//Former dispensary operator sues Ontario over ‘arbitrary’ and ‘unlawful’ cannabis retail lottery

Former dispensary operator sues Ontario over ‘arbitrary’ and ‘unlawful’ cannabis retail lottery

A former cannabis dispensary operator who owns a coffee shop in downtown Toronto is suing the Ontario government for $1.1 million in damages that he claims he incurred because of the Ford government’s abrupt December decision to cap the initial number of cannabis retail licenses at 25.

A statement of claim filed by Cannabis & Coffee Inc. against the Alcohol and Gaming Commission of Ontario (AGCO) and the Attorney General’s Office, states the coffee shop had been “structuring its operations and incurring expenses” for the past year in anticipation of obtaining a retail license that would enable the owner to turn his coffee shop into a cannabis store.

Those expenses include the cost of purchasing the business, legal fees, rent, and salaries of employees over the past year.

“We were told something by the Ford government, and then there was this complete 180 degree turn from qualified applicants to random applicants. It was kind of ridiculous,” said Chris James, owner of Cannabis & Coffee.

When the Ford government came into power last summer, it announced a repeal of the provincial-run retail system for cannabis proposed by the Liberal government, and instead proposed that any private operator would be eligible to apply for a licence to open a cannabis store.

Months later, citing a “severe supply shortage” of cannabis, the province reversed course and imposed a limit of 25 licences, which would be handed out through a randomized lottery system.

“The retail license lottery engaged in by the Defendants is arbitrary and thus unlawful, and has deprived the Plaintiff of a reasonable opportunity to acquire a license it has suffered tremendous financial harm preparing for the acquisition of,” the statement of claim read.

“This is fundamentally a story about a callous bureaucracy that has been totally comfortable allowing innocent small business owners like my client to dangle on a thread and spend precious business funds and then yank the rug out from under them,” said Daniel Sommers of Sommers Business Law who is representing Cannabis & Coffee in the lawsuit.

James had previously told the Financial Post that he signed a lease on his coffee shop with the long-term intention of converting the space into a cannabis retail store, hence the name “Cannabis & Coffee.”

James has been involved in the cannabis space for over a decade, operating an unlicensed online dispensary in Toronto called Weedora. He says that he shut down the dispensary in advance of legalization, complying with the rules laid out by both the federal government and the province in the hope that he would be able to participate in the legal market.

“Now we have a crazy system where people who know nothing about the business are being the front for these giant companies. It just doesn’t make any sense,” said James.

When the AGCO — the provincial body in charge of regulating the cannabis retail system — announced the 25 lottery winners, a majority of them ended being sole proprietors with no prior experience in the cannabis space, or in many cases, even in the retail space. That sparked intense criticism and outcry from seasoned retail operators and current cannabis industry participants who were hoping to leverage their expertise to open cannabis shops across Ontario.

Now we have a crazy system where people who know nothing about the business are being the front for these giant companies

Chris James, owner of Cannabis & Coffee

What ensued, in the days following the lottery, was an industry-wide scramble involving existing cannabis businesses, licensed producers, consultants and lawyers to craft deals with the 25 lottery winners that would still be in compliance of AGCO rules preventing the winners from ceding control of their business.

A number of cannabis companies including Canopy Growth Corp., Newstrike Brands Ltd. and High Tide Inc. have already affiliated themselves with lottery winners.

Most notably, Canopy Growth Corp. entered into an agreement with convenience store operator Alimentation Couche-Tard Inc. last week that also involved one of the province’s lottery winners. Both companies hope that pending a public consultation, the agreement will result in the opening of a Tweed-branded store in London, Ont.

“Is this lottery system designed to really help small business owners, like Ford said, or is it really a front to just let big companies take over the reins of some inexperienced business owners?” asked James. “All I really want is a fair system, and not this backroom dealing we are seeing.”

As part of the lawsuit, Cannabis & Coffee is also seeking for the province to grant it a cannabis retail license, in addition to the $1.1 million in alleged incurred expenses.

James is making the claims despite not having participated in the initial lottery.

He says he was hoping to enter into some kind of arrangement with a lottery winner and thought he would be disqualified from doing so if he participated in the lottery.

James, however, said no lottery winner ended up getting in touch with him.

“It seemed like the licenced producers had head hunters who were reaching out to these lottery winners so they didn’t even have the opportunity to reach out to me because they were being bombarded,” he said.

In an email to the Financial Post, the AGCO said they had not received notification of the lawsuit. The Attorney General’s office did not respond to a request for comment.

The province hopes to have 25 cannabis retail stores open by April 1, although no store locations have been definitively approved to date.

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