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Jmf, Inc. and Ww, Inc v. Medicine Shoppe International

September 16, 2011


The opinion of the court was delivered by: Ralph R. Erickson, Chief Judge United States District Court


Before the Court is Defendant Medicine Shoppe International, Inc.'s (hereafter "MSI") Motion for Summary Judgment (Doc. #56). Plaintiffs have responded to the motion. The Court, having carefully reviewed the record and the arguments of the parties, now issues this memorandum opinion and order.


Genuine issues of material fact preclude summary judgment on Plaintiffs' claims for breach of contract for failure to honor the "most favored nations" clause and for the alleged violation of N.D. Cent. Code Ch. 51-19. Plaintiffs other alleged breach of contract claims, including failure to provide bookkeeping and accounting services, failure to provide advertising, and failure to provide "guidance" fail as a matter of law and are hereby dismissed from this action.


JMF, Inc., is a North Dakota corporation operating a pharmacy in Jamestown, North Dakota (Doc. #57-9, Dep. Fugleberg at pp. 43, 58). John Fugleberg owns all of the stock of JMF, Inc. Id. at p. 58. Pursuant to a franchise agreement with MSI, Fugleberg operates a store known as The Medicine Shoppe. Id. MSI identifies Fugleberg's store as store #545. Id. at p. 13.

WW, Inc. is a North Dakota corporation operating a pharmacy in Fargo, North Dakota (Doc. #57-10, Dep. Wilhelm at pp. 11-12). Robert Wilhelm is the sole shareholder of WW, Inc. Id. at p. 11. Pursuant to a franchise agreement with MSI, Wilhelm also operates a store known as The Medicine Shoppe. Id. Wilhelm's son, Ross, manages the day-to-day operations of the store. Id. MSI identifies Wilhelm's store as store #80.

MSI is a wholly-owned subsidiary of Cardinal Health (Doc. #57-16, p. 5). In 2003, Cardinal Health acquired Medicap (Doc. #59-1, Fiacco Dep. p. 20). Medicap became a wholly-owned subsidiary of MSI. At the time of the acquisition, there were approximately 250 to 300 Medicap stores. Id. at pp. 20-21. Until 2006 or 2007, there was a separate "team" of employees working with Medicap stores. Id. at pp. 21-22. After that, management of MSI and Medicap was integrated. Id.

MSI currently franchises approximately 700 prescription pharmacies nationwide (Doc. #59-2, Lane Dep. p. 13). In the past, MSI had as many as 1,500 independent franchises. Id. at p. 8. Over the years, as part of its franchise license agreement, MSI provided a number of services to its franchisees, including, for example, a call center and business support, franchise business consultants, advertising and marketing services and support, computer and pharmacy dispensing equipment arrangements and services, contracting arrangements with third-party payers, and accounting services (Doc. #57-22, Fiacco Dec. ¶ 4). In exchange for these services, MSI received license fees based on a percentage of the pharmacy's monthly revenues. Id. at ¶ 5.

Historically, the franchise license agreements called for a 20-year term, an initial flat fee, and then a monthly fee (typically between 4.1 to 5.5 percent of sales). Id.

During the past decade, the healthcare industry and the nature of retail pharmacy have changed drastically. Now, prescription prices are higher, reimbursement rates are lower, and most pharmacy sales are paid for by third-party payers (Doc. #57-22, Fiacco Dec. at ¶ 11). In an effort to develop new contracts with franchisees, MSI made broad-based changes to its franchise system. Id. at ¶ 13. These changes included reduced license fees and modifications to the way the parties paid for services such as advertising. Id. at ¶ 12. As for existing franchisees, renewal agreements allowed MSI and the franchisee to adjust the terms. Id. at ¶ 13.

In March 2009, MSI announced a total overhaul of its franchise program (Doc. #57-22, Fiacco Dec. at ¶ 14). Under the new program, the franchisee would pay a fixed monthly fee ($499) to MSI and services to the franchisee would be available on a "pay as you go" model. Id. at ¶¶ 14-15. To accommodate existing franchisees, MSI presented a modified version of its new format. The modified version offered existing franchisees three options: (1) pay a fee to MSI to convert to the modified version of the new format with the conversion price being a "steeply" discounted amount of the franchisee's projected future franchise fees under the former system;

(2) pay MSI the projected future franchise fees under the former system and exit the system entirely through a "buyout" of the franchise agreement; or (3) remain under the existing contract with the same level of services. Id. at ¶ 17.

