When we all sheltered in place in mid-March, social media accounts everywhere reflexively joked how marijuana use was about to skyrocket like wine consumption and On Demand streaming. True to form, recreational marijuana retailers in LA and several markets in the US where stores remained open saw an immediate spike in sales; there was a 159% increase in California over the same time period in 2019. (And this author has since plowed through Ozark, The Wire, and Succession.)
But while these cannabis retailers may be dealing with lines wrapping around the block, they, and the vendor companies they rely on, are also dealing with economic realities and legal hurdles that pre-existed the pandemic – and have arisen from it. Undoubtedly, excluding US Cannabis companies from accessing federal Covid relief funds is the most glaring and potent new issue in an industry that was already suffering from a surprising down market in 2019, while most other sectors were thriving. (Note that whereas U.S. Cannabis companies are not eligible for the recent federal relief funds, such companies in Canada have been made eligible.)
Sure, the the challenges presented by various state and local regulatory requirements and employment restrictions have always been there. But when stores are forced to close or modify without the federal relief provided to others, and can’t access private capital during an economic disaster, that poses a particular set of problems in an industry that has no bankruptcy protections in accordance with US Federal law.
While relief may not yet be on the way from the federal level, certain states and cities are beginning to take action or consider taking action on the local level – with the likes of Massachusetts debating the enactment of a state-level equivalent of the PPP that would extend loans to the cannabis industry.
But despite all of these hurdles, there still is a line around the block for companies to enter a market that already employs more people in the US now (211,000) than the coal industry. Whether this line is moving, even in the most progressive of cities and states, is yet another issue that is made even more complicated by the pandemic and everything around it.
Case in point, the City of Los Angeles, which allowed its cannabis retailers to remain open in-full during the past few weeks (in contrast to cities in the Bay Area, who initially only permitted drive-by service for cannabis retailers). Despite being one of the more forward-thinking cities for recreational marijuana, LA had already put its next licensing round of 100 social equity permits on hold back in October of 2019.
Now, since the pandemic has refocused attention and presented economic and other crises for the City and its government officials, that licensing round remains on hold – with no hint as to when it will be revisited. This not only pushes back the 100 licenses that are pending, but the other 602 (and counting) applicants who were not among the first 100. In a recent article in the Marijuana Business Daily, a spokesperson for the LA Department of Cannabis Regulation (DCR) was quoted as saying “We’re at the mercy of the mayor and City Council with regard to a lot of what we do.”
In the meantime, while the shutdowns continue on even through the reopening of the economy, the DCR provided policy recommendations on April 10 to the LA City Council designed to improve permitting procedures and the social equity program moving forward. These recommendations include fast-tracking for the 100 pending retail license winners from last fall, allowing the other 602 applicants to be first in line for other license types such as manufacturing, distribution and delivery, and switching from a first-come-first serve to a lottery going forward.
However, these recommendations must first be adopted by the City Council, and as of yet, there is no indication that the issue has been scheduled for a hearing. Accordingly, many of the 100 retail “winners” from last fall sit with empty storefronts that have been leased but cannot be used. According to the Cannabis Equity Retailer Association, the losses of only 60 of those license winners adds up to over $1.2 million per month in real estate payments for shops that remain unopened.
This could present interesting arguments around force majeure, and whether the ongoing delays in licensing are caused by the pandemic and the government’s response to it. The cannabis industry was already one of the first industries to see actions to declare contracts unenforceable due to the pandemic fallout as early as March 23 (in a dispute between a Kentucky hemp company and an Oregon CBD processor), and this murky issue between pre-existing industry difficulties and post-pandemic industry difficulties may become a highly litigated issue in the coming months and years. (Further discussion and analysis on force majeure provisions and common law principles in the state of California can be found at: https://www.seyfarth.com/news-insights/covid-19-update-force-majeure-under-california-law-in-business-and-commercial-disputes.html)
But the question is: when will these recommendations be addressed by the City Council, and when will they be adopted by the City? While it may be harder and harder to survive until this day comes, as the line around the block indicates, there seems to be no shortage of retailers willing to wait it out to enter the market.