Franchising a Cannabis Business: What is the Law and Where is it Going?

Following the release of a report by the Canadian Task Force on Cannabis Legalization and Regulation in November 2016, the government confirmed its plans to move forward with legalizing marijuana for recreational use, and promised to table draft legislation in spring 2017. Officially, marijuana remains a controlled substance. This means it’s a crime in Canada to grow, sell or possess it. The exception to the rule is for medicinal marijuana, provided the user has a valid prescription, and purchases from a government-approved licensed cannabis producer. Despite the murky legal landscape, the cannabis industry continues to flourish in Canada and was recently valued by Deloitte at $22 billion. If legalization becomes a reality, we can expect storefronts that sell cannabis products (commonly known as dispensaries) to try their hand at franchising their business concepts. After all, many dispensaries have a recognizable brand in a nascent and growing industry – key components of the franchise business model. In fact, medicinal marijuana dispensaries are already offering franchises in Canada.

What can we expect from the legislation?

Given a variety of health considerations associated with cannabis products, we can expect to see a highly regulated legal regime with respect to the production and distribution of cannabis, and a strong focus on consumer protection and restrictions on use by minors. Based on recommendations in the Task Force report, the legislation will likely be federal, although provinces and territories are expected to have some control over distribution and sale. The advertising, marketing, and packaging of cannabis products will also be regulated, likely in a manner similar to tobacco, alcohol and pharmaceuticals. The report recommends that any cannabis product packaged to look like candy, in bright colours and with animated characters, or that is otherwise “appealing to children” should be prohibited. We can expect this to be an issue for so-called marijuana edibles which are often marketed in the form of brightly-packaged gummy-like candies. On the other hand, the report recommends increasing the diversity and quality of cannabis products, which can be expected to impact how sellers will differentiate themselves and ultimately market to consumers. At the very least, we can expect some access to retail distribution of cannabis products, likely with limits on the density and locations of storefronts.

Can I start a cannabis franchise?

Not yet. Unless and until the government says otherwise, the current law stands: operating a marijuana dispensary without a license and for non-medicinal purposes is against the law. However, dispensaries have undeniably multiplied across Canadian cities in recent years. The rapid growth of this industry despite its legal complexities and risks is an indication of what is yet to come. If the government stands by its decision to legalize recreational marijuana and convert the “black-market” product into a regulated and taxable industry, we can expect to see growth in the franchised business model for cannabis products, both at the retail level and, if permitted, in other parts of the supply chain such as cultivation and production. One thing to consider in anticipation of the legal changes is registering the trademark associated with your brand. In a “first to file” trademark jurisdiction such as Canada, a trademark owner can maintain a competitive edge in the marketplace by preventing others from using a confusingly similar trademark. By securing registration of your trademark now, you can avoid costly opposition proceedings to your brand in the future.
Sotos LLP works with emerging and established franchisors in a variety of industries to help them grow their brands within the confines of the law. If you are considering franchising, start by retaining qualified and experienced legal counsel to assist you with the expansion of your brand.