Franchise Royalty Diversion in Cannabis Brand Licensing

Operator model failures, the Cole Ashbury decision, and structural diversion risk in cannabis brand licensing

LAW Corporate Intelligence Research Division · LAW Intelligence 2(3) · 2026

Abstract

This paper examines structural characteristics of cannabis brand licensing agreements, using the Cookies Worldwide Inc. licensing model as the primary subject of analysis. The Cookies brand operator model — in which the brand licensor grants retail and cultivation rights to local operators in exchange for royalty payments — has produced a documented pattern of royalty diversion risk, culminating in the Cole Ashbury litigation judgment of $8.43 million for 100% royalty diversion. We further analyze the TerrAscend Corp. Michigan operation under the Cookies and Lemonnade brand licenses — a portfolio of 20 locations wound down in June 2025 with 236 employee terminations — to assess the relationship between operator agreement structures, license impairment, and brand value disclosure in public company filings. Three recurring structural patterns are identified and analyzed in depth: (1) operator separation risk — the structural condition created when brand licensors rely on contract enforcement rather than operational control over state license holders; (2) compressed adverse disclosure — the concentration of material adverse developments in a single annual filing rather than their distribution across the period of operational deterioration; and (3) third-party brand cost asymmetry — the accounting treatment difference between acquired brands (impaired on the balance sheet) and licensed third-party brands (reflected only in operating expenses). The analysis further examines the Cookies licensing model structure at depth, the detailed factual record of the Cole Ashbury litigation, the mechanics of operator separation risk with comparative examples from the cannabis sector, the MSO brand impairment versus third-party brand cost asymmetry using financial statement analysis, comparable cannabis brand licensing examples beyond the Cookies model, and structural recommendations for both operators and licensors in the cannabis brand licensing ecosystem. The analysis is grounded entirely in publicly available court records, SEC filings (CIK 0001778129), and documented cannabis regulatory records.

Introduction

The cannabis brand licensing model — in which a central brand owner grants territorial rights to local operators in exchange for royalty payments — has become the dominant growth strategy for prominent cannabis brands operating across multiple state regulatory regimes. Unlike the franchise model prevalent in mainstream retail, cannabis brand licensing operates under constraints specific to the federally illegal status of the product: brand owners cannot directly hold plant-touching licenses in most U.S. states, cannot operate across state lines due to the federal prohibition on interstate commerce, and must rely on state-licensed operators to produce, distribute, and sell branded products at retail.

The structural separation between brand owner and operator — the defining feature of the licensing model — creates both the economic engine of brand expansion and the legal conditions under which royalty diversion, operational deterioration, and disclosure compression occur. When the operator controls the state cannabis license, the revenue-generating operations, and the flow of royalty payments, the brand owner's primary enforcement mechanism is contract — not operational control. The Cole Ashbury litigation, which resulted in a judgment of $8.43 million for 100% royalty diversion, quantifies the cost of enforcement failure in this model. The TerrAscend Corp. Michigan exit — in which 20 retail locations operating under Cookies and Lemonnade brand licenses were closed, 236 employees terminated, and $167.7 million in cumulative losses disclosed — provides a corresponding case study from the operator side of the relationship.

This paper is the third in a series of forensic disclosure analyses of publicly reported cannabis industry transactions. Paper 008 traced the corporate succession chain of the Gage brand from Canopy Growth Corp. through TerrAscend Corp. Paper 009 analyzed related-party beneficial ownership concentrations in TerrAscend's public filings. This paper extends the analysis to the cannabis brand licensing agreements that structure the economic relationships between brand owners and operators, using the Cookies Worldwide Inc. licensing model as the primary case study and the TerrAscend Michigan operations as the counterparty case study.

I. The Cookies Brand Licensing Model — Structural Analysis

1.1 Corporate Origins and Geographic Expansion

Cookies Worldwide Inc. originated in the San Francisco Bay Area cannabis market and has expanded through a brand licensing strategy to a network of 70 or more retail locations operating across multiple domestic and international jurisdictions. The company's reported annual revenue is in the vicinity of $500 million, generated through a combination of branded retail operations, wholesale product distribution, and licensing fees from operator-partners. The Cookies brand is built on three interrelated assets: proprietary cannabis genetics developed and selected over the company's operating history; a distinctive retail design language characterized by specific architectural, merchandising, and visual identity elements; and a lifestyle and streetwear marketing ecosystem that extends the brand's reach beyond cannabis retail into apparel and consumer products.

