Since HB0001 was passed by the Illinois legislature and signed into law by Governor Quinn in August last year, it has been evident that Illinois’ MMJ regime would be a highly regulated one. With the recent release of draft regulations by the departments of Revenue, Public Health, Agriculture, and Financial and Professional Regulation, we’ve learned just how tight that regulation will be. In particular, forces of supply, demand, and freedom of contract are being significantly checked.
Below is a quick rundown of how Illinois regulators will control with whom and how Illinois dispensaries and cultivation centers will do business.
- Intrastate only. This is a no brainer, and pretty much mandated by the federal government’s Cole Memo. Moving marijuana across state borders constitutes drug trafficking, and doing that will surely get the feds interested in you. This also means that you cannot sell to out-of-state patients that try to buy here in Illinois.
- Numbers. Right now at least, Illinois will have a maximum of 22 cultivation centers and 60 dispensaries. Whether supply will meet demand is anyone’s guess, but with these firm caps in place, it will be interesting to see what kind of price pressures develop, particularly in more rural areas where dispensaries will be few and far between.
- No exclusivity. The Department of Agriculture and IDFPR both expressly prohibit dispensaries and cultivation centers from entering into an “exclusive agreement” with each other. This is a bit of a blow to dispensaries hoping to generate buzz by being the exclusive seller of a particular strain, medible, vaporizer, etc.
- No playing favorites either. Under the draft rules, a dispensary may not “refuse to conduct business with a cultivation center that has the ability to properly deliver the product … on the same terms and conditions as other cultivation centers with whom the dispensary organization is dealing.” Similarly, a cultivation center cannot “refuse to conduct business with any dispensary facility that has the financial ability to pay for the medical cannabis … on the same terms and conditions as other dispensary facilities with whom the cultivation center is dealing.” The effect of these provisions will depend on how broadly they are interpreted. Do they force dispensaries and cultivation centers to do business with one another, even if the demand isn’t there? What if a cultivation center doesn’t carry a particular strain your dispensary wants? Do you have to buy a substitute product? Read narrowly, the rules could just mean you can’t cut sweetheart deals. Indeed, additional provisions prohibit price discrimination by cultivators in sales of similar products to differing dispensaries.
- Geography. HB0001 mandated that cultivation centers be limited to one per state police district and that dispensaries would be “geographically dispersed.” IDFPR’s approach to geographic dispersion was to create “dispensing organization districts,” concentrated around the Chicagoland area and sprinkled around southern and western Illinois. Though this arrangement is a nod to the fact that much of the population and demand will be found in and around Chicago, it still inhibits market forces of supply and demand from working naturally. It also will have a real effect on transportation costs. Downstate growers will need to consider how much of their product will end up in Chicagoland, and what it is going to cost to get their product there. Simply locating closer to the hubs of demand will not be an option.
The elephant in the room here is enforcement. How does the state intend to make sure these market controls are actually followed? Marijuana business must submit financial reports with their annual license renewal, but it seems unlikely state officials have the funds or the manpower to sift through records of every cultivator and dispensary’s business transactions. If at some point the Illinois cannabis industry is allowed to grow beyond the 22 cultivators and 60 dispensaries, we cannabis lawyers are betting some of this market manipulation by the state will fall by the wayside.