High Risk Of Second Requests In The Cannabis Industry

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP

The cannabis industry faced heightened antitrust scrutiny from the Department of Justice (DOJ) in 2019.  There were public reports regarding several “Second Requests” seeking information about potential cannabis transactions.  Second Requests are a part of expensive and time-consuming antitrust investigations typically issued in the approximately 2 percent of transactions that present significant anticompetitive concerns.  To have several Second Requests within a short period of time in the same industry, particularly in an emerging industry such as cannabis, appeared unusual to many observers.  Recent events have shed light on some possible reasons for DOJ’s heightened focus.

John Elias, a career DOJ antitrust attorney, recently testified before the House Judiciary Committee about the DOJ’s cannabis antitrust investigations, claiming the DOJ was not motivated by concern over anticompetitive effects but instead was driven by Attorney General William Barr’s animosity towards the cannabis industry.  During his testimony, Elias explained that there had been ten full-scale investigations into cannabis deals since March 2019, accounting for 29% of the DOJ’s second requests in 2019, and, according to Elias, none were motivated by antitrust concerns:  “While these were nominally antitrust investigations, and used antitrust investigative authorities, they were not bona fide antitrust investigations.”  Elias claimed Makan Delrahim, Assistant Attorney General for the DOJ’s Antitrust Division, acknowledged as much in an all-staff meeting, informing staff that the investigations were the result of Barr’s disdain for the cannabis industry.  Elias’s testimony also detailed the burdens imposed by these Second Requests on the cannabis companies involved.

The DOJ’s Office of Professional Responsibility (OPR) investigated Elias’s claims and concluded that the DOJ’s actions “were consistent with all applicable laws, regulations, and DOJ guidelines. . . .”  According to OPR, it was permissible for the DOJ to issue Second Requests to learn more about an industry that presented a “unique challenge.”  Most notably, OPR went on to conclude given the “latitude [DOJ] has in issuing Second Requests,” “even if the whistleblowers’ allegations were true,” the Second Requests still “would not have violated any relevant laws, regulations, rules, policies, or guidelines.”

Regardless of the DOJ’s reasoning for issuing Second Requests in cannabis deals, what is clear is that the DOJ has given these deals an unusually high level of scrutiny, and the likelihood of its issuing a Second Request in a cannabis deal is far higher than the usual two percent  Consequently, cannabis companies contemplating a transaction should consider the risks associated with an antitrust investigation and potential Second Request when negotiating deal terms.  They should also double-check whether a Hart-Scott-Rodino (HSR) filing is truly required for a potential transaction (Elias’s testimony noted that after issuing one Second Request, the companies revisited their HSR analysis and determined that they should not have filed HSR forms in the first place).  If a cannabis deal moves forward, the companies involved should have a plan in place for dealing with the DOJ if a Second Request is issued.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Sheppard Mullin Richter & Hampton LLP

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