If you are in the cannabis industry in Oklahoma, then you have probably heard the term “consignment” thrown around… a lot. I hear it a lot. And it bothers me.
Not because I have a problem with selling goods on consignment. Of course not. Business people should be free to engage in whatever sort of transactional arrangement suits their fancy.
I take issue with how the word consignment is used in the vast majority of cannabis transactions that I’ve seen in the state. Quite simply, both cultivators and processors, as well as retail purchasing managers, are using the term incorrectly. In this article, I’m going to explain what is actually going on in the most common situations and what terminology should actually be used.
What is a Consignment in the sale of goods?
Let’s start with the basic definition of consignment. Black’s Law Dictionary explains that a consignment sale is “a sale of an owner’s property (such as clothing or furniture) by a third party entrusted to make the sale.” (8th edition, 2004).
[Author’s Note: Oklahoma has adopted the Uniform Commercial Code which governs the sale of goods and has very specific definitions in relation to consignment of goods, but for purposes of this article, let’s keep it simple].
Quite simply, consignment is the act of authorizing someone else to sell your goods.
So what’s going on here, legally, with regards to rights? Good question.
In a true consignment situation, the third party who is selling the goods does not have title to the goods, but does have authority to transfer title. This person is actually acting as a bailee in possession of the property. The law surrounding bailments would apply.
The bailor gives the goods to the bailee. This happens all the time. You take your car to the mechanic and leave it there to be repaired. You own the car, you have legal title. But you have now authorized the mechanic to be in possession of the car.
Parties that act as bailees have certain rights and obligations. For example, the Bailee has the right to sue to recover damages to the property. This right is derived from the bailee’s duty to take reasonable care of the property, as the Bailee can sued by the owner if the property is damaged while in the bailee’s possession.
So a Consignment Sale is a form of Bailment. The owner of the goods gives possession to a bailee (or consignment shop) with specific authority to sell the goods at a predetermined price.
The difference between Consignment Authority and Net Payment Terms
Now back to the Oklahoma cannabis industry.
It is very common to hear dispensary purchasing managers ask Growers if “they do consignment?” A typical conversation will go something like this:
Grower: “Hi, I have some Wedding Cake for sale. It’s 20% THC and it’s only $2,200, a real deal for this type of quality.”
Dispensary: “This is real nice. I’d love to purchase this right now, but we are tight on cash.”
Then it comes….
Dispensary: “Wait… Do you do consignment?”
Grower: “Well, I normally like to get my money up front, but I really want to work with your store… so yes, we can do consignment and I’ll pick up the cash next week.”
Dispensary: “Oh that would be great. Do you have an invoice with you?”
Grower: “Yes, here is the invoice/manifest for this flower to your store, with the total price at the bottom.”
Now what just happened is not a consignment. At least, it’s not clear that the parties intended a consignment. No, this was a sales transaction.
Instead of consigning the goods, the Grower sold the goods to the Dispensary for the sum of $2,200. The fact that the goods were delivered prior to the payment of the purchase price does not void the title to the goods that were sold.
In this example, the Dispensary is now the lawful owner of the Wedding Cake flower, even though they have not yet paid for the flower. The Dispensary can sell the flower to consumers, and keep the proceeds from those individual sales. The proceeds of those sales belong to the Dispensary, not the Grower.
This arrangement is not a consignment. In a true consignment, the Dispensary would be holding the flower, waiting for customers to come in and purchase it. Typically, there would be a fee, such as a commission, paid to the consignee/bailee (Dispensary) after the sale is made. The funds from the transaction would actually belong to the consignor, and therefore should be set aside in escrow to be paid to the consignor, less the consignment fee.
None of that is going on in these day-to-day cannabis transactions between the wholesaler and the retailer. Instead, these growers and dispensaries are simply doing what the rest of the business world already does: extending credit to their customers.
Extending Credit to a Commercial Purchaser is a common practice in all industries, including the Oklahoma Cannabis industry
The extension of credit, from seller to buyer, is a normal aspect of trade, and the Cannabis industry is not unique in that regard.
An invoice with “Net 15” or “Net 30” is simply a form of trade credit, installment credit, etc. There are many names for it but the concept is the same. Sometimes finance charges are applied. Sometimes late charges are applied. But title is transferred upon delivery. That is the important concept to remember.
All parties to a transaction will benefit from using the proper terminology, because it will clarify the rights and obligations of the parties. In a typical cannabis transaction between a Grower and a Dispensary, the Grower is extending trade credit to the Dispensary by allowing the Dispensary to pay for the goods after delivery and acceptance of the goods.
Growers and Processors cannot legally consign Cannabis to a Dispensary in Oklahoma
Under Oklahoma law, a true consignment arrangement between a Grower and a Dispensary would not be legal.
A commercial Grower can only sell flower to a Dispensary or to a Processor, but not to a patient/consumer. Under a true consignment arrangement, the Dispensary would be selling on behalf of the Grower to the Patient, and holding those funds in escrow to be paid to the Grower less the consignment fee. This would not be legal, and nobody would ever agree to this anyway.
When is Consignment of cannabis legal in Oklahoma?
Not all consignment or bailment arrangements are illegal in Oklahoma. A grower or processor can hire a transportation company (bailment) to transport the goods. The transporter is in lawful possession but not title to the goods.
A grower (or processor) can hire a licensed transportation company to act as a broker or distributor of the goods, which would be a true consignment arrangement. The broker would pick up the goods, store them at a secure and licensed location, and advertise the goods to potential buyers (i.e. dispensaries). Once the broker finds a buyer, the broker would close the sale and remit payment to the grower.
Cannabis Purchasing Managers should use the correct terminology when buying goods
Many folks in the Oklahoma cannabis industry are using the wrong terminology. Let’s help each other by using the correct terminology and sharing this information.
When negotiating a purchase of flower, a Dispensary Purchasing Manager should not ask the grower if he would be open to a consignment arrangement. Instead, the purchasing manager should ask if the grower would extend credit, for example, for 7 days. The grower could respond that the payment on the invoice is due “Net 7.”
About the Author
Travis C Smith is an attorney with offices in Oklahoma City, Oklahoma and can be contacted here.