Ontario’s marijuana store regulator clarifies ‘inducement’ rules, bans house brands

The regulator overseeing Ontario’s huge network of marijuana stores has provided long-awaited details clarifying the types of incentives, or “inducements,” that federally licensed producers can and can’t dole out to retailers that might carry their products.

At the same time, the Alcohol and Gaming Commission of Ontario (AGCO) is barring retailers from entering into any new deals with licensed producers to offer their own house brands, or white-label products, as they’re also called.

The AGCO’s updated rules governing inducements aim to close loopholes allegedly being used by some licensed producers to buy shelf space in retail stores.

It’s a practice industry sources say was happening even though it was already technically prohibited.

The AGCO said the updated inducement rules will help foster a level playing field between large and small businesses.

In its email notice to retailers and industry stakeholders, the AGCO also said the rules “have always prohibited licensed cannabis retailers from accepting or requesting material inducements from licensed producers.”

However, “the updated Standards set out additional detail related to inducement activity between federally licensed producers and retailers to support consumer choice and a level playing field in the legal cannabis industry,” according to the notice, which was shared with MJBizDaily.

The new guidelines take effect June 30, 2022.

Trina Fraser, a partner at Brazeau Seller Law in Ottawa, Ontario, said the 2018 law banning material inducements was vague and did not clearly outline what “material” meant.

That 2018 law stated that licensed producers may not “directly or indirectly offer or give a material inducement” to store owners “for the purpose of increasing the sale of a particular type of cannabis.”

However, Fraser said, “there’s all sorts of wiggle room that people were finding in the fact that the AGCO had not been more explicit on its policy on inducements. So this (updated guideline) is now the response to that.”

“In some respects, it is just giving further detail on what the AGCO would have considered all along to be a material inducement that’s prohibited, and where the line between nominal and material exists.

“Just further clarification. But they have made some substantive changes,” added the lawyer, who leads the firm’s cannabis practice.

‘Inconsequential value’

The updated guidelines spell out the situations in which licensed retailers may enter into agreements with licensed producers, saying that any benefits or services received must be of “nominal value.”

“Nominal value items, benefits or services, unlike financial or material inducements, are those that are of inconsequential value,” according to a guidance document released with the updated rules.

The AGCO does not apply a dollar figure to “nominal value.”

Rather, a number of factors are considered, including:

• If a cannabis store is likely to change its behavior toward a licensed producer after receiving an item, benefit or service, then it would not be considered to be of nominal value.
• To be considered nominal value, the product or service cannot be significant enough to defray a store’s operational costs.
• Any product or service may be considered of nominal value if it is provided infrequently and does not add up to a “substantial value” over time.

As examples of nominal value products, the AGCO cited:

• T-shirts.
• Hats.
• Inexpensive cannabis accessories.

The new rules specifically allow licensed retailers to accept items, benefits or services that are related to education or training.

However, LPs may not directly or indirectly pay for licensed retailers’ travel or accommodation related to education and training.

Cannabis product samples can also be provided by LPs to stores, so long as they’re directly related to education or training, per the new guidelines.

The expectation is that sample sizes would be a small quantity of a cultivar or product available in Ontario.

Any samples should be received infrequently, the new rules note.

Selling data

The updated guidelines stipulate that retailers are allowed to enter into agreements with licensed cannabis producers for the sale of data for business intelligence purposes.

However, the AGCO added a key caveat: The fee charged by the store and paid for by the LP should be at “fair market value.”

Fraser believes the AGCO is looking to close a loophole in which some LPs were overpaying for store data as a way to essentially buy shelf space.

“It became very clear that these data agreements were being used as a mechanism to funnel money for what are clearly prohibited inducement payments, from LPs to retailers,” she said.

“I think, at some point, maybe people caught on.

“Now what they said is, ‘Yes, you can sell your data, but it has to be for actual fair market value for that data.’”

Fraser still has concerns that the updated guidelines are too subjective.

“Why do we open this up?” she said. “Because as soon as this form of agreement is permitted, it would mean there could be permissible flows of money from LPs to retailers, and then it becomes, what is it really for, regardless of what the paper says?

“So, to me, it just opens this up to subjectivity and potential abuse.”

House brands banned

In a move that caught some industry players by surprise, the AGCO is banning house brands going forward.

Some retailers had been hoping to leverage white-label products for the extra margin.

The guideline document lists in-house brands, or white-label products, as one of the “prohibited activities.”

“Retailers may continue to sell white label products that have already been produced; however, the AGCO expects retailers to exit any current agreements and not enter any new agreements with LPs once the updated standards come into effect,” the document stipulates, referring to co-branded cannabis and cannabis accessories.

Mimi Lam, co-founder and CEO of Ottawa cannabis retailer Superette, called the move “the biggest head-scratcher.”

“This is something that is very exciting for the development of this industry,” she said, “and in addition, the (Ontario Cannabis Store wholesaler) has been actively supporting the development of this program.

“To do a 180 and to severely limit collaboration and innovation in this space just doesn’t make sense.”

In a statement to MJBizDaily, the Ontario Cannabis Store said it is “in the process of reviewing the new rules announced by the AGCO around inducements to assess possible impacts to its operations and policies.”

Other prohibited activities

The updated guidelines specifically prohibit the “sale of in-store or online advertising space.”

LPs are not allowed to pay for advertising space, preferred shelf placement or promotional activities either in-store or online, the document says.

Licensed retailers are also evidently not allowed to receive cannabis for sensory-display purposes from LPs, implying stores are supposed to pay for those products.

Another practice that is banned is stores receiving assets, such as branded fridges, from licensed producers.

The guidance document is available here.

Matt Lamers can be reached at mattl@mjbizdaily.com.