Cannabis Musings - February 18, 2025
Antitrust. It's back.
Friends, antitrust is one of those things that lots of people reference, but few actually understand. Like RICO. Or postmodernism. It’s got a reputation for being one of the headier, more intellectual areas of law, instilling fear into the hearts of corporate executives, and maddening deal lawyers and bankers for getting in the way of closing. Antitrust raised its ugly head last week in a lawsuit filed by Arizona-based cannabis operator Earth’s Healing against Smoore, maker of the omnipresent CCELL vape device and cartridges, and a number of its distributors. Before we look at the case, let’s dig a little bit into the arcana of antitrust.
Antitrust is the product of federal law, first being enacted in 1890 with the Sherman Act that went after unreasonable restraints on trade, like monopolies. Its counterparts are the Federal Trade Commission Act, which covers unfair competition, like competitors agreeing to fix prices, and the Clayton Act, which limits mergers and acquisitions that might substantially lessen competition. There’s about eleventy-billion exceptions to these core goals, which is why antitrust lawyers are some of the most revered and expensive attorneys at their BigLaw firms.
The cannabis industry was introduced to the joys of antitrust law in the 2017-2019 heyday of capital and mergers. When one company buys another, and the dollar amount is large enough (currently, over $126.4 million), the Department of Justice and the Federal Trade Commission get to review the deal for antitrust issues through what’s known as Hart-Scott-Rodino (HSR) review. You compile a plethora of documents prepared for the deal, hoping that no one wrote down that the acquisition would allow one party to, say, “dominate the market” or “destroy the competition” or something fun like that, and then submit them for review. Most of the time, you wait about 30 days and get the nod. But sometimes, you get a ‘second review’, meaning the FTC and DOJ want to scrutinize the deal for antitrust concerns - an expensive, long, and painful process.
Back in 2019, in the heyday of high-valuation cannabis deals fueled by exuberant stock price, many acquisitions lingered for months in HSR review. It later came out that then-U.S. Attorney General William Barr got the Department of Justice to use its HSR review powers to intentionally delay cannabis company M&A, even though the deals themselves posed no actual antitrust issues. Of course, nothing ever came of that, even though the delays caused deals to either be recut or terminated because stock prices dropped precipitously while companies waited for clearance. I mean, why would a senior federal official suffer repercussions for playing politics?
Preemptory review is one side of antitrust, the other being scrutiny of ongoing business practices. This typically takes the form of a group of companies colluding to fix prices or one company monopolizing an industry (remember Kodak?). Enter the vape device market, in which Smoore’s CCELL products are the 800-pound knish in the room. ACTIVE, a competitor to Smoore in the vape device market, filed a countersuit against Smoore in 2024 in a patent dispute, alleging that “Smoore had and has monopoly power in the closed cannabis oil vaporizer systems market in the United States … which allows Smoore to unilaterally control prices and exclude competitors, by means other than competition on the merits.” (That case, which started in 2022, is still pending, because litigation takes forever.)
The new case, filed not by a competitor, but instead by a wholesale buyer of vape tchotchkes, alleges that Smoore and its distributors (full disclosure – I represented KushCo, Inc. in its 2021 merger with Greenlane Holdings, one of the named distributor defendants) colluded to fix prices and limit competition, claiming that:
Smoore and each of its Authorized Distributors entered into written and signed agreements to (a) not charge their customers below minimum prices agreed to by all of the Defendants and (b) not compete for other Defendants’ (including Smoore’s) customers … [which is] direct evidence of the Defendants’ conspiracy. (emphasis in the original)
…
For example, (a) Smoore and its Authorized Distributors provided training to their employees that include an express instruction that they are prohibited from competing for each other’s customers, and (b) Smoore and its Authorized Distributors held in-person meetings, including one in Los Angeles in 2019, where they confirmed that the Defendants had agreed not to compete with one another.
Bad, if true. What’s even more interesting is that Smoore not only sold wholesale through its distributors, but also sold the same products directly to wholesale buyers:
because Smoore competes with each of its Authorized Distributors in the sale of Vapes at the wholesale distribution level (i.e., sales to Plaintiff and the Class), the Defendants’ agreement not to compete is in and of itself a horizontal restraint. … Additionally, because Smoore organized, facilitated, and enforced a horizontal conspiracy between the Authorized Distributors—the dominant wholesale distributors of Vapes in the United States—the agreement is also a horizontal restraint.
In short, what Earth’s Healing is arguing is that this horizontal conspiracy (a term that’s worth the price of admission alone) unlawfully “artificially fixed the price” for Smoore’s products. Under antitrust law, you (for the most part) can’t collude with others to set pricing and control the flow of goods in the marketplace – it’s the kind of conspiracy that makes a ‘free market’ not completely free. Even though we’re violating federal law, we (ironically) still have to comply with it (that being the quantum mechanics aspect of cannabis policy).
Now, this is just a complaint, and for better and very much for worse, anyone can file a lawsuit in the US about anything alleging anything. However, Earth’s Healing hired a very serious antitrust boutique law firm to bring this case, and this is now a second antitrust claim against Smoore. If true, and if successful, it would surely upend the industry, because vape is a large form factor, but it’ll likely be years before the case is resolved.
This case will be one to watch, because the alleged activities are a product of the fractured and inefficient nature of the national licensed cannabis marketplace. It’s hard to foster broad-based competition when the landscape looks like an M.C. Escher environment.
Speaking of claims, a Southern California group with the alliterative name “Hemp Hoax” has put out a white paper alleging that most of the so-called hemp products they tested aren’t what they claim to be. Nit kosher!
Be seeing you.
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© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.