Authored By: Idan Erez

416.977.2553
ierez@hofferadler.com

Bio: Idan Erez is a member of the Bar in the Province of Ontario and in the State of Georgia. He practices in our litigation department focussing on a variety of subject matter including franchising and other commercial disputes, professional liability/personal injury defense, and other types of civil litigation. His experience includes shareholder disputes, commercial contract disputes, injunctive proceedings and real estate litigation, as well as class action work in the areas of pharmaceuticals and data breach. He has appeared in the Ontario Superior Court and Divisional Court as well as in the Superior Court of British Columbia and the Alberta Court of Queen’s Bench.

Introduction to the New Proposed Cannabis Act

In April 2017, the federal government proposed legislation in the form of the Cannabis Act to legalize the recreational use of cannabis (marijuana). Once passed, this legislation will establish a framework for the production, possession, distribution, and selling of cannabis for recreational use.

The imminent creation of potentially nation-wide market for a high-demand retail product may be appealing to entrepreneurs seeking not only to enter that market, but doing so in a way that lends itself to establishing a long-term national franchise; however, would-be franchisors should bear in mind that many of the details of the eventual legislative framework are presently unknown. This is so for two reasons. First, the proposed legislation must proceed through a number of legislative steps before it becomes law, and its contents may change over the course of that process. Second, many of the specific requirements, such as those pertaining to licensing, have not yet been released, and are not expected to be known until the federal regulations are published, and until the provinces and territories introduce their own cannabis legislation.

This article provides an overview of the draft legislation and identifies some of the issues that stand to affect future cannabis franchisors.

Overview of the Cannabis Act

According to the draft bill, the Cannabis Act is intended “to provide legal access to cannabis and to control and regulate its production, distribution and sale.” In doing so, the legislation will extend the legality of cannabis production, distribution and sale beyond certain medical uses, which are presently legal in Canada, and into recreational ones.

Among the objectives of the legislation are the prevention of access to cannabis by young persons, the protection of public health and safety through the establishment of a strict regulatory environment, and the deterrence of criminal activity through the imposition of serious criminal penalties on those operating outside the legal framework.

Some of the significant ways through which the Cannabis Act proposes to accomplish those objectives are the restriction of sales to people aged 18 and older; the legalization of possession of up to 30 grams of dried cannabis for adults; the legalization of cultivation of up to four cannabis plants per residence; the imposition of strict licensing requirements on production, distribution, sale, importing and exporting; the strict regulation of promotion, packaging and labelling of cannabis; and the continuation of the existing program for access to cannabis for medical purposes.

Licensing

The implementation of a licensing regime will be a critical component of the eventual framework, and most of the contents of that regime are not yet known. What is known is that both individuals and corporations will be entitled to apply for licensing.

What is also known is that the process of obtaining a license to produce medical cannabis under the Access to Cannabis for Medical Purposes Regulations has been stringent. There have been over 1,600 applications made to Health Canada for licenses to produce medical cannabis, but as of today, only 43 licenses have been approved. The process can take more than a year to complete.

What is also known is that existing licenses to sell medical cannabis will automatically be deemed to be licenses under the Cannabis Act. That confers a significant head start to existing licensees, something that would-be franchisors who are not already existing licensees will need to incorporate into their business plans.

Promotion, Packing, and Display

The legislation proposes stringent restrictions on how cannabis and related products may be promoted. For instance, the legislation proposes to prohibit the presentation of cannabis in a manner that evokes a positive or negative emotion about a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring. The use of testimonials or endorsements would also be prohibited, as would the promotion of cannabis in a manner that could be appealing to young persons.

The legislation will also closely regulate the packaging and labelling of cannabis and related products, much as other legislation regulates the packaging and labelling of tobacco products. For instance, the legislation proposes to prohibit the selling of cannabis in a package or with a label that sets out a depiction of a person, character or animal, whether real or fictional.

These restrictions will create significant challenges for the prospective franchisor, since much of the success of a franchise depends on the franchisor’s ability to develop a brand that is not only distinctive, but also consistent and uniform in appearance.

