About 60 Medicine Shoppe and Medicap pharmacy owners nationwide have filed an arbitration claim against their parent franchise companies, which are subsidiaries of Cardinal Health Inc., for allegedly failing to support the franchise systems.

Medicine Shoppe, Medicap, pharmacy owners, Cardinal Health, independent pharmacy, breach of contract, Medicine Shoppe International, MSI, Pharmacy Franchise Owners Association, PFOA, Zarco Einhorn Salkowski & Brito, Gaye Moseman, Robert Zarco, arbitration claim, American Arbitration Association, franchise agreements, Leader Drugstores, Russell Redman

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Medicine Shoppe, Medicap franchisees seek arbitration

December 15th, 2011

ST. LOUIS and DES MOINES, Iowa – About 60 Medicine Shoppe and Medicap pharmacy owners nationwide have filed an arbitration claim against their parent franchise companies, which are subsidiaries of Cardinal Health Inc., for allegedly failing to support the franchise systems.

The independent pharmacy owners announced their breach-of-contract claim against Medicine Shoppe International (MSI) and Medicap Thursday in a press release from a public relations firm representing the Pharmacy Franchise Owners Association (PFOA), which in 2009 formed two franchisee representative organizations — PFOA-MS and PFOA-MC — for Medicine Shoppe and Medicap pharmacy owners.

Cardinal Health denied the pharmacy owners' claims. "The overwhelming majority of our franchisees are pleased with the franchise system and its current offerings. We believe these claims are without merit, and we intend to vigorously defend our position," the company said in a statement Thursday.

The individual franchisees are being represented by Miami-based law firm Zarco Einhorn Salkowski & Brito. The statement of claim and demand for arbitration was filed with the American Arbitration Association in St. Louis, and more arbitration and litigation filings in other venues, such as Iowa, are expected in the next few weeks, according to a spokeswoman for the PFOA. Medicine Shoppe and Medicap pharmacies must go through arbitration, as required under in their contracts, she said.

In the arbitration statement, the pharmacy owners claim they invested in a "thriving" system of branded stores supported with various services from MSI/Medicap. However, they allege that those services have dissipated in recent years while MSI/Medicap has continued to collect "substantial" monthly royalties and "excessive" franchise fees.

"Claimants properly assumed that when they entered into franchise agreements with MSI that MSI would continue to support the Medicine Shoppe brand name and franchise system pursuant to MSI's contractual obligations set forth in claimants' franchise agreements. Indeed, claimants are particularly reliant on such support and guidance in an ever-changing pharmaceutical industry," read a copy of the arbitration statement obtained by Chain Drug Review.

"Regrettably, MSI has ceased to provide claimants with the vast majority of services that claimants previously received under their franchise agreements, to the point where MSI has essentially abandoned its franchise concept altogether," the document stated. "Cardinal, MSI's parent company, has instead placed its focus squarely on developing and maintaining the franchise system for Leader Drugstores Inc., a network of independent pharmacies also owned by Cardinal. Medicine Shoppe franchisees and the Medicine Shoppe brand have simply been neglected."

In the arbitration statement, the pharmacy owners cited a new franchise agreement introduced in 2009 by MSI that included an offer in which new franchises could join the system for royalty of $499 per month and a reduced bundle of services. The claimants said the remaining franchisees, including those involved in the litigation, pay 5.5% of store sales — as much as $25,000 per month in some cases — as royalties to MSI/Medicap and under the new agreement were offered three options: pay a lump sum and transition to the new arrangement; buy out of their existing agreements; or stand pat and continue paying the 5.5% license fees but receive the scaled-down services.

The claimants "were unwilling or financially unable" to pay the lump sum or buyout in the first two options and were relegated to the third option to continue paying the 5.5% license fee "without receiving the services, support and benefits they bargained for," the arbitration statement said. The pharmacy owners are "held hostage to a brand and system which is little more than a shadow of its former self," the document stated.

The owners also claim they were promised that the new system would be implemented only if at least 95% of the franchisees adopted it and that MSI never achieved the 95% acceptance level and began to reduce services.

Under the arbitration statement, filed Dec. 7, the claimants seek "the franchise fees they have overpaid to MSI over the years" as compensation.

"Medicine Shoppe and Medicap's failure to provide meaningful support, coupled with their exorbitant franchise fees, put the independent pharmacists in an untenable position through no fault of their own," Robert Zarco, lead attorney representing the pharmacy owners, said in a statement.

North Carolina Medicap franchisee Gaye Moseman, one of the pharmacy owners filing a claim, said in a statement, "American consumers overwhelmingly prefer independent pharmacies over big-box retailers, yet MSI/Medicap has treated their own franchisees in such a hostile and unfair way as to make our businesses uncompetitive."

According to the news release, the arbitration filing marks the final step of a multiyear effort by the franchisees to negotiate with MSI/Medicap and realign the franchise relationship.

In early 2010, Medicine Shoppe and Medicap franchise owners filed a class-action lawsuit against Cardinal Health, MSI and Medicap in connection with the franchise agreement introduced in 2009.