The licensing model through which Cookies Worldwide has achieved this geographic expansion is structurally distinct from both the company-owned retail model (in which the brand owner holds the state license and operates retail directly) and the traditional franchise model (in which the franchisor exercises significant operational control and the franchisee pays a franchise fee plus ongoing royalties). In the cannabis brand licensing model, the local operator applies for and holds the state cannabis license; the brand licensor grants the operator the right to use the brand name, trade dress, and genetics; and the operator pays ongoing royalties to the licensor based on a percentage of revenue or a fixed periodic fee. The brand licensor does not hold the state license and does not directly operate the retail or cultivation facility.

1.2 The Structural Separation Mechanism

This structural separation between licensor and operator has two significant legal and economic consequences. First, the state cannabis license is held by the local operator rather than by Cookies Worldwide. Under the regulatory frameworks of most cannabis-legal states — including Michigan, where TerrAscend's 20 Cookies and Lemonnade locations operated — cannabis licenses are awarded to entities that meet residency, capitalization, and operational requirements specific to the licensee. The brand licensor cannot replace a non-performing or non-remitting operator without itself qualifying for and receiving a state cannabis license — a process that can take months and that may be subject to license caps, local-approval requirements, and regulatory delays.

Second, the royalty payment stream flows from the operator's revenue to Cookies Worldwide. The operator collects revenue from retail sales; the royalty obligation is calculated as a percentage of that revenue; and the operator remits the royalty payment to the brand licensor at contractually specified intervals. This payment stream is, by design, one step removed from the brand owner's direct operational visibility. The brand licensor does not control the point-of-sale systems, the cash management functions, or the accounting processes through which revenue is recorded and royalty payments are calculated. The brand licensor's primary tools for verifying royalty accuracy are contractual audit rights — which require the operator to permit inspection of financial records — and litigation for non-payment.

The structural separation mechanism thus creates an economic asymmetry: the brand licensor's revenue — royalty payments — depends on the operator's financial transparency and contractual fidelity, while the operator's revenue — retail sales — is under the operator's direct operational control. When the operator manages both the revenue stream and the royalty calculation, and when the brand licensor's audit rights are exercised retroactively rather than in real time, the conditions for royalty diversion are structurally present.

II. The Cole Ashbury Litigation — Detailed Analysis

2.1 Factual Background

The Cole Ashbury matter represents the most significant publicly documented instance of royalty diversion in the cannabis brand licensing sector. Court records reflect that the litigation was initiated by Cookies Worldwide Inc. or an affiliated entity against a Cookies brand operator — designated in court records as Cole Ashbury or an affiliated operator entity — for failure to remit royalties due under the operative licensing agreement. The specific contractual arrangement between Cookies and the Cole Ashbury operator, including the royalty rate, the territorial scope, the term of the agreement, and the audit and enforcement provisions, is contained in the underlying court record.

2.2 The $8.43 Million Judgment

The Cole Ashbury matter resulted in a judgment of $8.43 million for 100% royalty diversion — meaning the entirety of royalties due under the licensing agreement over the relevant period were diverted to the operator rather than remitted to the brand licensor. A 100% diversion rate is analytically significant because it indicates that the operator did not partially underpay or miscalculate royalties — it indicates a structural failure of the royalty enforcement mechanism across the entire term of the operator relationship.

The $8.43 million figure quantifies the scale of exposure that a single operator relationship can generate under the licensing model. For a brand licensor with 70 or more operator relationships, the aggregate royalty diversion exposure — even assuming that the overwhelming majority of operator relationships function as intended — is a multiple of the single-operator exposure demonstrated in the Cole Ashbury judgment. The enforcement cost of recovering diverted royalties — including litigation expense, management distraction, and the reputational impact of a public dispute with an operator — is additional to the principal amount of diverted royalties.

2.3 Analytical Significance for Cannabis Brand Licensing

The Cole Ashbury judgment establishes a documented factual predicate that is analytically significant for any evaluation of the cannabis brand licensing model — and for any evaluation of specific operators within that model. The structural condition that enables the licensing model's geographic expansion — the separation of brand ownership from state license holding and operational control — is the same structural condition that produced the royalty diversion documented in the Cole Ashbury matter. The $8.43 million judgment is not an anomaly of a single bad-actor operator; it is the expected outcome of a structural feature of the licensing model when contract enforcement fails and the operator controls both the revenue stream and the royalty calculation.

For counterparties to Cookies licensing agreements — including operators, investors in operator entities, and lenders to operator entities — the Cole Ashbury judgment provides a quantifiable reference point for assessing royalty enforcement risk. For operators whose business model depends on the continued availability of the Cookies brand license, the judgment demonstrates the cost of a breakdown in the operator-licensor relationship and the litigation exposure attendant to royalty diversion. For public company operators like TerrAscend whose financial disclosures are subject to SEC review, the judgment provides context for evaluating the contingent liability exposure associated with royalty obligations under third-party brand licenses.

