White Label Agreements and Flow-Through Program
On June 30th, 2022, the Ontario Cannabis Store (the “OCS”), the sole licensed wholesaler of cannabis in Ontario, enacted its new “flow through program” (the “Program”). Prior to the introduction of this Program, licensed cannabis retailers (“Retailers”) were required to purchase their cannabis products from the OCS directly, through wholesale orders. With the introduction of the Program, participating Retailers will be able to order products not stocked in the OCS warehouse and the OCS will facilitate the wholesale purchase from licensed producers (“LPs”).[1] Products that are part of the Program are listed in a separate flow-through catalogue, as opposed to the OCS’ general catalogue of cannabis products.
Since the regulatory framework in Ontario places the OCS in the middle of the supply chain, the Program cannot fully circumvent the OCS or be structured as a direct pass-through from LP to Retailer. However, the Program does allow Retailers and Licensed Producers to develop relationships and interact directly. The Program will also allow some Retailers to carry unique product offerings, as compared to their competitors, and will also allow LPs to provide branded products that feature the Retailer’s brand. LPs will have to work with the OCS to ensure that any obligations they have to Retailers are met, determine the product quantity needed, and ensure that the proper inventory method is used.
In connection with the introduction of the Program, the Alcohol and Gaming Commission of Ontario (the “AGCO”) has updated its standards regarding the provision of inducements from LPs to Retailers. A guidance document, Inducement Rules for Licensed Cannabis Retailers, was released to clarify the changes to the AGCO’s Registrar’s Standards for Cannabis Retail.[2] The changes detail the continued general rule against material inducements, but also highlight new exceptions to this rule. This article will review these new exceptions including with regard to the practice of “white labelling.”
Rule Against Material Inducements
The Registrar’s Standards for Cannabis Retail (the “Standards”) prohibit Retailers from entering into agreements with LPs and their representatives for items, benefits, payments, or services in exchange for the promotion or increased sale of a particular product by the Retailer or its employees.[3] In other words, LPs are prohibited from approaching Retailers and offering them any incentives to promote that LP’s product over other products sold by the Retailer. An example of this would be a Retailer entering into an agreement with an LP whereby the Retailer agrees to promote and increase sales of that LP’s product in exchange for exclusive product features. The provision of exclusive product features would be considered a material inducement by the AGCO and, as such, would be prohibited.
Other prohibited activities or inducements include: the sale of in-store or online advertising space; the provision of cannabis samples for sensory display purposes; the provision of fixtures or physical assets; the provision of items essential to the operation of the business; sales incentives; cash or rebates; travel or accommodation for education or training; and monetary compensation for education or training.[4]
The Exceptions to the Rule:
While the AGCO’s general rule prohibits the provision of material inducements by LPs to Retailers, a few important exceptions do exist, the most important of those being (1) the allowance of items, benefits, or services of nominal value, and (2) the allowance of “white-labelling”.
- Items, Benefits, or Services of Nominal Value:
Retailers may enter into agreements with LPs or their representatives for items, benefits, or services of nominal value. Nominal value items are defined as those of inconsequential value (unlike the prohibited financial and material inducements). The AGCO has not prescribed a specific monetary value above which an item would not be considered “nominal”. Instead, the AGCO has advised that it will consider the following factors in determining whether the benefit or item would be considered nominal;
- Would a licensee be likely to change their behaviour toward an LP or the LP’s product after receiving the item, benefit, or service?
- Are the items, benefits, or services valued at an amount that would defray the Retailer’s operational costs?
- How many items, benefits, or services have been provided over what period of time? [5]
Retailers should consider these questions when entering into any type of agreement with an LP to ensure that they are not receiving inducements that might be considered material and would, therefore, be prohibited by the Regulations.
- Items, Benefits, and Services Related to Education or Training:
Retailers may accept items, benefits, or services from LPs that are related to education or training. This may include education or training sessions or materials, meals and refreshments during the education or training, and cannabis product samples directly related to education or training. [6]
- Ownership Interest and Franchise Agreements:
Retailers and LPs are permitted to enter into financing, leasing, and franchise agreements. A copy of any such agreement must be disclosed to and approved by the AGCO. All agreements must comply with the Cannabis License Act, 2018 (CLA)[7] and the Standards. Note that the AGCO will not provide any commentary or explanation regarding its decision to accept or reject a proposed agreement. As such, it is important that Retailers familiarize themselves with the Standards.
