Green Light Law Group: New York Takes a Hard Stand Against Vertical Integration

The Cannabis Control Board (CCB) and Office of Cannabis Regulations (OCM) recently issued “Guidance for Adult-Use Retail Dispensaries.” The twenty-seven-page document provides insight into what the Conditional Adult-Use Retail Dispensaries (CAURD) regulations will look like and will shape the non-conditional retail dispensaries license regulations down the road. We will cover the guidance in subsequent blog posts but one particular section caught our attention and it relates to vertical integration.

Vertical integration in the cannabis context means one company or group of companies controlled by the same management group who own businesses through the cannabis supply chain. A vertically integrated cannabis company will typically cultivate, process, and sell cannabis products. New York prohibits vertical integration meaning that in New York licensees are limited to cultivating and processing or selling cannabis. There are some exceptions, such as microtier licenses, but for the most part vertical integration is a non-starter in New York.

Section 34 of the Guidance reads, in part, as follows:

Undue Influence. To prevent suppliers from exerting inappropriate control over retail dispensaries, the Cannabis Law places restrictions on the ability of an entity in one tier from having an interest in an entity in another tier of the industry.

Retail dispensaries, their true parties of interest, passive investors, and any management service providers cannot have any interest in any business anywhere that cultivates, processes, or distributes cannabis. Applicants with an interest in such a business, no matter how small that interest is, will not be approved. A licensee who, themselves or through their True Parties of Interest, passive investors, or any management service providers, holds a prohibited interest risks their license being cancelled, suspended, or revoked or other enforcement actions being taken.

This portion of the guidance essentially prohibits anyone who owns, invests in, or manages a cannabis dispensary, both CAURD and otherwise, from having any form of ownership interest in any cannabis cultivation or processing operation throughout the United States and even abroad. This would be the most restrictive ban on vertical integration in the country. A licensed New York dispensary will not be able to work with any company that also owns even the smallest share of a cannabis cultivation or processing company. This will effectively prohibit any Multi-State Operators (MSO) from owning a retail dispensary in New York if those entities have invested in cultivation and processing elsewhere.

New York lawmakers and regulators were clearly influenced by Washington state cannabis laws and regulations. The term “True Party of Interest” is a unique term when it comes to cannabis and originated in Washington shortly after cannabis was legalized recreationally nearly a decade ago. In both Washington and New York, the term broadly covers any person or entity that has any remote ownership interest in a cannabis license. Washington also prohibits vertical integration and uses the term “Undue Influence” like section 34 of the Guidance.

While New York may have been influenced by Washington’s ban on vertical integration, it has taken that policy to an extreme new level. Washington does not prohibit true parties of interest in owning different license types elsewhere. It remains to be seen whether Section 34 of the Guidance will become a more permanent regulation. We’ll keep monitoring and report on the Green Light Law Blog.