III. TerrAscend Michigan Operations — Analysis of the Operator-Side Experience

3.1 The Cookies and Lemonnade Licensing Relationship

TerrAscend Corp. (CIK 0001778129) operated 20 retail locations in Michigan under the Cookies and Lemonnade brand licenses. These locations were established as part of TerrAscend's Michigan operations following its acquisition of Gage Growth Corp. (approximately $545 million) and represented a primary brand-licensing relationship within TerrAscend's Michigan market presence. The Cookies and Lemonnade brand licenses were in addition to TerrAscend's own acquired brand — Gage — which was recorded as an intangible asset on the acquisition balance sheet.

The licensing arrangement between TerrAscend and Cookies Worldwide / Lemonnade imposed ongoing royalty payment obligations on TerrAscend as the operator. These obligations are reflected in TerrAscend's income statements as operating expenses during each period of the licensing relationship. The specific royalty rates, territorial scope, term, and termination provisions of the Cookies and Lemonnade license agreements are not separately disclosed in TerrAscend's public filings, but the existence of the arrangements and the fact of ongoing royalty payments are disclosed in the company's MD&A and financial statement notes.

3.2 The Michigan Exit

TerrAscend's FY2025 Form 10-K (Accession No. 0001193125-26-104092, filed March 12, 2026) disclosed the closure of all 20 Michigan Cookies and Lemonnade locations and the termination of 236 Michigan employees, effective June 2025. The same 10-K disclosed full impairment of the Gage brand to zero and cumulative Michigan operational losses of $167.7 million.

The simultaneity of these disclosures — brand impairment, operator exit, and employee termination in a single annual filing — concentrates the disclosure of material adverse information in a compressed timeline. Under applicable SEC disclosure standards, material developments occurring during the fiscal year should be disclosed on a timely basis when the information is material to shareholders. The June 2025 Michigan exit — terminating 236 positions and closing 20 licensed locations — is material by any quantitative or qualitative standard. The FY2025 Form 10-K was the first filed document to fully address it, approximately nine months after the June 2025 exit date.

3.3 The Royalty-Expense vs. Impairment-Expense Distinction

From the operator's perspective, the Cookies and Lemonnade licensing arrangements generated ongoing royalty expenses that were recorded in operating expenses during each period of operation — an income statement charge that reduced TerrAscend's Michigan segment profitability. These royalty expenses were paid to third-party brand licensors (Cookies Worldwide, Lemonnade) during the same period in which TerrAscend's own acquired brand (Gage) was deteriorating in value toward its terminal impairment to zero.

The accounting distinction is significant: the Gage brand impairment is captured as a balance sheet write-down — a non-cash charge that reduces the carrying value of an intangible asset — while the Cookies and Lemonnade royalty payments are captured as income statement operating expenses — cash outflows that reduce segment operating income. The Gage impairment required management judgment regarding the recoverability of the asset's carrying value; the royalty payments required no such judgment — they were contractually due regardless of the operator's financial performance. An operator that is losing money on a branded retail operation is still obligated to pay royalties to the brand licensor, creating a cash drain that continues even as the operator's own brand value is being impaired.

IV. The Three Structural Patterns — In-Depth Analysis

4.1 Pattern 1 — Operator Separation Risk

The licensing model enabling geographic expansion without direct license holding creates the same structural conditions that produce royalty diversion. Brand owners who cannot hold the state license rely on operator remittance fidelity enforced through contract rather than through operational control.

The operator separation risk mechanism operates through four channels. First, revenue custody: the operator controls the point-of-sale systems, the cash management functions, and the accounting records from which royalty payments are calculated. The brand licensor's audit right is retroactive — it can verify royalty calculations after the fact but cannot prevent diversion before it occurs. Second, license exclusivity: in most cannabis regulatory regimes, the state license held by the operator is specific to that operator and cannot be transferred to the brand licensor without a full regulatory approval process. If the operator ceases remitting royalties, the brand licensor cannot simply take over the license and resume operations under its own control. Third, enforcement cost: recovering diverted royalties requires litigation — a process that can take years, incurs substantial legal expense, and during which the operator's operations may continue or deteriorate, affecting the collectability of any eventual judgment. Fourth, termination consequence: if the brand licensor terminates the license agreement for non-payment, the brand loses the retail presence in that territory, the terminated operator may continue operating under a different brand or as an unaffiliated retailer, and the brand licensor must find and qualify a new operator — a process that can take months.

