It is now a standard occurrence when joining a large banner group that pharmacists are being asked to sign formal ‘member agreements’ which are not only lengthy and complex documents, but are legally binding upon the pharmacist.
Despite this, many pharmacists are signing these member agreements without turning their minds to whether their business interests are being properly protected.
Member Agreements and Franchising
From a legal perspective, typical modern banner group member agreements are likely to constitute ‘franchise agreements’ under the Franchising Code of Conduct which is a mandatory government code with the force of law under the Commonwealth Trade Practices Act 1974.
As a result, prior to a pharmacist being required to sign a member agreement, under the Code a franchisor must provide the pharmacist with a disclosure document detailing various categories of information as prescribed by the Code.
Unfortunately, it appears that this regime of compulsory disclosure and Code compliance has led pharmacists to incorrectly believe that a banner group’s standard member agreement is a ‘safe’ document to sign. This is not the case.
Standard Documents and a Key Deficiency
It is amazing how many pharmacists simply sign a banner group standard member agreement without considering important commercial and legal issues and/or without obtaining independent legal advice from a lawyer experienced in the pharmacy and franchising areas.
A key issue for pharmacists, which is not addressed in a typical banner group member agreement is the issue of a buffer zone or territory. That is, when a pharmacist (eg. Patsy) agrees to join a banner group this decision will result in Patsy making a significant financial investment in a new fit-out, new signage and re-badging, additional marketing and quite often in relocating premises.
Assuming the member agreement is for a 5 year term, Patsy will then spend the next 5 years helping promote and develop the banner group’s brand name in the immediate locality.
However, in the absence of negotiating a variation to the member agreement, the standard member agreement will not prevent the franchisor, during Patsy’s 5 year term, from signing up another member (eg. Johnny), who is a direct competitor. All of a sudden, despite significant financial investment and expenditure, Patsy’s exclusivity in both the banner group’s branding and business proposition is lost.
Indeed, at the end of the initial 5 year term, having assisted in the development and recognition of the banner group in her locality, Patsy may not be offered a renewal of her member agreement, in which case the ‘benefit’ of Patsy’s branding exercise will automatically transfer to Johnny as an existing nearby competitor who is a member of the same banner group. Even if Patsy has been fortunate enough during her 5 year term that the franchisor has not signed up any nearby competitors (eg. like Johnny) as members, if Patsy’s membership is not renewed she runs the risk at anytime thereafter of her goodwill linked to this branding work ‘transferring’ to a competitor who subsequently signs up as a member of Patsy’s former banner group.
Buffer Zones
A well advised pharmacist contemplating entering into a member agreement should at a minimum consider 2 forms of a buffer zone – one buffer zone which applies for the duration of the member agreement whereby the franchisor agrees not to sign up another member within that buffer zone, and a second buffer zone which is to apply for a period after the pharmacist’s member agreement expires.
This post-termination buffer zone is extremely important especially where the franchisor controls, as part of its system, the customer database of the banner group’s customer club or loyalty program.
Using Patsy as an example, the absence of a buffer zone which applies for a reasonable period after termination of the member agreement (eg. 12 months) allows for the possibility of the franchisor granting the member rights to a nearby competitor who will then immediately pick up Patsy’s existing banner group club customers who are no longer able to redeem their club points or benefits from her store.
This unfortunate consequence would no doubt result in a significant reduction in the value of the goodwill of Patsy’s business.
Conclusion
Pharmacists are warned not to treat banner group member agreements as an innocuous standard document which is in a form acceptable for immediate signing by the pharmacist. A pharmacist who dismisses the underlying dangers behind a standard member agreement and signs the agreement, without obtaining a detailed legal review of this agreement, does so at its own peril. Remember, don’t be a Patsy or you risk losing out to a Johnny come lately!
Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 10, 200 Queen Street
Melbourne 3000
Tel (03) 8628 2000
Fax (03) 8628 2050
Email: anthony@robertjames.com.au
Web site: www.robertjames.com.au