- Store Brand Cannabis Products (White Labelling)
Agreements between Retailers and LPs for store-branded cannabis products (also known as white labels, private labels, and in-house/house brands) are also permitted (“White Label Agreements”). White Label Agreements allow Retailers to partner with LPs to develop products that include that Retailer’s specific brand. This involves Retailers entering into contractual agreements with LPs for the manufacture and sale of products that are specifically branded for that retail store.[8] These types of agreements are subject to the same review process by the AGCO as mentioned above. Retailers should be aware that any branded products will remain available for any other retailer to purchase on the OCS’ “flow-through catalogue,” provided they are part of the Program.
While these agreements are permitted, the AGCO does place certain constraints on their contents. Retailers and LPs should be cognizant of these rules before entering into any such agreement and seeking AGCO approval. In particular, White Label Agreements must not:
- Define the amount of product from the LP or its affiliates that must be offered for sale by the Retailer;
- Require a defined amount of display space at the retail space to be dedicated to products from the LP or its affiliates;
- Provide merchandising, marketing, or promotional activities to the LP or its affiliates; or
- Restrict the LP’s ability to have its products sold at other retail stores, or the Retailer’s ability to sell products produced by other LPs (or their affiliates). [9]
White Label Agreements and the Program are intended to benefit smaller LPs and Retailers, as they will enable the OCS to offer more products to Retailers, including products that have a short shelf life or are slower-moving. It is important that Retailers and LPs monitor how the industry reacts to these changes. White Label Agreements also allow Retailers to further differentiate themselves from their competitors and to build brand loyalty and awareness.
Key Takeaways:
Given the rapid evolution of the cannabis industry, Retailers and LPs alike need to ensure they are familiar with and current on industry developments. The introduction of the OCS’s flow-through program and subsequent changes to the relevant regulations regarding material inducements are two such developments. Both provide additional growth opportunities for LPs and Retailers but also present a minefield of potential pitfalls if the rules are not properly understood. Becoming well-versed in the OCS’s Program and the AGCO’s rules regarding material inducements is crucial for Retailers and LPs who want to be able to avail themselves of these new opportunities without costly hiccups.
Anna Thompson-Amadei, Sotos LLP
Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She is the head of the firm’s cannabis practice area. Please contact Anna at 416.572.7322 or athompson-amadei@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.
Don Houston, Sotos LLP
Don is one of our articling students for the 2022-2023 term.
[1] Brown, David. “Ontario’s New Flow-Through Model and Product Call Timeline, Comes with Pros and Cons, Says Producers and Retailers.” Stratcann September 1, 2021. https://stratcann.com/insight/ontarios-new-flow-through-model-and-product-call-timeline-comes-with-pros-and-cons-say-producers-and-retailers/
[2] Brown, David. “Ontario Chamber of Commerce Concerned with Province’s Plan to Ban In-House Cannabis Brands and Products” Stratcann March 4, 2022 https://stratcann.com/news/ontario-chamber-of-commerce-concerned-with-provinces-plan-to-ban-in-house-cannabis-brands-and-products/
[3] “Cannabis Retail Regulation Guide” Alcohol and Gaming Commission of Ontario https://www.agco.ca/book/export/html/19736
[4] “ Guidance Document- Inducements Rules for Licensed Cannabis Retailers” Alcohol and Gaming Commission of Ontario https://www.agco.ca/guidance-document-inducements-rules-licensed-cannabis-retailers
[5] Ibid
[6] Ibid
[7] Cannabis Licence Act, 2018, S.O 2018, C.12, SCHED 2.
[8] Maurer, Matt, “The “Return” of White-Labelling is a win-win-win for LPs, Retailers, and Consumers” Grow Opportunity. June 1, 2012. https://growthopportunity,ca/legal-matters-2/?utm_source=rss&utm_medium=rss&utm_campagin=legal-matters-2
[9] Supra, note 4