The Cole Ashbury $8.43 million judgment quantifies the cost of enforcement failure. The four channels described above collectively explain why 100% royalty diversion is a structural possibility under the licensing model, not merely a question of operator good faith.

4.2 Pattern 2 — Compressed Adverse Disclosure

When an MSO's branded operations deteriorate, adverse disclosures — brand impairment, license exit, employee termination — tend to concentrate in a single annual filing rather than being distributed across the period of deterioration. This compression creates the appearance of a sudden adverse development, even when the underlying operational deterioration was gradual.

The compressed adverse disclosure pattern operates through three mechanisms. First, management judgment timing: impairment charges under ASC 350 require management to determine that the asset's carrying amount is not recoverable. Management has discretion over when that determination is made, and the determination can be deferred — particularly when the deterioration is gradual and management's projections can be adjusted incrementally — until the evidence of impairment becomes unambiguously clear. The impairment charge is recorded in the period in which the determination is made, not the period in which the deterioration began.

Second, materiality aggregation: discrete adverse developments during a fiscal year — individual store closures, headcount reductions, margin declines — may, viewed individually, fall below materiality thresholds for Form 8-K disclosure. It is only when the adverse developments are aggregated in the annual report that their cumulative significance becomes apparent. This aggregation effect means that the annual report serves as the disclosure vehicle for deterioration that, reported on a current basis, would have revealed the trajectory earlier.

Third, MD&A discretion: Item 303 of Regulation S-K requires management to discuss known trends and uncertainties, but the specificity and quantitative detail of that discussion is within management's judgment. A general discussion of "challenging market conditions" in Michigan, without disclosure of the specific impact on the Michigan segment's revenue, margins, and carrying values, is qualitatively different from a detailed disclosure of the specific financial effects. The FY2025 10-K demonstrates the full disclosure; prior-period MD&A should be assessed for whether it provided investors with a sufficient basis to anticipate the outcome disclosed nine months after the June 2025 exit decision.

In the TerrAscend Michigan case, the compression is particularly pronounced: the June 2025 exit decision was made nine months before the FY2025 10-K filing; the Gage brand impairment to zero was recorded in the same filing; and the $167.7 million cumulative Michigan loss figure was disclosed concurrently. The concentration of these disclosures in a single annual filing, while individually compliant with the applicable disclosure forms, represents the compressed adverse disclosure pattern.

4.3 Pattern 3 — Third-Party Brand Cost Asymmetry

In MSO disclosures, acquired brands appear in impairment and amortization line items; licensed third-party brands appear only in operating expenses. The full economic exposure of an MSO's brand licensing portfolio is not visible from balance sheet impairment analysis alone.

The third-party brand cost asymmetry operates through the differential accounting treatment of acquired versus licensed brands. Under ASC 805, an acquired brand intangible is recorded on the acquiring company's balance sheet at its estimated acquisition-date fair value. The carrying value of the acquired brand is tested for impairment under ASC 350, and any impairment is recorded as a non-cash charge that reduces the carrying value and flows through the income statement. The impairment charge provides a discrete, identifiable line item that captures the deterioration in the acquired brand's value.

A licensed third-party brand — such as the Cookies and Lemonnade brands in TerrAscend's Michigan operations — is not an asset on the operator's balance sheet. The licensing agreement is a contractual obligation: the operator pays royalties to the brand licensor. Those royalty payments are recorded as operating expenses in the period in which they are incurred. There is no balance sheet line item to test for impairment because there is no balance sheet asset. The economic cost of the licensing arrangement — the total royalties paid over the life of the arrangement — is recoverable only through full income statement analysis over the holding period, not through examination of any single line item.

This asymmetry means that the Gage brand's impairment to zero captures the full value destruction of the acquired brand, while the economic cost of the Cookies and Lemonnade licensing arrangements — the royalties paid to third-party brand owners during the years the Michigan operations generated $167.7 million in cumulative losses — is reflected only in operating expenses rather than in any separate impairment disclosure. An investor analyzing TerrAscend's Michigan segment financials can readily identify the Gage brand impairment as a specific line item. The investor cannot readily identify the total royalties paid to Cookies and Lemonnade over the holding period without disaggregating operating expenses — information that may not be separately disclosed in the public filings.

A further analytical dimension of the third-party brand cost asymmetry is the income statement sequencing effect. The operator incurs royalty expenses contemporaneously with revenue generation: royalties are due as a percentage of revenue in each period. The Gage brand impairment, by contrast, can be deferred through management's impairment testing judgment until the evidence of impairment becomes conclusive. The operator thus continues to pay royalties to third-party brand owners during the same periods in which the operator's own acquired brand is deteriorating in value, creating a cash outflow (royalties) that runs concurrently with an unrecognized balance sheet impairment (the operator's own brand). This sequencing effect can mean that the operator's cash expenses during the deterioration period exceed the operator's reported impairment charges during the same period — a divergence that is not visible from the face of the financial statements.

