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Trump's Justice Department Is Making Life Hell for Legal Weed

A wave of investigations unleashed by Attorney General Bill Barr last year cost companies millions, torpedoed deals, and scared off investors.
June 30, 2020, 4:02pm
Marijuana for sale during a stop at a dispensary on a cannabis tour organized by L.A.-based Green Tours, January 24, 2019 in Los Angeles, California.

WASHINGTON — Ever notice there’s no Starbucks for weed? No dominant, national retailer with outlets in all states where cannabis is legal?

The Trump administration went out of its way to make sure that couldn’t happen.

A wave of antitrust investigations unleashed by President Trump’s Department of Justice last year wreaked havoc among mid-sized regional cannabis companies, undermining their attempts to expand. The probes cost companies millions in legal fees, bogged employees down for thousands of hours with mind-numbing paperwork, and scared off investors, a half-dozen industry insiders told VICE News.

A DOJ whistleblower denounced these probes in sworn testimony to Congress last week, saying they served little practical purpose except to target companies selling a product that Trump’s Attorney General Bill Barr personally dislikes.

“As a whole, these investigations had an incredibly chilling effect on the industry,” said Joe Caltabiano, a co-founder and former president of Cresco Labs, whose acquisition of Origin House was among those scrutinized by DOJ. “They didn’t stop the cannabis industry. But they definitely slowed growth.”

READ: Trump says weed makes you dumb, leaked audio reveals

The probes froze billion-dollar deals in place for months. And while companies waited, the fast-moving industry shifted to the point where deals had to be renegotiated or abandoned, even after they received approval. At least three large acquisitions failed after receiving DOJ requests for vast amounts of extra information that required months to prepare and deliver.

“It was a pain in the ass,” one industry insider at a company that went through the review and asked not to be named due to the sensitivity of the issue, told VICE News.

There are other good reasons why the American legal weed industry remains regional and fractured. Cannabis is still illegal at the federal level, even though 33 states allow medical use and 11 allow recreational consumption. Any company hoping to expand from one state to another has to cut through a thicket of complex state laws and licensing procedures.

Aggressive probes

Still, the DOJ’s probes stunted the industry’s growth at a key moment in its early development, experts on the U.S. cannabis sector said.

“If not for these DOJ actions, would we have more major players in the industry than we have today? Absolutely,” said Zachary Kobrin, special counsel of government affairs and cannabis industry expert at the Florida-based law firm Akerman LLP. “This was the icing on the cake.”

At first, industry insiders thought the wave of extra scrutiny that began pouring over them in 2019 might actually be a good thing: They hoped it meant the government was taking their fledgling business seriously and trying to learn more about it.

After all, these weren’t criminal investigations. Antitrust probes are about making sure a company won’t be able to dominate the market and jack up prices by buying a competitor.

But DOJ officials weren’t even reading many of the millions of pages they demanded that companies painstakingly produce, a whistleblower named John Elias, who was chief of staff for the DOJ’s antitrust division from 2017 through 2018, told Congress last week.

The department threw enormous resources into clobbering the industry, Elias said, pretty much just because Barr doesn’t like pot.

Normally, these requests for tons of extra info are rare: Only about 3% of deals trigger one. But the DOJ launched at least 10 major probes in the cannabis sector starting in March 2019, according to Elias.

Cannabis accounted for five out of eight active merger probes in one office, he said, even though there was no real threat of a major weed player conquering the American market and boosting prices.

“They were not bona fide antitrust investigations,” Elias testified. “These mergers involve companies with low market shares in a fragmented industry; they do not meet established criteria for antitrust investigations.”

Deals crushed

Soon, the casualties began mounting.

A DOJ probe helped blow up a $680 million mega-deal planned by a firm vying to become the Apple of legal pot: MedMen.

The LA-based dispensary and delivery service announced a record-setting deal to buy cannabis vendor PharmaCann in October 2018, which would have let it expand into Virginia, Illinois, Ohio and Pennsylvania. The tie-up would have created the country’s largest cannabis company by market reach, with 66 retail stores and 13 cultivation facilities across 12 states.

But in March 2019, the Department of Justice stepped in — and didn’t clear the acquisition until September. A month later, MedMen announced the agreement had fallen apart, saying “regulatory hurdles” had “significantly impacted” the plan.

A similar fate befell Arizona-based Harvest Health & Recreation, which announced a blockbuster $850 million accord to buy Chicago-based Verano Holdings in March 2019.

The deal was trumpeted with great fanfare as the most expensive transaction the industry had yet seen.

But a year later, it was dead. Harvest blamed the failure, in part, on the “significant delays” caused by the DOJ antitrust review.

The extra scrutiny sent ripples of anxiety radiating through the industry, well beyond the companies that were directly targeted by the DOJ, said John Kagia of New Frontier Data, which tracks sales and consumer trends in the cannabis industry.

“The DOJ interventions threw a huge dose of cold water on the companies that were even thinking about M&A activity,” Kagia said. “No one knew what the rules were going to be.”

If these probes hadn’t taken place, would we now have a big national legal weed player with outlets on every corner? Given all the other restrictions facing the industry, the answer is probably still no — or at least, not yet. But it’s hard to say how different the industry might look today if these expansion plans had sailed through.

“It had a chilling effect on the money in the cannabis industry,” said Caltabiano. Startups in other industries that have since grown to become household names might have wilted under that kind of scrutiny if it had been applied when they were small, growing fast, and needed the cash, he said.

“If this had happened to Amazon in its sixth year,” Catabiano said, “Amazon probably wouldn’t be here now.”

Cover: Cannabis for sale during a stop at a dispensary on a cannabis tour organized by L.A.-based Green Tours, January 24, 2019 in Los Angeles, California. (Photo: ROBYN BECK/AFP via Getty Images)

This article originally appeared on VICE US.