Recent antitrust litigation in the cannabis and vape sectors signals intensified scrutiny of pricing practices, distribution restraints, and exclusionary conduct.
Two recent cases, Redbud Roots, Inc. v. Shenzhen Smoore Technology Co., Ltd. in California and MJ’s Market Inc. v. Jushi Holdings Inc. in Massachusetts illustrate the antitrust risks associated with distribution agreements, pricing policies, and exclusionary conduct in the cannabis industry.
Redbud Roots, Inc. v. Shenzhen Smoore Technology Co., Ltd.
Redbud Roots Inc. (Redbud), a Michigan-based cannabis processor and cultivator, filed an antitrust lawsuit accusing Shenzhen Smoore Technology Co. Ltd. (Smoore) and various US distributors of conspiring to fix prices, lock out competitors, and allocate customers in violation of Section 1 of the Sherman Act. Redbud alleged Smoore cut off fair market access and manipulated wholesale prices.
Smoore and its distributors (Greenlane Holdings, Jupiter Research, 3Win, and Canna Brand), which are direct competitors at the wholesale distribution level, entered into a written and signed agreement to (a) not charge their customers below the minimum prices agreed to by all defendants and (b) not compete with the other defendants (including Smoore’s customers). Redbud alleged the defendants’ anticompetitive conduct has artificially fixed the price of Smoore’s vapes. Redbud further alleged that defendants agreed to a monthly exchange of their prices and instructed their employees not to compete with one another. Redbud’s complaint also pleaded a scheme to detect and punish cheating among the horizontal competitors, including Smoore’s withholding of distributors’ security deposits in cases of noncompliance.
The lawsuit seeks treble damages and injunctive relief on behalf of a nationwide class of direct purchasers of Smoore-manufactured cannabis oil vaping devices sold in the United States from 2016 to present. Smoore filed a motion to dismiss, which is pending.
MJ’s Market Inc. v. Jushi Holdings Inc. et al.
MJ’s Market (MJ’s) alleged that Jushi conspired with the sellers of Nature’s Remedy to prevent MJ’s entry into the Tyngsborough, Massachusetts retail market. After MJ’s secured local permitting, Jushi and its partners allegedly initiated a series of regulatory objections and state court lawsuits intended to overturn the permitting approval—actions MJ’s characterized as sham petitioning to establish monopoly control. According to the complaint, Jushi acquired Nature’s Remedy soon after the town approved MJ’s application. The Jushi/Nature’s Remedy transaction included $15 million in “additional merger consideration” that was contingent on no competitors opening in the area. MJ’s entry meant that the former owners and sellers of Nature’s Remedy, Annette Iacozili and Chris Vanni, would not receive the additional $15 million consideration. MJ’s claimed that Jushi and the former owners of Nature’s Remedy coordinated efforts to block its entry to preserve Jushi’s monopoly and trigger the bonus consideration payment.
United States District Court Judge Margaret Guzman has denied a motion to dismiss in the case, allowing the plaintiff’s Sherman Act and state antitrust claims to proceed. Judge Guzman held that MJ’s had plausibly alleged that Jushi’s conduct fell outside the Noerr-Pennington doctrine, which protects legitimate petitioning activity, holding that the plaintiff plausibly alleged the use of sham litigation and pretextual objections as part of an exclusionary scheme. With the complaint sustained, the case has proceeded to discovery and antitrust claims are moving forward.
Takeaways
- The MJ’s case underscores that Noerr-Pennington immunity does not protect all litigation or regulatory activity. Courts are increasingly willing to scrutinize whether lawsuits or objections are a pretext for anticompetitive exclusion, especially when tied to financial incentives or broader schemes. Companies that rely on petitioning to block competitors must ensure those actions are well founded and not strategically abusive.
- Dual-distribution models, where a manufacturer sells both directly and through distributors, require thoughtful development because if improperly developed a dual-distribution model can lead to unlawful horizontal collusion. Although Smoore and its codefendants are not affiliated companies, coordination was alleged through monthly information exchanges and the imposition of financial penalties to enforce the agreement.
- Antitrust counsel should be consulted before including clauses in merger or acquisition agreements that are contingent on one or both of the parties engaging in conduct that restrains competition. While earnouts and contingent consideration are common in transactions, they can become problematic if tied to excluding or suppressing competitive entry. When antitrust enforcement agencies or courts detect these arrangements, they may view them as horizontal allocation agreements in disguise.
*Alexandria Santiago, a summer associate at McCarter not yet admitted to the bar, contributed to this alert.