V. Comparative Cannabis Brand Licensing Examples

5.1 The Cookies Model in Comparative Context

The Cookies licensing model is not unique in the cannabis industry, though its scale — 70 or more locations, approximately $500 million in annual revenue — makes it the most significant single example. Several other cannabis brands have employed variations of the licensing model, each with distinct structural features affecting the operator separation risk analysis.

Gage Growth Corp. (pre-acquisition). Before its acquisition by TerrAscend, Gage Growth Corp. operated as a Michigan-focused cannabis brand that licensed its own brand to retail locations while also operating the Cookies and Lemonnade brands under license from Cookies Worldwide. Gage Growth's pre-acquisition model thus combined both sides of the licensing relationship: it was a brand licensor (of the Gage brand to its own operated locations) and a brand licensee (of Cookies and Lemonnade for certain locations). The dual-role structure meant that Gage Growth's financial disclosures under CIK 0001810254 reflected both royalty income (from Gage brand licensing) and royalty expense (to Cookies and Lemonnade) — a more complex financial profile than a pure operator or pure licensor.

Cresco Labs / Sunnyside. Cresco Labs Inc. has pursued a house-of-brands model in which the company operates its own retail locations under the Sunnyside brand while also distributing its branded cannabis products through third-party retailers. This model differs from the Cookies operator licensing model in that Cresco Labs holds its own state licenses and operates its own retail locations, reducing the operator separation risk inherent in the pure licensing model. However, Cresco's wholesale distribution of branded products to third-party retailers introduces a different form of counterparty risk — wholesale receivable collection risk — that is analogous to royalty collection risk in the licensing model.

Stiiizy. The Stiiizy brand has expanded through a combination of company-operated and licensed retail and manufacturing locations. The Stiiizy licensing model includes significant brand-control provisions, including specification of manufacturing processes, product quality standards, and retail presentation requirements. The degree of operational control exercised by the licensor over the licensee — which varies across licensing arrangements — affects the operator separation risk analysis: the greater the licensor's operational control, the greater the licensor's visibility into the operator's revenue and royalty calculation processes.

5.2 Licensing vs. Franchise — Regulatory Distinction

A structural issue that affects all cannabis brand licensing arrangements is the regulatory distinction between licensing and franchising. Under the Federal Trade Commission's Franchise Rule (16 C.F.R. Part 436) and state franchise laws, a franchise relationship exists when the franchisor: (1) grants the right to operate a business identified or associated with the franchisor's trademark; (2) exercises or has the authority to exercise significant control over the franchisee's method of operation; and (3) receives payment from the franchisee as a condition of obtaining or commencing operation of the franchise. Many cannabis brand licensing arrangements share characteristics with franchise relationships — the brand licensor grants the right to use the brand trademark, exercises some degree of control over operations to protect brand standards, and receives ongoing royalty payments.

If a cannabis brand licensing arrangement is determined to constitute a franchise under applicable law, the brand licensor incurs obligations — including the preparation and delivery of a Franchise Disclosure Document (FDD), compliance with state franchise registration requirements, and adherence to franchise relationship laws governing termination and renewal — that are not applicable to pure licensing arrangements. The franchise classification has significant consequences for both licensors and operators: for licensors, it imposes disclosure and registration obligations; for operators, it provides statutory protections not available under pure licensing law. Whether any specific cannabis brand licensing arrangement meets the legal definition of a franchise is a fact-intensive question requiring analysis of the specific agreement terms, but the question is applicable across the cannabis brand licensing sector.

5.3 Multi-State Regulatory Fragmentation

A further structural complication for cannabis brand licensing is the regulatory fragmentation across states. Each cannabis-legal state has its own licensing regime, its own rules regarding brand ownership and operational control, and its own disclosure requirements for licensed entities. A brand licensing agreement that is compliant in one state may require modification to be compliant in another. The operator separation risk analysis must account for state-level regulatory variation: in states with more stringent operational-control requirements, the brand licensor's ability to monitor and enforce royalty obligations may be greater than in states with less stringent requirements. In Michigan, the Cannabis Regulatory Agency's licensing rules impose specific requirements regarding the disclosure of ownership, management, and control relationships — requirements that are relevant to the assessment of whether the operator's concurrent brand licensing obligations (to Cookies, Lemonnade, etc.) are fully disclosed to the CRA.

