A Little Bird Told Us: A Rumor About Marijuana Business Licensing Limits & the OLCC

According to common sense, legislative trends, and a well-sourced rumor, Oregon’s Liquor Control Commission (OLCC) is considering imposing a cap or limit on the number of licenses available to the state’s marijuana industry, possibly in the fall of 2018. While there has been no official statement on this topic and the OLCC has historically not acted to impose limitations in the dead of night, nevertheless, prospective marijuana business owners and entrepreneurs may want to consider submitting their licensing applications sooner rather than later.

Currently, Oregon is one of the easiest states in which to obtain a marijuana business license. The legislature repealed the recreational program’s prohibitive residency requirements in 2016, application fees are relatively low, and companies have permission to vertically integrate their businesses. Historically, Oregon has had an active and unregulated medical cannabis market; in 1973 it became the first state to decriminalize possession of small amounts of marijuana, which has led to decades of serving as the country’s primary producer of product on the black market according to Oregon State Police. Legislators hope low barriers to market entry and subsequent regulation of the state’s cannabis industry participants will quell many of these issues. In addition to these historically motivated low barriers to entry, there is no cap on the number of licenses granted to marijuana producers, processors, wholesalers, or retailers.

Oregon does impose some limitations on industry participants, such as canopy limits for growers (i.e. the size of the licensed land or premises that can be used to cultivate plants). Further, a report first made public in June 2017 prepared by the Oregon State Governor’s Office describes the state’s robust system of regulating marijuana in a way that safeguards public safety, but also acknowledges the state’s problem with overproduction and it’s growers’ continued participation in the black market. The report acknowledges that new laws may be necessary to help suppress this ongoing activity, including increased penalties for marijuana-related crimes or possible limits on growers. This report may signal that Oregon government leaders are willing to impose license caps in the near future if this illicit activity continues in order to ensure state compliance with federal guidelines, as well as to ensure the integrity of its own marijuana market and regulatory structure.

Oregon has also opted to impose license quotas in other highly regulated industries within its borders. For example, most cities authorize population-proportionate allocations of taxicab licenses. (e.g. Baker City Code of Ordinances § 116.23: maximum of 1 license per 1,500 residents; etc.) With respect to more obscure yet state-regulated activity, Oregon State imposes a limit of 16 licenses for commercial or exhibition holding of Rocky Mountain elk, and/or Roosevelt elk and their hybrids – although an exception does exist; there is no limit on the number of these licenses the Department may issue for holding Type 1 species if sought for scientific research, education or conservation operations. The report taken together with Oregon’s willingness to impose license caps in other industries may provide some objective evidence in support of Oregon’s future imposition of license caps on the state marijuana industry.

Across the country, some states limit the number of marijuana business licenses available through predictive market-need studies, zoning codes, or density-proportionate calculations, among others. Licensing limits the number of players in a market, and quota systems further decrease competition with respect to businesses operating in a particular industry by imposing a predetermined limit on market participants as opposed to allowing the market to regulate itself by letting consumers speak with the dollar – a policy that is good for businesses in license-capped states. However, in these quota states, second-hand and sometimes black-markets often control the purchase, sale, and transfer of coveted licenses, demanding hefty sums of money. For example, liquor licenses have reportedly recently traded for $1 million and $1.6 million in Montana and New Jersey, respectively. Other states choose not to cap the number of available licenses and instead allow each market to find its own sustainable saturation equilibrium. Each solution presents advantages and drawbacks.

Quota systems also serve to limit the amount of a product or service available in an area, and overproduction is likely the issue Oregon will attempt to address through impending licensing caps. Marijuana production in Oregon far outpaces demand, according to a report titled “A Baseline Evaluation of Cannabis Enforcement Priorities in Oregon.” According to law enforcement, overproduction encourages Oregon producers to participate in the black market and undermines the state’s recreational and medical cannabis regulatory scheme.

In 2017, Oregon State Police released a study providing evidence connecting illegal external markets and in-state overproduction of marijuana. Despite having a relatively low population compared to others states regulating recreational marijuana, Oregon has a diversion rate (the amount of marijuana otherwise legally produced that gets diverted from the host state to states where it is illegal) comparable to much larger, more densely populated states; by way of example, it has twice the diversion rate of Washington State despite having half the population. Additionally, six counties in Oregon, taken together, are the confirmed source of illegally exported cannabis conservatively valued between $13.4 million and $19.2 million in the ten years between 2006 and 2016. The report argues that these figures constitute evidence that production has been pushed “far beyond satiation of local demand” in Oregon.

As a result, our experts predict Oregon will cap production licenses; processor and retailer licenses will probably not be subjected to these numerical limitations; the earliest the OLCC would impose these regulations is likely in the fall of 2018. If you own or operate a marijuana business in Oregon, consider contacting an attorney to understand how these changes can affect you. If you are considering entering the marijuana market, it’s a good idea to consider expediting your application timeline to ensure you timely receive your license.

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