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Franchisees file lawsuit against MSI.

ST. LOUIS -- More than 70 Medicine Shoppe International (MSI) franchisees are suing the drug chain and its parent company, Cardinal Health Inc., alleging that MSI has not kept up its side of franchise agreements.

The franchisees, which own 82 stores, are all members of the Pharmacy Franchise Owners Association (PFOA), a group of 220 MSI and Medicap franchisees that was formed two years ago in an effort to give franchisees more control of their businesses.

The 70 MSI franchisees claim that the drug chain has failed to fulfill its marketing and advertising obligations to the store owners and breached its licensee agreements. Cardinal, they say, has violated unfair trade practices laws and antitrust statutes.

The legal action, filed here on June 2 with the American Arbitration Association, calls MSI's business model "broken and archaic."

"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," PFOA president and MSI franchisee Todd Pendergraft says. "Our previous efforts to address these serious issues with MSI and Cardinal Health have proven unsuccessful."

Because Cardinal is one of the country's largest pharmaceutical wholesalers, Pendergraft and the attorneys representing PFOA say the company's ownership of a drug store chain presents a conflict of interest and makes it difficult for franchisees to get the best deals on drugs and other products.

"Cardinal Health's vast pharmaceutical empire has pitted a variety of its subsidiaries' interests against the interests of the Medicine Shoppe franchisees," notes Robert Zarco, senior partner in the Miami law firm Zarco Einhorn Salkowski & Brito P.A. and the attorney handling the case for PFOA.

"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," he says.

For its part, Medicine Shoppe executives say that Missouri state law and the laws of the American Arbitration Association forbid them from discussing the specifics of the franchisees' claims.

In a statement, however, MSI reiterated its commitment to its franchisees and said the issues cited in the legal filing were being addressed and rectified.

"We will continue strong efforts toward offering the programs and services our franchisees want and need," the statement said.

The company stressed that it is aware of the impact that recent changes in retail pharmacy have had on franchise owners and noted that it is on the verge of introducing new programs and services to help franchisees deal with these changes.

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Publication:Chain Drug Review
Date:Jun 26, 2006
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