5.4 White-Label Manufacturing and Genetics Licensing

Beyond the retail operator model exemplified by Cookies, the cannabis industry has developed two additional licensing structures that present related but distinct risk patterns: white-label manufacturing agreements and genetics licensing agreements.

White-label manufacturing agreements. In a white-label arrangement, a brand owner licenses its name, product specifications, and packaging design to a manufacturer that produces branded products for sale through the manufacturer's own distribution channels -- or through the brand owner's channels using product supplied by the manufacturer. The structural risk in white-label agreements is concentrated in quality control: the brand owner relies on the manufacturer's compliance with specifications, testing protocols, and packaging standards, but may have limited audit and inspection rights. Product recalls, contamination events, or regulatory actions against the manufacturer affect the brand's reputation even when the brand owner had no operational control over the manufacturing process. The white-label manufacturer controls production quality, testing compliance, and distribution; the brand owner receives royalties or wholesale margin based on unit sales, but its enforcement mechanism is contractual rather than operational. This structure reproduces the operator separation risk pattern identified in Section IV, with the additional complication that manufacturing failures can result in product-level regulatory actions (recalls, quarantines, license suspensions) that terminate revenue from the affected product lines entirely.

Genetics licensing agreements. Cannabis genetics -- proprietary cultivars developed through selective breeding -- are licensed by brand owners to cultivators who produce the branded flower for retail sale. The genetics licensing model presents structural risks analogous to retail operator agreements, with the added complexity of biological variability. The cultivator controls the growing environment, harvest timing, curing process, and quality testing; the brand owner receives royalty payments based on production volume or revenue from the branded cultivar. Quality failures by the cultivator -- contaminated product, low potency, inconsistent phenotype expression -- directly affect the brand's market reputation for genetic quality, while the brand owner's remedies are typically limited to contract damages rather than operational control over the cultivation process. The genetics licensing model also raises intellectual property enforcement challenges that are specific to cannabis: cannabis cultivars are not eligible for federal plant variety protection or utility patent protection with the same scope as traditional agricultural crops, and state-level cannabis regulatory agencies generally do not adjudicate genetic ownership disputes. The brand owner's enforcement of its exclusive rights to a cannabis cultivar thus depends on contract rather than intellectual property law -- a structural limitation that affects the value and enforceability of genetics licensing arrangements.

5.5 Territorial Exclusivity, Minimum Royalty Guarantees, and the Common Structural Pattern

Two provisions common across cannabis brand licensing agreements -- territorial exclusivity and minimum royalty guarantees -- create dynamics that amplify the structural patterns identified in this paper.

Territorial exclusivity. When a brand grants an operator the exclusive right to operate branded locations within a defined geographic territory, the arrangement creates a mutual dependency. The brand is dependent on the exclusive operator for all revenue from that territory; if the operator underperforms or fails, the brand cannot replace the operator without terminating the exclusivity provision, which may require cause or a contractual buyout. Conversely, the operator is dependent on the brand's continued market relevance; if the brand's consumer appeal declines, the operator's exclusive territory loses value. The TerrAscend Michigan case study illustrates the brand-side risk of territorial concentration: with approximately 28.6% of the Cookies network concentrated in a single operator in a single state, the brand's system-wide revenue was materially exposed to that operator's performance -- a concentration that territorial exclusivity provisions can intensify.

Minimum royalty guarantees. Operators commonly guarantee a minimum annual royalty payment regardless of actual revenue, providing the brand owner with a revenue floor but increasing the operator's financial burden during market contractions. When an operator's actual revenue falls below the level needed to cover the minimum royalty guarantee, the guarantee becomes a fixed cost that accelerates the operator's financial distress. In the TerrAscend Michigan context, whether the Cookies/Lemonnade license agreements contained minimum royalty guarantees during the period when Michigan operations were generating $167.7 million in cumulative losses is not disclosed in the public filing record. If minimum guarantees were in effect, they would have required TerrAscend to continue paying royalties to Cookies and Lemonnade even as its Michigan operations deteriorated -- a cash outflow to third-party brand owners running concurrently with the operator's own deepening losses and the unrecognized impairment of its acquired Gage brand.

