The industry must pick its poison carefully
By Sean Badgley
Much has been said about the failure of Ohio’s Initiative 3, which would have legalized cannabis and delivered the entire market into the hands of a small, state-sanctioned cartel.
What’s more interesting is the debate triggered by the failed vote. In light of Ohio, some now suggest that the market should be wholly run by state governments, due to the seemingly omnipotent specter of corporate takeovers in the industry.
Before we condemn the various tobacco, pharma and alcohol CEOs who undoubtedly gaze upon the cannabis market with leering voraciousness, we ought to take a moment to understand what the Ohio vote really meant, while considering the lessons of Washington’s legalization experiment.
First, Ohio voters’ objection to placing the cannabis market in the hands of a monopoly does not really speak to a rejection of corporate influence over the industry, but over the legislative process. Those who attempted to seize control of the market tried to do so through force of law, not through bona fide monopolistic practices such as price manipulation.
Ohio residents were rightfully suspicious of this approach, and rejected it for the same reasons Americans generally reject monopolistic behavior. High prices, poor quality and limited supply are the calling cards of a market that is fundamentally insensitive to consumer demand.
This brings us to the proposition that corporations should be weeded out (pun intended) of the process by handing control over to the state. Washington’s model has been praised for precisely this reason, because certain individuals see a simplistic dichotomy between corporate control and government control.
However, as those of us who went through this process in Washington have learned, the state system isn’t really all it’s cracked up to be. In Seattle, there is currently a price war at the retail level — or, viewed from another angle, pricing meant to gain market share in the short term, thereby eliminating competition in the long term.
Similarly, the buffer rule that prohibits cannabis businesses from operating within 1,000 feet of certain locations was meant to protect children from the horrors of the cannabis market. Yet, when Seattle moved to relax its buffers, one group notably opposed the efforts: current, state-licensed retailers. Indeed, children need protection, and who better to advocate on their behalf than those seeking to eliminate competition through state control?
Government regulations start with good intent. One prime example was when the British government decided to eliminate the deadly cobra. Indians had lived with the snakes forever. However, the British had had enough of the damned things, and offered a bounty for every dead cobra. Crafty individuals soon began breeding cobras to kill, and then collected the bounty. An entire cottage industry formed around breeding cobras. Eventually, the crown got wise to this new market and dropped the bounty program. Without the promise of a reward, the cobra breeders simply let their snakes free, and there were more cobras than when they started.
Remember that the main rationale for legalization was to generate tax revenue while simultaneously undermining the black market. Some residents cast their vote for other reasons, including social justice and criminal justice reform, but undermining the black market was the bill of goods most Washingtonians were sold.
Now, Washington is slowly and quietly loosening its iron grip on the recreational market. To me, the most telling indicator of this is the Washington State Liquor and Cannabis Board’s proposal to allow out-of-state financiers. While the rule has yet to be adopted formally, the proposal comes from the board itself. For those in the market, who have either received a license, or are still in the application process, capitalization is the central challenge to getting off the ground. Currently, and until the Liquor and Cannabis Board changes residency requirements, Washington’s licensed cannabis enterprises cannot take on out-of-state investors.
The ballot initiative in Ohio rightly failed, yet this failure shouldn’t be seen as a rejection of corporate control, but rather of those who wish to harness the power of the state to entrench their own economic interests at the expense of a competitive market. The opportunity for such individuals to take advantage of state law is much greater in an over-regulated system.
Corporations will undoubtedly bring their own set of woes to the industry, and it is likely that the cottage industry we are all so familiar with will eventually be confined to the dustbin of history. However, legalization necessarily means normalizing the market for cannabis similarly to other goods. If we are to have a normalized market capable of efficiently compromising the black market, then for better or worse, our Wall Street corporate overlords are a necessary part of that equation.
Sean Badgley is a Washington attorney who’s been working in the recreational cannabis industry for more than two years. He is the founder of C3 Law Group and can be reached at badgley@cannaconsultantslegal.com.