Franchisees File Legal Action Against Cardinal Health and Medicine Shoppe International.

MIAMI -- More than 70 Medicine Shoppe franchise owners representing 82 stores have filed legal action against Medicine Shoppe International, Inc. (MSI) and its parent company, Cardinal Health, Inc. (Cardinal Health). The action was filed June 2, 2006, in Missouri through the American Arbitration Association as required by the parties' agreement.

The group of franchisees is comprised of members of the Pharmacy Franchise Owners Association (PFOA), which is made up of 220 Medicine Shoppe and Medicap franchise owners - approximately 20 percent of the total domestic franchisees of MSI.

In the filing, the franchisees lay out several key factors that have led to filing the action, including:

--MSI's failure to provide accountings of, and failure to perform, marketing and advertising obligations;

--MSI's continued use of a broken and archaic business model;

--Breaches of licensee agreements;

--Cardinal Health's conflicts of interest and anti-competitive activities;

--The sale of the Managed Pharmacy Benefits Network; and

--Encroachment on protected sales territories.

The demand for arbitration seeks redress for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of unfair trade practice laws, violations of anti-trust laws, and violations of state franchise laws. Participants in the action are seeking relief against Cardinal Health for tortious interference with contractual relations, violations of unfair trade practice laws, and violation of antitrust laws.

"As a result of significant changes in the pharmacy industry and the evolution of the franchise business, the original franchise fees imposed on franchisees have become overwhelming and have made it impractical to compete and survive," says PFOA president and MSI franchisee Todd Pendergraft. "Our previous efforts to address these serious issues with MSI and Cardinal Health have proven unsuccessful."

Franchisees filed the legal action through Miami-based Zarco Einhorn Salkowski & Brito P.A., a commercial litigation firm that is internationally recognized for providing expert legal services in franchisor/franchisee cases.

"Cardinal Health's vast pharmaceutical empire has pitted a variety of its subsidiaries' interests against the interests of The Medicine Shoppe franchisees. These conflicts have consistently been resolved with an eye toward achieving Cardinal Health's short-term profits, at the expense of the Medicine Shoppe franchisees' long-term success," says Robert Zarco, senior partner with Zarco Einhorn Salkowski & Brito P.A.

PFOA was formed in February 2004 by a small group of MSI franchisees to improve the value of system services, protect the business equity of franchise owners and provide leverage and structure to negotiate with suppliers and MSI on key topics like distribution, licensing agreements, reimbursement and marketing. Since that time, PFOA membership has grown steadily to 220 stores.

PFOA, which is incorporated and requires members to financially support the organization, was formed in part to address the concern that MSI's Owners Advisory Council (OAC) does not have sufficient leverage to create improvements or affect change within the system. MSI distribution programs are negotiated through Cardinal Health.

"PFOA gives us negotiating power in an age where profit margins are under attack and the number of MSI franchise pharmacies is on the decline," Pendergraft says. "Our members agree that we simply have to do something to address these inequities."

In 2005, PFOA renewed and extended a preferred supplier arrangement with AmerisourceBergen Corporation, a leading distributor of pharmacy products and services to independent community pharmacies. Under the terms of the agreement, AmerisourceBergen is the primary supplier of goods and services to PFOA member stores through 2008.

For more information about PFOA, visit www.pfoai.org.