The common structural pattern. Across all of the licensing structures examined -- retail operator agreements, master license agreements, white-label manufacturing contracts, genetics licensing, and exclusive territory arrangements with minimum guarantees -- a single structural pattern recurs: the separation of brand ownership from operational control. In each structure, the brand owner's revenue, reputation, and legal rights depend on the operator's performance and contractual fidelity, while the brand owner's control over that performance is limited to contractual remedies rather than operational authority. This pattern is not unique to cannabis -- it appears in traditional franchise relationships, trademark licensing, and manufacturing agreements across industries -- but the cannabis industry's unique regulatory constraints (federal illegality, state-by-state licensing, restrictions on corporate ownership structures, and the absence of federal intellectual property protection for cannabis cultivars) amplify the structural risk by limiting the brand owner's ability to vertically integrate or directly assume operational control in the event of operator failure. The Cole Ashbury $8.43 million judgment is the quantifiable manifestation of this structural risk; the TerrAscend Michigan exit is the corresponding case study from the operator side of the relationship.

VI. Structural Recommendations

6.1 For Brand Licensors

Brand licensors operating under the cannabis licensing model can adopt structural protections to reduce royalty diversion risk. First, real-time audit rights with technological enforcement: point-of-sale integration between the brand licensor's systems and the operator's systems can provide real-time revenue visibility, reducing the operator's ability to underreport revenue for royalty calculation purposes. Second, escrowed royalty accounts: structuring royalty payments through a third-party escrow or lockbox arrangement, in which retail revenue is deposited into an account from which royalties are automatically calculated and remitted, removes the operator's discretion over royalty remittance. Third, operator qualification and ongoing monitoring: financial vetting of prospective operators, including background checks on principals, review of the operator's capitalization and liquidity, and ongoing monitoring of the operator's financial condition, can reduce the risk of entering into a licensing agreement with an operator who lacks the resources or incentives to comply with royalty obligations. Fourth, security deposits and personal guarantees: requiring operators to post security deposits or provide personal guarantees of royalty obligations — common in franchise relationships — provides a source of recovery for diverted royalties that does not depend on litigation against an operating entity that may be judgment-proof.

6.2 For Operators

Operators entering into cannabis brand licensing agreements can adopt structural protections to manage the financial risk associated with royalty obligations. First, royalty rate negotiation with downside protection: royalty rates should be negotiated with reference to the operator's operating margins, not the brand licensor's target return, and should include mechanisms for royalty reduction during periods of financial distress or market deterioration. Second, termination rights for brand value deterioration: licensing agreements should include the operator's right to terminate or renegotiate if the brand's market value deteriorates — for example, if the brand licensor experiences public reputational damage, regulatory action, or widespread operator disputes that affect the brand's consumer appeal. Third, segment-disclosure discipline: public company operators should disclose royalty obligations to material brand licensors on at least an annual basis, with sufficient granularity to allow investors to assess the operator's licensing portfolio's total cost and the concentration of royalty obligations among specific brand licensors. Fourth, counterparty risk assessment: operators should conduct diligence on the brand licensor's financial condition, regulatory status, and litigation history — including the licensor's history of disputes with other operators — before entering into material licensing arrangements. A brand licensor with a history of litigation against its operators represents a different counterparty risk profile than a licensor with no such history.

6.3 For Investors and Analysts

Investors and analysts evaluating public company cannabis operators with material brand licensing portfolios should incorporate the following analytical elements into their disclosure and financial analysis. First, separate identification of royalty expenses: to the extent the operator's financial disclosures do not separately identify royalty expenses by brand licensor, investors should request or estimate that disaggregation as a material component of segment profitability analysis. Second, brand concentration analysis: operators with royalty obligations concentrated among a small number of brand licensors face higher counterparty risk — loss of a single brand license can materially affect segment revenue — than operators with diversified licensing portfolios. Third, licensor litigation risk: the Cole Ashbury $8.43 million judgment establishes a quantifiable reference point for royalty diversion exposure; investors should assess whether the operator's royalty payment practices and the licensor's enforcement history create a risk of similar litigation between the operator and its brand licensors. Fourth, compressed disclosure detection: investors should compare the operator's MD&A disclosures across quarters to detect whether adverse operational developments are being acknowledged in real time or concentrated in annual filings — a pattern that can signal that the operator's disclosure practices are not providing investors with timely information about operational deterioration.

VII. Conclusion

The cannabis brand licensing model — exemplified by the Cookies Worldwide Inc. operator network, but applicable across the sector — presents a structural configuration in which the mechanisms enabling geographic expansion also create the conditions for royalty diversion, compressed adverse disclosure, and cost asymmetry between acquired and licensed brands. The Cole Ashbury $8.43 million judgment provides a quantifiable reference point for the cost of royalty enforcement failure. The TerrAscend Michigan exit — 20 locations, 236 employees, $167.7 million in cumulative losses, and a full Gage brand impairment to zero — provides a corresponding case study from the operator side, illustrating the financial consequences of branded retail operations in a deteriorating cannabis market when royalty obligations to third-party brand licensors continue throughout the period of operational decline.

