Medicine Shoppe franchisees sue Cardinal Health

“Defendants’ action can only be viewed as an effort to transform the vestiges of the Medicine Shoppe and Medicap franchise systems into captive markets for Cardinal’s pharmaceutical distribution business and, in the process, squeeze every last penny out of the system before it ultimately fails,” the franchisees wrote in the suit.

St. Louis Business Journal
March 10, 2010

Medicine Shoppe franchisees sue Cardinal Health

When Cardinal Health Inc. renegotiated franchise agreements with pharmacies under its Medicine Shoppe and Medicap brand last year, the company said it gave franchisees breathing room to decide what’s best for them.

Several franchisees are calling the move a ploy to drum up more business for Dublin, Ohio-based Cardinal that strong-armed pharmacies and has left some paying for services they aren’t getting.

They filed a lawsuit Tuesday in U.S. District Court in Columbus, Ohio, against Cardinal (NYSE: CAH) and its Medicine Shoppe Inc. and Medicap Pharmacies Inc. units. The suit claims that Cardinal in March 2009 moved to renegotiate franchise agreements with the dwindling network of fewer than 700 pharmacies that would give franchisees more favorable terms, including reduced royalty requirements, and fix what the franchisees described as “an unworkable and oppressive regime.”

Stores, the suit said, were given three options. The first was to become part of the revamped system by paying an early termination penalty based on more than half of estimated future royalties and agree to buy only from Cardinal for terms that stretched past a decade in some cases. Franchisees also were allowed to buy out of the network by paying all estimated future royalties or take no action.

Cardinal, the suit said, told stores their decisions would be honored only if 95 percent of them opted for the first choice. Little more than half of the franchisees did, the suit alleged, but the company accepted tens of millions of dollars in prepaid fees and went on to cut services across the board as it rolled out the new system.

“Defendants’ action can only be viewed as an effort to transform the vestiges of the Medicine Shoppe and Medicap franchise systems into captive markets for Cardinal’s pharmaceutical distribution business and, in the process, squeeze every last penny out of the system before it ultimately fails,” the franchisees wrote in the suit.

Terry Burnside, an executive who oversees Cardinal’s Medicine Shoppe and Medicap operations, said in a statement that the suit lacks merit and “largely addresses past issues.”

“Medicine Shoppe empowered franchisees to select which of the options made the most sense for their businesses,” Burnside said. “… We firmly believe that our franchise options are fair and equitable and that franchisees were provided full opportunity to determine which option would be most beneficial for their business.”

Stan Winters, owner of a Medicine Shoppe franchise in California and a lead plaintiff in the class-action suit, said in a statement that the suit is intended to “clear the slate with Cardinal Health, put an end to their heavy-handed ways and roll back the predatory pricing on pharmaceuticals that many stores are forced to accept.”

The franchisees are seeking to have their agreements rescinded or terminated and receive damages for fraud and breach of contract.

During Cardinal Health’s reorganization of its Medicine Shoppe unit last year, the company laid off 109 people at its Earth City, Mo., facility in St. Louis County and moved Medicine Shoppe’s headquarters to Ohio. The move left Cardinal’s Medicine Shoppe unit with 40 people in Earth City, who handle some finance and back-office support for the franchise operation.

http://stlouis.bizjournals.com/stlouis/stories/2010/03/08/daily41.html


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