I have written several articles in the past pointing out a myriad of serious issues resulting from the typical habit of pharmacy owners blindly signing pharmacy brand franchise agreements without first obtaining independent legal advice.

Stating the obvious – the pharmacy owner already owns their pharmacy business, so when contemplating entering into a pharmacy franchise agreement (i.e. essentially to obtain the right to use the franchisor’s “brand/image” in their store signage and certain “support” services) the pharmacy owner needs to project ahead and try to understand what rights they are (ignorantly) providing to the franchisor under the franchise agreement if and when the pharmacy owner seeks to no longer use the brand/image in operating their business.

A typical pharmacy franchise agreement will likely contain all or a combination of the
following provisions:

  • A clause granting the franchisor the first (and last) right to find a buyer for the pharmacy if the pharmacy owner decides to sell their business;
  • A clause preventing the pharmacy owner from owning a competitive pharmacy business;
  • A clause requiring the pharmacy owner to pay a large franchise transfer fee when
    selling all or a part interest in the business;
  • A clause allowing the franchisor to unilaterally change the financial amounts payable where the franchise is transferred to a new business owner;
  • A clause allowing the franchisor the right to buy the business if pharmacy ownership laws change.

Many of these provisions unreasonably fetter the pharmacy owner’s rights, especially given that the pharmacy owner does not receive any form of monetary payment from the franchisor in return for agreeing to grant these rights to the franchisor.

The restrictive nature of these rights is illustrated by a recent case where a pharmacy owner was looking to sell their pharmacy and was of the belief that, as the specified initial term of their pharmacy agreement had expired, the franchisor no longer had a first or last right to find a buyer of their own preference.

The pharmacy owner proceeded to accept a binding offer from a buyer via a signed sale contract before seeking my advice.

On reviewing the provisions of the “expired” franchise agreement, it was found that:

  • The franchisor still retained a first and last right of refusal (which meant the pharmacy owner had to give the franchisor 42 days’ notice of the offer received from the intended buyer allowing the franchisor to nominate its own buyer within this 42 days period);
  • This first and last right of refusal still applied after expiry of the initial specified term as the franchisor agreement had been drafted (for the franchisor’s sole benefit) to preserve this right if the pharmacy owner continued to use the franchise branding on a month to month “overholding” basis (as the pharmacy owner had).

The pharmacy owner was understandably shocked by the outcome of my above review, as it meant that they were exposed to either:

  • the buyer (whose offer they had accepted by way of a signed contract) suing them for breach of contract if the pharmacy owner was required to sell the business due to the franchisor exercising their first and last right of refusal; or
  • the franchisor suing them for breach of contract if the pharmacy owner proceeded to sell to the buyer.

The moral of the story is it definitely pays to get specialist legal advice on any legally binding document before you are being asked to sign.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 22, 140 William Street
Melbourne 3000
Mobile 0439 00 2012
Reception 03 8628 2000
Email: anthony@robertjames.com.au
Web site: www.robertjames.com.au