A high-stakes lawsuit that Canopy Growth and other Ontario, Canada, cannabis companies had hoped would disappear along with their ill-fated PharmHouse joint venture has been revived and refiled.
The new lawsuit seeks 500 million Canadian dollars ($394 million) and is loaded with more details and allegations than a related suit filed last August and later set aside after PharmHouse was granted creditor protection.
A group of cannabis companies, including Canopy Growth, is being accused of entering into the PharmHouse joint venture nearly three years ago to mass produce cannabis “solely” to pump their stock prices and earn profits for company insiders, according to the new lawsuit filed in February in the Ontario Superior Court of Justice.
The companies, however, didn’t intend to honor agreements to purchase cannabis from PharmHouse, given that they had more than enough product lined up from other sources, according to the lawsuit.
The suit, filed on behalf of 2615975 Ontario, seeks damages for bad faith, fraud, civil conspiracy and breach of fiduciary duty, according to court documents obtained by Marijuana Business Daily.
The numbered company was formed in 2018 to participate in the joint venture with Canopy Rivers by a group of investors that included Paul Mastronardi, CEO of Mastronardi Produce, a leading vegetable greenhouse grower in Ontario and the owner behind the Sunset produce brand.
In addition to Canopy Growth, the defendants named in the suit include former Canopy Growth subsidiary Canopy Rivers, TerrAscend and its Canadian arm as well as Olivier Dufourmantelle. Dufourmantelle was the sole director of PharmHouse, a former chief operating officer of Canopy Rivers and ex-senior vice president at Canopy Growth.
PharmHouse, listed as a defendant in the August lawsuit, is not a defendant on the recommenced claim.
In 2020, Canopy Growth increased its ownership stake in TerrAscend and split with its subsidiary, Canopy Rivers, which is now called RIV Capital.
A spokesperson for RIV Capital told MJBizDaily the claims in the new suit are “entirely without merit” and the company plans to “vigorously defend against what we consider to be baseless claims.”
In a separate statement to MJBizDaily, RIV CEO Narbe Alexandrian said, “We are extremely disappointed with the devolution of our partnership with the majority owners of PharmHouse, but we have remained focused on navigating the challenges at PharmHouse to maximize value preservation for both PharmHouse and our shareholders.”
Canopy Growth said it hasn’t been served with the suit and that it doesn’t comment on pending litigation. Other companies did not comment immediately, and Dufourmantelle couldn’t be reached for comment.
Alleged stock pump
The August suit was halted after PharmHouse was granted creditor protection under the Companies’ Creditors Arrangement Act the following month – meaning there was no ability to proceed with that litigation because it was caught in the PharmHouse insolvency filing.
However, in October a judge allowed the plaintiff to discontinue the stayed action, opening the door for the claim to be reissued outside the PharmHouse insolvency process in 2021.
The new lawsuit adds parties to the defendant list, namely Dufourmantelle, and adds allegations with respect to the motivations for the venture, including pumping stock prices to earn profits for insiders such as Canopy Growth co-founders Bruce Linton and Mark Zekulin, in addition to others.
In essence, the new lawsuit is less about failed offtake agreements to purchase cannabis and more about the intentions of the defendants in striking the joint venture in the first place.
The lawsuit claims the most important part of the greenhouse joint venture was the news release, and the defendants weren’t serious about honoring the offtake agreements or “building a cannabis empire” together.
Instead, 2615975 Ontario alleges, the defendants hoped the news of the PharmHouse joint venture would push up their stocks.
“The defendants knew and intended that these news releases would cause the market to react positively and result in the increase of their respective share prices, which was the sole intention of the defendants in pitching and inducing the Plaintiff to enter into the PharmHouse joint venture,” according to the suit.
In its statement of claim, 2615975 Ontario said Canopy Rivers, Canopy Growth and TerrAscend “effectively acted in concert and as one with respect to PharmHouse.”
The core of the joint venture business, the lawsuit alleges, involved:
- Promises by Canopy Rivers to broker purchase, or offtake, deals.
- An agreement by Canopy and its partners to purchase a set amount of cannabis flower from PharmHouse at fixed prices – even though the companies had secured more than enough marijuana to meet their needs from other sources.
“Unbeknownst to the plaintiff at the time, the defendants already had production facilities and/or agreements with other cannabis flower producers which were capable of producing more than 10 times the amount of cannabis flower which the defendants were actually capable of selling and/or processing,” the lawsuit alleges.
Significant oversupply
When the gigantic 1.3 million-square-foot greenhouse produced its first commercial cannabis flower last year, Canopy Growth and TerrAscend Canada refused to accept delivery “for no justifiable reason and on the (basis) that they already had more product than they could actually use and that the market price per gram of cannabis flower had fallen lower than the fixed-price guaranteed to PharmHouse in the offtake agreements,” the lawsuit claims.
The suit alleges that, flush with cannabis, “Canopy Growth specifically manufactured a quality control and inspection regime which included impossible quality standards designed to ensure that any product produced by PharmHouse would fail inspection regardless of actual quality” in order to reject the flower produced by PharmHouse.
The inspection regime was so rigorous that Canopy’s own cultivation would not have passed, the claim says.
With no buyer for the cannabis, PharmHouse was unable to make payroll or meet financing obligations and entered creditor protection last year.
The lawsuit also alleges “the defendants were not concerned with the significant oversupply of cannabis flower which they had available to them.”
Rather, “their sole focus” was forming the cultivation joint venture “to artificially inflate the value of their respective share prices to earn profits for a select group of insiders,” including Canopy co-founders Linton and Zekulin, Canopy Chief Legal Officer Phil Shaer and Dufourmantelle.
The suit contends “the defendants’ strategy to unjustly enrich themselves at the Plaintiff’s expense was successful,” highlighting in excess of CA$75 million in stock-sale proceeds pocketed by Canopy insiders after issuing news releases related to the venture.
Billions in losses
As Marijuana Business Daily reported in January 2018, the largest Canadian producers had bankrolled more than enough production to meet demand for adult-use cannabis in the early years of legalization.
Despite that, the companies continued to add millions more square footage of cultivation space – to the point where cannabis became the fourth-largest greenhouse crop in Canada in terms of harvest area.
That subsequently resulted in a massive oversupply of cannabis, falling wholesale prices and uneconomical large greenhouses across the country, leading to billions of dollars in losses for certain producers.
All told, about a dozen licensed producers lost more than CA$5 billion since cannabis was legalized in Canada – largely as a consequence of the greenhouse building binge in Canada and overseas.
Canopy Growth alone lost CA$1.3 billion in 2020.
As of mid-2020, the plaintiff had put more than 100 million Canadian dollars ($79 million) into the property, equipment and product, the suit claims.
In addition to financial loss, the plaintiff also claims its credibility took a hit in the community and greenhouse industry after the joint venture was unable to pay its bills “as a result of the conduct of the defendants.”
In an emailed statement to MJBizDaily, a RIV Capital spokesperson said:
“On February 10, 2021 we received an updated statement of claim from 2615975 Ontario Ltd., the majority owners of PharmHouse and the principal shareholders and operators of Mastronardi Produce Ltd. As with the original statement of claim filed in September 2020, we view the claim as it relates to our actions to be completely and entirely without merit. We intend to vigorously defend against what we consider to be baseless claims.”
PharmHouse entered into an asset-purchase agreement in early March as part of the sale and investment solicitation process led by BMO Capital Markets, RIV Capital announced last week.
No price was listed, and court approval of the sale is required.
Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at matt.lamers@mjbizdaily.com.