannabis retailers from accepting or requesting material inducements from LPs, their representatives, or suppliers of cannabis accessories, there has been a lack of clarity around what kinds of activities constitute prohibited material inducements. Accordingly, the AGCO introduced the Updated Standards, to provide additional certainty to the existing Standards and published a companion Guidance Document which (among other things) sets out examples of acceptable and prohibited activities involving LPs and cannabis retailers. While not exhaustive, the list of explicitly prohibited activities includes those that:

(a) define the amount of product from the LP or its affiliates that must be offered for sale at the retail store;

(b) require a defined amount of display space or promotional activities in the retail store or online to be dedicated to product from the LP or its affiliates;

(c) provide merchandising, marketing, or promotional activities to the LP or its affiliates;

(d) restrict the ability of the LP or its affiliates to sell its products at other retail stores, or the ability of the licensee to sell products from other LPs or their affiliates;

(e) provide cannabis to retailers for cannabis sensory display purposes;

(f) provide physical assets (e.g., branded and non-branded refrigerators, televisions, computers) to the cannabis retailer;

(g) provide items essential to the retailers business (e.g., staff uniforms, furniture, refrigerators, appliances, renovations, point of sale system or equipment, security equipment); and

(h) involve retailers co-branding cannabis or cannabis accessories with LPs (i.e., the production of cannabis retailer-branded products).

The AGCO’s new resources also provide further detail regarding which activities do not meet the threshold of materiality that triggers the prohibition set out in the Updated Standards.

In implementing the Updated Standards (which take effect on June 30, 2022), the AGCO is seeking to facilitate entry and competition in the legal cannabis industry amongst cannabis retailers and LPs of all sizes. However, the Updated Standards will have wider implications for all stakeholders involved in the cannabis industry, including consumers.

Implication on Cannabis Retailers

  • Cannabis retailers that have established relationships with LPs will have to review these relationships in order to ensure regulatory compliance with the Updated Standards or otherwise adapt accordingly.
  • The Updated Standards provide retailers with additional (but not necessarily complete) clarity and certainty around the kinds of arrangements they may and may not enter into with LPs. For example, the Updated Standards allow inducements where they are geared towards educating or training of cannabis retailers and their representatives (e.g., staff). However, some regulators have historically not included activities related to educating staff on brand-differentiation as being the appropriate form of “education or training” to benefit from the exception. It remains to be seen how these categories are defined under the Updated Standards.
  • Several retailers had previously entered into “white label” agreements to produce and sell retail-branded cannabis products. Despite a small exception for arrangements that are already underway, this will no longer be possible given the AGCO’s supplemental guidance.

Implication on Licensed Producers

  • With new features to LPs’ already-limited advertising capability, including on product packaging, LPs will need to be increasingly creative and innovative in order to differentiate themselves from their competitors at the retail level.

Impact on Branding Houses

  • Branding houses (i.e., companies that produce branded cannabis products and/or accessories by way of co-manufacturing arrangements with LPs) have always had to be creative when bringing their products to market. Branding houses that have considered creating co-branded products with popular retailers have now lost another potential revenue stream which would have otherwise appeared available.
  • Provincial regulators are becoming increasingly interested in regulating branding houses similarly to LPs (e.g., the new requirement in Alberta for branding houses to register as cannabis representatives with the Alberta Gaming, Liquor and Cannabis Commission). Impacts similar to those imposed on LPs may also be experienced by branding houses.

Implication for Consumers

  • Where cannabis retailers are not capable of differentiating available cannabis products based on quality, investments by LP’s in product quality and innovation may have limited value and consumers may remain unfamiliar with the many brands that are presented to them at licensed cannabis retail stores. While the AGCO hopes that the Updated Standards will facilitate consumer choice by increasing competition amongst LPs and introducing a greater element of neutrality amongst retailers recommending cannabis brands to their customers, time will tell if the Updated Standards will have this desired effect.