At the time of the overhaul, some of the franchisees were operating under a renewal agreement containing a "most favored nations" clause*fn1 ; therefore, the new format could not be offered to new franchisees without allowing "most favored nations" franchisees to opt-in at no cost to them (Doc. #57-22, Fiacco Dec. at ¶ 18). Due to the loss of income MSI would endure in allowing these existing franchisees to opt-in at no cost, MSI only offered Option 1 (a discounted conversation price) to franchisees like JMF, Inc. and WW, Inc., who hold "most favored nations" clauses. Id. at ¶ 18. In states where a franchisee with a "most favored nations" clause has not reached an agreement with MSI, MSI has agreed it will not offer the new format of that brand of franchise until it resolves issues with the existing franchisee. Id.

A. Store # 545

Under a license agreement executed in 1990 with WW, Inc., WW, Inc. was obligated to pay a 5.5 percent commission on net revenues after the seventh month of operation and continuing through the duration of the agreement (Doc. #57-7, p. 12 of 50). In 1998, JMF, Inc. purchased Store #545 from WW, Inc. (Doc. #57-9, Fugleberg dep. pp. 15-16). JMF, Inc. signed a franchise agreement with MSI. Id.; Doc. #57-15. Under the terms of the agreement, JMF, Inc.'s license fee rate was 5.5 percent of net revenues. Id. at p. 33; Doc. #57-15, p. 11 of 32.

In 2004, JMF, Inc. exercised its option to renew early its license agreement with MSI. The early renewal addendum provided for a continuing license fee equal to 4.1 of the gross receipts from December 30, 2004, through February 27, 2018, plus contribute to a business development fund a fee of .8 percent of gross receipts, for a total fee of around 4.9 percent of gross receipts (Doc. #57-9, Fugleberg dep. pp. 33-34; Doc. #57-1, p. 1 of 5). From February 28, 2018, through February 27, 2028, the continuing license fee would be 2.2 percent of gross receipts plus the same contribution to the business development fund. Id.

The agreement further provided that fees contributed to the business development fund were to "be managed by the Company [MSI] or a business development trust established by the Company in its sole discretion from time to time, without any obligation to continue such separate trust." (Doc. #57-2, p. 11). The agreement further provided:

Methods, media employed, contents of advertising, and terms and conditions of advertising campaigns and promotional programs, studies, initiatives and other expenditures related to the development or retention of business, shall be within the sole discretion of the Company or if applicable, the business development trust. There shall be no requirement that all or any part of the fund be disbursed within any accounting period. Selection of media and locale for media placement shall be at the sole discretion of the administrator of the fund at the Company or if applicable, the business development fund. The Franchisee understands that the business development fund is intended to maximize the business generated and retained throughout the Franchise Network, and that the Company accordingly undertakes no obligation to insure that any individual franchisee benefits directly on a pro rata basis from the expenditures of the fund or from the placement, if any, of advertising or marketing.

Id. In addition to the identified advertising services, MSI agreed to provide accounting and bookkeeping services (Doc. #57-2, ¶ 22). It is undisputed there were complaints from franchisees regarding MSI's accounting and bookkeeping services (Doc. #59-1, Fiacco Dep. pp. 44-46).

Despite the identified services, John Fugleberg asserts he executed the renewal agreement in 2004 "primarily" because it contained a "most favored nations" clause (Doc. #62, ¶ 5), which reads in its entirety:

7.) Most Favored Nations Clause - If at any time during the term of the New Agreement, the Company is offering a new form of license agreement to all new franchisees in the state in which the Business is located, the Franchisee shall have the option of converting the New Agreement to the new form of agreement for the remaining term of the New Agreement (as amended by this Addendum). The Franchisee will not be required to pay any new initial fee to the Company in connection with the execution of that agreement, nor shall the Company be obligated to provide any pre-opening services to the Franchisee that it would provide to new franchisees under such agreement prior to the opening of their business, but otherwise, both the Company and the Franchisee shall be bound by the provisions of such new agreement, which shall take the place of all the provisions of the New Agreement upon its execution by the Franchisee and the Company. This conversion right shall apply only to a new form of license agreement then being offered to new franchisees seeking to become members of the Franchise Network, and shall not apply to any negotiated amendments to the current form of franchise agreement used by the Company or any subsequent form of agreement that may have been granted to any individual franchisee based upon its unique circumstances. In addition, no amendments to the New Agreement shall carry ...

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