Common Practice Understanding pay-to-stay and slotting fee agreements

With the rollout of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), there are a lot of are “pay-to-stay” and slotting fee agreements being made between cannabis cultivators, manufacturers, distributors and retailers. In these agreements, cultivators, manufacturers and distributors are locking retailers into contracts for dedicated, primetime shelf space. The question, though, is whether such agreements are kosher in California and what you need to know to have a reliable, enforceable, pay-to-stay contract.

Here in California, licensees pretty much have free rein to contract for whatever they want, for however long they want, without fear of interference from state regulators (so long as such agreements basically don’t amount to anti-competitive behavior). In addition, in case you’re thinking that licensee contracts don’t matter, California already passed legislation ensuring that commercial cannabis contracts are indeed enforceable in state court so that no one is left holding the bag over some illegality defense to performance.

On to the slotting fee and pay-to-stay agreements. When you walk into the grocery store, the retailer likely isn’t just arranging products by name or color. In fact, what’s likely going on is that certain shelf space for new products has been negotiated and paid for by a manufacturer—and with good reason. In commodities, especially saturated ones, face time with consumers isn’t great, margins can be really poor and the competition is vast. In California, only cannabis retailers can sell to the public, so it’s hugely important for wholesale and distributor licensees to have good placement on shelf space in dispensaries and on the retailers’ online menus. The slotting fee agreement essentially amounts to the lump sum fee the supplier pays to the retailer to reserve their sacred, strategic shelf space. The pay-to-stay agreement (which can be similar to the slotting fee) typically takes things a step further where it’s instituted after the initial slot and addresses issues for existing products like marketing, promotion, inventory stocking, failure fees and paying extra to ensure that your competitors don’t get any valuable shelf space near you or at all.

“In California, only cannabis retailers can sell to the public, so it’s hugely important for wholesale and distributor licensees to have good placement on shelf space in dispensaries and on the retailers’ online menus.”

 

What should go into these contracts? Like any other agreement, if you’re the supplier, you want to fully articulate exactly where your placement will be in the store, how often that placement occurs, your inventory schedule, what happens in the event you cannot deliver on the inventory, what happens if no one wants your product despite its placement, what happens if the retailer (for its own benefit) wants to place another, better performing product in close proximity to yours, and the list goes on and on. Suppliers of cannabis in California should not be paying robust slotting fees to retailers willy-nilly.

You’ve probably already concluded that the companies that can afford the highest slotting fees are the ones that will make it to the shelves of cannabis retailers in California. And you’re likely not wrong, since retailers also have to financially survive in this newly regulated marketplace and slotting fee agreements certainly help to allocate the risk on what products to buy and resell (or not). In addition, the bigger cannabis brands may not even face the prospect of these contracts from retailers because the retailers desperately want to carry on them on their shelves anyway.

That begs the question, then, of whether slotting fee agreements and pay-to-stay contracts are actually anti-competitive in violation of MAUCRSA. There’s no doubt that they certainly could be, if retailers band together and start to create extremely high, universal slotting fees or if suppliers decide to lock up entire dispensaries. The upside, though, could be that retailers are actually more willing to take on new products since they shift liabilities for their failure back to the supplier. The slotting relationship makes product distribution more efficient, and consumers can benefit from lower prices where the retailer can better allocate its risk on investing in the presentation of new products. In any event, state regulators have stayed silent on this practice for now.

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