As will be discussed below, it will be within the jurisdiction of the provinces and territories to decide whether the sale of cannabis at stores will be permitted. In provinces that will allow the sale of cannabis through store-fronts, the manner with which the cannabis for sale can be displayed will be regulated to ensure that, for instance, it cannot be seen by a young person.

Pricing and Taxation

How cannabis will be priced and how it will be taxed remain significant open questions. The draft legislation is silent on these issues. It can be anticipated that, in regulating pricing and taxation, the government will try to set a cost for the purchase of cannabis that strikes a balance between being high enough to discourage consumption, particularly by younger consumers, and being low enough that those consumers do not seek out cheaper alternatives on the black market.

There is some likelihood that the same form and manner of taxation, and perhaps pricing, presently governing the sale of medical cannabis will be applied to the sale of recreational cannabis; however, entrepreneurs seeking to franchise will need to wait for further guidance from the Minister of Finance before they can evaluate the economic model for their franchised systems.

The Division of Jurisdiction

An important aspect of the eventual framework is the fact that jurisdiction over the regulation of the cannabis supply chain will be divided as between the federal government, on the one hand, and the provinces and territories on the other. More particularly, under the proposed framework, the federal government will license production, while the provinces and territories will license sale and distribution.

To date, none of the provinces or territories have introduced legislation, although a number of provinces, such as Ontario and Alberta, have engaged in an initial public consultation process. Accordingly, a significant part of the regulatory framework remains incomplete. What is known now is that the federal government will impose minimum standards, and the provinces will have jurisdiction to raise those standards. By way of example, the provinces will be allowed to increase the minimum age for possession from 18 years.

If and when the provinces and territories do introduce cannabis legislation, it will need to include measures that permit the sale only of cannabis produced by persons federally-authorized to do so for commercial purposes, that prohibit the sale of cannabis to young persons, that require sellers to keep appropriate records respecting their activities in relation to cannabis, and that require sellers to take adequate measures to reduce the risk of cannabis in their possession being diverted to an illicit market or activity.

The fact that provinces and territories will have the authority to regulate sale and distribution stands to introduce a considerable degree of variability into how cannabis will be sold and distributed across the country. That variability, in turn, will make it challenging for potential national franchisors to accomplish the uniformity that is necessary for the implementation of a national or even regional system.

For instance, it will be left to the provinces and territories to decide whether and how cannabis can be purchased in their jurisdictions; conceivable, one or more provinces may elect not to permit the sale of cannabis at all, or to permit such sales to occur only through direct, mail-order purchase from the supplier. Licensing requirements may also vary by province, as may zoning regulations for locations from which cannabis is sold.

Other Issues for Cannabis Franchisors

Of note to would-be cannabis franchisors is the proposal that employees of a person licensed to sell or distribute cannabis will be permitted to do so as part of their employment duties. If it survives the legislative process, this proposal will create a structure whereby franchisees can sell cannabis through their employees, without requiring separate licensing for each employee.

The downside to such a structure is the related concept that employee contravention of the legislation can be imputed to the employer. Prospective franchisors would find this particularly worrisome when it is noted that contravention of the proposed legislation can result in imprisonment, as well as fines of up to $5 million.

If a corporation contravenes the proposed legislation, liability for that contravention extends to the corporation’s directors, officers or agents who directed, authorized, assented to, acquiesced in or participated in the commission of the offence. If the violation is of the sort that gives rise to an administrative penalties, then certain defences are specifically made unavailable by the proposed legislation: it is no defence that the person accused of the violation exercised due diligence to prevent the violation, or that that person reasonably and honestly believed in the existence of facts that, if true, would exonerate the person.

Conclusion

It is important to recall that the proposed legislation must proceed through a number of legislative steps before it becomes law, and its contents may well change over the course of that process. The government has indicated that it hopes that the proposed legislation will become law July 2018. Even when it becomes final, there will remain the enactment of provincial and territorial legislation that will fill in big gaps in the framework for the sale and distribution of cannabis.

The proposed legislation to legalize cannabis production, possession, distribution and sale for recreational use may create unique opportunities for future franchisors; those opportunities, however, come with challenging legal issues that should be addressed early in the process of creating any new franchise.