Greenhouse Shareholders sue Cannabis Producers for Bad Faith

The shareholders of a Leamington, Ontario based greenhouse facility recently filed a $500M civil claim against a group of marijuana producers alleging bad faith, fraud, breach of fiduciary duty, among other claims. A numbered company that owns a majority share of the greenhouse company, claims that it entered into a series of supply agreements with the producers in 2018. The agreements stated that the greenhouse company would grow marijuana for the producers for a specified price. The amount required under the agreements was so large the greenhouse company constructed a custom cultivation facility at a cost of $1.3M enabling it to grow up to 50 thousand kilograms per year. The new facility was completed in February of this year, at which point it went into production.

Cannabis Producers Refuse Delivery of Product

When the greenhouse company attempted to deliver the product to Canopy, Canopy refused the delivery, citing a drop in wholesale prices for cannabis. Canopy said that the price had dropped below what was set in the agreement with the greenhouse company, and therefore, the original set price in the contract was no longer reasonable.

This has left the greenhouse company with 7,500 kilograms of cannabis plants, and a number of unpaid debts to third-party contractors engaged to finish building the new facility. The suit is in the early stages at this point, with the greenhouse company having served the Statement of Claim to Canopy. Canopy released a brief statement, saying the suit is without merit and that the company plans to vigorously defend the claims in court. We will monitor this case and provide updates as they become available.

The lawsuit coincides with Canopy’s recent high-profile collaboration with Martha Stewart, which saw the launch of several CBD products in America. The product line, which includes gummies, oils and soft gels, is set to be distributed in America only, with no plans to launch in Canada for the time being.

Cannabis Sales Declined at Beginning of Pandemic but Have Mostly Recovered

Cannabis retail sales in general have seen ups and downs since the industry was legalized in October 2018. There was a notable decline in sales across the country in September of last year, with New Brunswick being the hardest-hit province with a 40% drop in sales. In comparison, Ontario saw a 6% decline in the same month. Some experts chalked it up to the shorter month, while others saw it as part of a ‘back to school’ phenomenon, with people naturally consuming fewer recreational drugs in September than they would have during the summer months.

Since the pandemic hit Canada in early March, many retailers were forced to close initially as part of the province’s emergency order requiring all non-essential businesses to close temporarily to slow the spread of COVID-19. The stores were allowed to resume business again in April, however through curbside pickup only. Many shops only accepted debit or credit card payments during that time, which affected sales. One Ottawa store owner said that cash transactions normally account for 1/3 of her business, so there was still a noticeable drop once they resumed limited services.

Again, the country has been up and down, without a consistent trend province-to-province since March. In the statistics comparing March to April, some provinces experienced declines, including many maritime provinces and Ontario, while others saw a dramatic increase in sales. Alberta, for example, saw sales grow by nearly 5%. Ontario, in comparison, saw a decline of 9.6% in the same period.

For Skilled Guidance Through Ontario’s Cannabis Retail Industry, Contact GLG LLP in Toronto

At GLG LLP, our business lawyers provide a full range of services to Ontario’s growing cannabis industry. They advise clients with respect to licencing, regulation and operations for new and existing cannabis retailers and cultivators. To speak with a lawyer, please contact the firm online or call 416-272-7557.