More uncertainty for Canadian cannabis as class-action suits filed in U.S.
TORONTO -- Canada’s cannabis industry could be in for another hit.
At least nine U.S. law firms have launched proposed class-action lawsuits in American courts against three major Canadian cannabis producers: Canopy Growth, Aurora Cannabis and Hexo Corp. While they vary from case-to-case, the allegations include releasing misleading inventory information and overstating the potential for sales.
To make matters worse for the industry, cannabis stocks have dropped 75 per cent in the past two years, down to US$44 per share currently compared to US$180 in Jan. 2018, according to the global cannabis stock index.
Whether the proposed class-action lawsuits will discourage investors from backing Canadian cannabis is “very hard to say,” according to Toronto-based lawyer Paul-Erik Veel.
“That’s the million dollar question,” Veel, a partner at Lenczner Slaght, told CTV’s Your Morning on Monday.
“To some extent, class-action lawsuits are a normal part of a growing industry. This isn’t unique to cannabis. All industries see them. But certainly it’s going to be something that’s going to cause investors to think twice before they invest in this industry.”
The proposed class-action cases raise deeper questions about the strength of the burgeoning industry. Last week, Aurora Cannabis – one of the world’s largest cannabis companies with operations in 25 countries -- eliminated 500 positions in Canada and announced the sudden retirement of its CEO Terry Booth. Days before, Nanaimo-based Tilray Inc. laid off 10 per cent of its workforce.
For the moment the class-action cases are limited to the U.S. But it’s possible that similar cases could be filed in Canada, Veel said.
“In Canada, these types of issues are burbling. Certainly the very same things these companies are being sued for in the U.S. they can be sued for in Canada. So I think this is something that we could see potentially coming down the pipeline,” he said.
COMPANIES ACCUSED OF MISLEADING MARKET
Last month, U.S. firm Robbins Geller Rudman & Dowd LLP filed a class-action suit against Aurora Cannabis alleging, among other things, that the company “failed to disclose that they had materially overstated the demand and potential market for Aurora’s consumer cannabis products.”
Earlier in January, New-York based Pawar Law Group filed a similar class-action lawsuit alleging that Hexo Corp., based in Ottawa, cultivated cannabis that was not licensed by Health Canada and released public statements that were “materially false and misleading at all relevant times.”
Canopy Growth is the subject of a proposed class-action case by Rosen Law Firm alleging, in part, that the company “exaggerated and/or overestimated the potential market for its products in Canadian retail stores.”
But even if the cases do make it to court, the allegations will still need to be proven before a judge, Veel said.
“It may be that the companies were doing the very best that they could with the information they had at the time and they just thought they were going to do better than they did and they got it wrong in hindsight. It still remains to be seen whether any of these claims actually have any merit.”
BLACK-MARKET POT STILL CHEAPER: REPORT
Experts say the cannabis industry needs to adjust its prices after a recent Statistics Canada report found that illegal cannabis is significantly cheaper than legal cannabis.
According to crowdsourced data collected by the government agency and released last month, the average price of legal cannabis increased to $10.30 per gram versus $5.73 per gram for black-market pot. Those figures reflect prices between October and December 2019.
Delays in opening new dispensaries in Ontario may also be playing a role.
Aphria Inc., a cannabis company based in Leamington, Ont., blamed the Ontario government’s delay in approving licenses for new cannabis stores to its decision to cut its revenue outlook for 2020. The company expects a net revenue of between $575 million and $625 million, down from $650 to $700 million.
The province recently announced that it would drop its lottery-based system to allowing select business owners to open pot stores. Anyone hoping to open a new dispensary may need to wait until the spring.