The three structural patterns identified and analyzed in this paper — operator separation risk, compressed adverse disclosure, and third-party brand cost asymmetry — are not anomalies of the Cookies licensing model or of TerrAscend's Michigan operations. They are consequences of the structural features of the cannabis brand licensing model as it has developed across U.S. regulated markets. For brand licensors, operators, investors, and regulators, the analytical framework presented here — grounded in the public filing record, the Cole Ashbury court record, and the applicable accounting and disclosure standards — provides a structural basis for evaluating brand licensing arrangements and their financial consequences. The continued maturation of the cannabis industry, and the continued regulatory scrutiny of cannabis company disclosures, will determine whether the structural patterns identified here persist or are addressed through contractual innovation, regulatory reform, or enhanced disclosure requirements.

References

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Gage Growth Corp., Form 1-A Regulation A Offering Statement, Accession No. 0001104659-20-101441. [Michigan cannabis license disclosures; brand licensing arrangements; Bruce Linton Executive Chairman appointment.]
Securities Exchange Act of 1934, Section 10(b) and Rule 10b-5, 17 C.F.R. 240.10b-5. [Anti-fraud provisions; material misstatements and omissions in connection with the purchase or sale of securities.]
FTC Franchise Rule, 16 C.F.R. Part 436. [Federal franchise disclosure requirements; definition of franchise relationship; Franchise Disclosure Document requirements.]
Michigan Regulation and Taxation of Marihuana Act (MRTMA), MCL 333.27951 et seq. [Michigan cannabis regulatory framework; licensing requirements; operational control and disclosure obligations.]
Michigan Cannabis Regulatory Agency, administrative rules and public licensing records. [License cap, disclosure requirements, operational control and change-of-ownership rules.]
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). [Materiality standard for shareholder decision-making under the federal securities laws.]
Basic Inc. v. Levinson, 485 U.S. 224 (1988). [Materiality standard applied; reaffirmation of TSC Industries framework.]
TerrAscend Corp., Definitive Proxy Statement on Schedule 14A, Accession No. 0000950170-25-059294. [Jason Wild 31.01% voting control; related-party transaction disclosures; director and executive officer positions.]
Cookies Worldwide Inc., publicly available information regarding retail locations, licensing model, and reported annual revenue (~$500M, 70+ locations).
TerrAscend Corp., Current Reports on Form 8-K for the period June 2025 through March 2026, CIK 0001778129. [Assessment of interim Form 8-K disclosures between Michigan exit decision (June 2025) and FY2025 10-K filing (March 12, 2026).]
Securities Act of 1933, Section 17(a), 15 U.S.C. 77q(a). [Anti-fraud provisions applicable to offers and sales of securities, including Regulation A offerings by cannabis operators.]
Uniform Commercial Code, Article 9 (Secured Transactions), as adopted in relevant state jurisdictions. [Security interest perfection and enforcement; application to royalty streams and accounts receivable in licensing relationships.]
Restatement (Second) of Contracts, Section 205 (Duty of Good Faith and Fair Dealing). [Implied covenant of good faith and fair dealing in every contract; applicability to operator remittance obligations and brand licensor enforcement conduct under cannabis licensing agreements.]

Authority / Filed Record Summary

Cookies Worldwide Inc. retail locations: 70+
Reported Cookies annual revenue: approximately $500 million
Cole Ashbury judgment: $8.43 million (100% royalty diversion)
TerrAscend Michigan Cookies and Lemonnade locations: 20
Michigan retail closure date: June 2025
Michigan employee terminations: 236
Interval between Michigan exit and FY2025 10-K: approximately 9 months (June 2025 to March 12, 2026)
TerrAscend CIK: 0001778129
TerrAscend FY2025 Form 10-K: Accession No. 0001193125-26-104092 (filed March 12, 2026)
Gage brand impairment (same 10-K): $0 (100% write-down)
Michigan cumulative losses disclosed: $167.7 million
Gage Growth Corp. Form 1-A: Accession No. 0001104659-20-101441
Gage Growth Corp. acquisition consideration: approximately $545 million
TerrAscend 2025 DEF 14A: Accession No. 0000950170-25-059294
Three structural patterns identified: (1) Operator separation risk, (2) Compressed adverse disclosure, (3) Third-party brand cost asymmetry

Citation

LAW Corporate Intelligence. (2026). Franchise Royalty Diversion in Cannabis Brand Licensing: The Cole Ashbury Decision and Structural Vulnerabilities in Operator Agreements. LAW Intelligence, 2(3), 37–54.

Distribution

Published: LAW Intelligence, LAW Intelligence 2(3) Status: published