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Canada's New Proposed Cannabis Legislation: Challenges to Franchisors

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April 19, 2017

I) Introduction to the New Proposed Cannabis Legislation

The federal government has recently introduced proposed legislation to legalize the recreational use of cannabis (marijuana). Once this legislation is passed, it will establish a framework for the production, possession, distribution, and selling of cannabis for recreational use.

Entrepreneurs can be expected to view the imminent creation of an un-crowded, nation-wide market for a high-demand retail product as an opportunity for franchising. Would-be franchisors would be well-advised to give early consideration to some of the legal questions that are likely to arise as the legislative framework becomes finalized.

Under that framework, the federal government will license production, while the provinces and territories will license sale and distribution.

II) Challenges Confronting the Creation of a National Cannabis Franchise System

Because the manner of sale and distribution will be left to the provinces and territories, there is a real likelihood that the laws regulating these activities will vary across the country. It may even be that one or more provinces will elect not to permit the sale of cannabis through storefronts. Licensing requirements may also vary by province, as may zoning regulations for locations from which cannabis is sold.

This potential lack of uniformity will create challenges for any would-be franchisor seeking to create a national system.

Other aspects of the legislative framework are likely to be more consistent, and would-be franchisors should develop an early appreciation of these:

  • promotion: the legislation proposes stringent restrictions on how cannabis and related products may be promoted. For instance, the legislation proposes to prohibit the presentation of cannabis in a manner that evokes a positive or negative emotion about  a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring. This will create challenges for the would-be franchisor in the development of a distinctive brand.
     
  • packaging and labelling: the legislation will closely regulate the packaging and labelling of cannabis and related products, much as other legislation regulates the packaging and labelling of tobacco products. For instance, the legislation proposes to prohibit the selling of cannabis in a package or with a label that could be appealing to young persons. The package or label could not depict a person, character or animal, whether real or fictional.
     
  • display: in provinces that will allow the sale of cannabis through store-fronts, the manner with which the cannabis for sale can be displayed will be regulated to ensure that, for instance, it cannot be seen by a young person.

III) Other Issues for Cannabis Franchisors

Of note to would-be cannabis franchisors is the proposal that employees of a person licensed to sell or distribute cannabis will be permitted to do so as part of their employment duties. If it survives the legislative process, this proposal will create a structure whereby franchisees can sell cannabis through their employees, without requiring separate licensing for each employee.

The downside to such a structure is the related concept that employee contravention of the legislation can be imputed to the employer. This is particularly worrisome when it is noted that contravention of the proposed legislation can result in imprisonment, as well as fines of up to $5 million.

If a corporation contravenes the proposed legislation, liability for that contravention extends to the corporation’s directors, officers or agents who directed, authorized, assented to, acquiesced in or participated in the commission of the offence.

IV) Conclusions

The proposed legislation to legalize cannabis production, possession, distribution and sale for recreational use creates unique opportunities for would-be franchisors. Those opportunities come with challenging legal issues that should be addressed early in the process of creating any new franchise.

It is important to recall that the proposed legislation must proceed through a number of legislative steps before it becomes law, and its contents may change over the course of that process. The government has indicated that it hopes that the proposed legislation will become law July 2018. Even when it becomes final, there will remain the enactment of provincial and territorial legislation that will fill in big gaps in the framework for the sale and distribution of cannabis.