Today, the acting Chief of Staff at the Department of Justice's Antitrust Division, John Elias, testified at the House Committee on the Judiciary's hearing into "political interference and threats to prosecutorial independence." In his prepared remarks released yesterday, Mr. Elias stated that at the direction of Attorney General William Barr, the Antitrust Division conducted reviews of 10 mergers involving cannabis businesses.
Mr. Elias' testimony further underscores the need to be aware of and plan for the myriad ways federal policies and enforcement beyond criminal enforcement can affect businesses involved in the cannabis industry.
According to Mr. Elias, the Antitrust Division conducted a number of investigations of cannabis transactions which "were not bona fide antitrust investigations," beginning with its March 2019 investigation of the blockbuster MedMen/PharmaCann merger, which the parties abandoned later that year. These investigations were opened at the direction of political staff, over the objections of the DOJ's career antitrust attorneys, and accounted for 29 percent of the Antitrust Division's full-phase merger investigations in Fiscal Year 2019.
Mr. Elias in his prepared remarks stated that the investigations included two matters in which there was no potential antitrust violation because the parties did not compete "at all," and other transactions in which any overlap was so small that no traditional antitrust analysis would suggest the Division investigate further. In each case, however, the Antitrust Division issued a "Second Request"—which prevents the parties to a transaction from closing until they produce a substantial number of documents and data for the Antitrust Division's review and spend millions of dollars to comply with the request.
The Antitrust Division has a long tradition of independence and a reputation for conducting investigations without regard for political considerations. But Mr. Elias' comments suggest that businesses involved in the cannabis industry should consider the potential for executive branch action when pursuing mergers, joint ventures, acquisitions, significant asset purchases, or other M&A activity involving cannabis firms, regardless of the likely competitive effects of the transaction at issue.
Although the conduct Mr. Elias describes is a departure from tradition at the Antitrust Division, it is consistent with the federal government's general trend towards "soft power" enforcement against the state-legal cannabis industry. For several years during the Obama administration, DOJ followed an explicitly "hands off" policy towards state-legal cannabis, declining to enforce federal criminal laws against cannabis businesses operating in compliance with state law.
Even when then-Attorney General Jeff Sessions rescinded the policy, we saw little or no change in federal enforcement of criminal laws against the industry. During his confirmation hearings, Attorney General Barr stated he would follow the prior policy and, under his leadership, DOJ would not "go after" cannabis businesses that complied with state laws.
With respect to federal criminal laws, that has been mostly true. There has been no surge of federal prosecutions of state-legal cannabis businesses, and no DEA raids on dispensaries. But various federal agencies have staked out a position regarding cannabis when it presents questions within their jurisdiction.
The Office of the United States Trustee has repeatedly argued—not always successfully—that businesses that derive some profits from the cannabis industry are not eligible for bankruptcy reorganization. The USPTO has refused to issue registrations for trademarks used in connection with cannabis and cannabis-related goods and services. And Customs and Border Protection has claimed that any foreign national with even a remote connection to the cannabis industry is a "drug trafficker" who may be banned for life from entering the United States.
As well as being aware of and considering how federal criminal law might affect them, companies involved in the cannabis industry should carefully consider all the ways they are subject to federal oversight or regulation, where some kind of government action is far more likely. When assessing the risk of federal antitrust enforcement, parties will want to consider a number of factors. Chief among them is an assessment of whether the companies must notify federal antitrust authorities of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) and its rules and regulations before consummating the transaction.
The HSR Act requires that parties to most transactions valued at over $94 million (this threshold is adjusted annually) file a notification. In the usual course of business, many transactions for which notice is given do not result in further review, but companies in the cannabis industry should now consider whether their transactions are more likely to result in a Second Request.
Even when no HSR notification is required, the Federal Government may investigate transactions as potential violations of the antitrust laws.1 Indeed, Mr. Elias's testimony notes that the Division has issued a Civil Investigative Demand in one transaction that did not require an HSR notification as part of its recent review of cannabis mergers. Although an assessment of the need for an HSR filing is critical, it is not sufficient. Parties to any significant transaction in the cannabis industry should consider how an antitrust investigation (or other required federal approvals) would affect the transaction.
Such investigations are invasive, burdensome, and costly. For the six investigations for which Mr. Elias provided statistics, the parties produced between 759,000 and 1.3 million documents during the course of each investigation. Even if an investigation produces no evidence that a transaction has anticompetitive effects, the cost of an investigation might be enough to derail an otherwise profitable merger. Businesses in the cannabis industry should be aware of the increased likelihood of such costs when considering a transaction and should work with experienced counsel to prepare for the possibility of an investigation.
DWT's national antitrust practice can advise cannabis clients on:
- Whether their potential transaction creates any legitimate antitrust risk,
- Whether the transaction is reportable under the HSR Act,
- A strategy for obtaining antitrust approval in a cost-effective manner, and
- What contractual language in the transaction documents would be appropriate to account for potential federal antitrust investigations and appropriately allocate such risk among the parties.
If you have any questions regarding the impact of this testimony on your plans, transactions, or interactions with federal regulators, please do not hesitate to reach out to DWT for assistance.
1 Many state Attorneys General maintain active and vigorous antitrust divisions that often investigate smaller transactions that may not be reportable under the HSR Act.