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Legal Considerations: ‘Drugstore’ or ‘Pharmacy’?

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A recent opinion reveals how the words “drugstore” and “pharmacy” may be interpreted in different ways. It also shows just how valuable the terms may be in conducting pharmacy (or drugstore) business.

Facts

Legal Considerations: ‘Drugstore’ or ‘Pharmacy’?A pharmacy signed a 20-year lease in 1977 with a commercial landlord, for occupancy of a 15,000-square-foot space in a shopping center. The pharmacy negotiated several exclusive rights in the lease, including an obligation by the landlord not to lease space in the shopping center to any other “drugstore” or any other store whose “primary business is the sale of patent medicines, health and beauty aids, cosmetics” or other specific items. A similar clause gave the pharmacy an exclusive right to operate a “photo-finishing business” in the shopping center. The pharmacy lease indicated that the pharmacy would be an anchor tenant and that the landlord would lease another anchor space to a supermarket. The pharmacy lease also indicated that the pharmacy’s exclusive right to sell specific items, including patent medicines, health and beauty aids, and cosmetics, would not apply to the supermarket. The pharmacy lease contained a clause that would obligate the landlord to pay the pharmacy a minimum of $25,000 annually if these provisions were breached.

The pharmacy was purchased by a large chainstore operator sometime later. As a successor to the original pharmacy, the chainstore assumed the rights and obligations of the lease. Near the end of the lease term, the lease was renewed.

A supermarket did eventually open in the shopping center. It operated for 18 years without a pharmacy or photo-developing service. The supermarket underwent a change of ownership and the new operator remodeled the store with a full-service pharmacy and a photo-developing drop box. The supermarket’s lease indicates that the supermarket is prohibited from operating a pharmacy only to the extent that the chainstore lease prohibits as much.

In April 1998, the chainstore notified the landlord that it was aware that the new supermarket owner was planning to open a pharmacy and photo-developing service. It asked the landlord to intervene and enforce the exclusivity portions of the chainstore lease. The landlord failed in its attempts to limit the supermarket’s plans. In June 1998, the supermarket did reopen with the pharmacy and photo-developing service.

Within four months after opening, the supermarket averaged approximately $30,000 in monthly sales just from the pharmacy. This represents about 2.3% of the supermarket’s total business. During the same period, the chainstore pharmacy generated an average of $55,000 per month, significantly less than when it operated the only pharmacy in the shopping center.

Lawsuits

Legal Considerations: ‘Drugstore’ or ‘Pharmacy’?The chainstore stopped paying the rent and the landlord filed a suit against the chainstore and the supermarket, seeking a declaratory judgment on the rights and obligations of all of the parties. The chainstore and the supermarket filed counterclaims against each other and the landlord for breach of contract. In essence, everybody claimed that everybody else breached the leases. Each of the parties also filed motions for summary judgments asking the trial court to declare a winner. The supermarket operator argued that it is not a “drugstore” or a “pharmacy” and that when a pharmacy is operated in a supermarket, the pharmacy is no longer a “drugstore” within the meaning of the chainstore lease.

The trial court judge ruled that the supermarket was neither a “drugstore” nor a “pharmacy,” nor engaged in a “photo-finishing business.” Part of the rationale expressed by the judge included the fact that only 2.3% of the supermarket’s income was generated from the pharmacy. The judge concluded that these sales are “incidental” rather than the “primary” source of income. The claims against the landlord and the supermarket were dismissed in January 1999.

Appeal

The chainstore appealed, claiming the judge made a mistake in interpreting the various provisions in the leases.

The Court of Appeals reversed the lower court rulings, taking what it called a “commonsense” approach to defining the relevant terms. The higher court ruled that considering the supermarket’s sales from the pharmacy operation as only “incidental” to the total business is “simply a red herring.” It noted that the supermarket pharmacy was bringing in $30,000 per month in pharmacy business while the chainstore pharmacy generated $55,000 in the same period— hardly incidental, noted the Court of Appeals. These figures qualified the supermarket pharmacy as “exactly the form of competition that the chainstore sought to avoid in its lease.”

The Court noted that the dictionary definition of a ‘drugstore’ is ‘a store where prescriptions are filled and drugs and sundries are sold.’

The Court of Appeals also found it absurd to not consider the supermarket’s pharmacy to be a “drugstore,” as that term is used in the chainstore lease. Looking at the exclusive rights provisions of the lease in context, this Court concluded that the supermarket is prohibited from selling prescription pharmaceuticals. The fact that the exclusivity clause provided an exception, allowing the supermarket to sell nonprescription patent medicines, health and beauty aids, and other specific items, did not give the supermarket any right to sell prescription-only items. The Court stated, “In other words, when the exclusivity provisions are viewed in context, it is clear that the chainstore’s prohibition of another ‘drugstore’ sought to avoid the competitive sale of prescription medicines in the shopping center.”

The Court noted language from another case of controlling precedence, stating that “the academic definition of words is often important, but more important still is the purpose of the [lease]. Has the purpose been kept or broken?” From this, the Court concluded that it is more important to look at the substance of the business than what it is called. The supermarket contended that it would not be in violation of the chainstore lease, as long as the supermarket did less than 50% of its business in prescription drug sales because until that time, it is not a drugstore. The Court rejected this argument, stating, “An approach that permits the label to control substance could surely lead to absurd results.” Further, the Court stated, “A ‘drugstore’ is no less a drugstore merely because it has been incorporated into a structure called a ‘supermarket.’” The Court also noted that the state statutes regulating pharmacists and pharmacies use the terms “drugstore” and “pharmacy” as synonyms. The Court then opened a dictionary and noted the definition of a “drugstore” is “a store where prescriptions are filled and drugs and sundries are sold.”
To add muster to its conclusion, the Court reached into an ancient Latin canon of contract construction and interpretation: expressio unius est exclusion alterius (“expression of one thing is the exclusion of another”). Excluding prescription drugs from the list of items that the supermarket could sell without violating the chainstore lease supports the notion that the chainstore has an exclusive right to prescription-only sales in the shopping center. Using similar logic, the Court also concluded that the photo-developing drop box in the supermarket also violates the exclusive right of the chainstore to engage in the photo-developing business.
The case will now be sent back to the trial court for further proceedings. Ultimately, a trial will be conducted to determine what damages, if any, have been sustained.

Analysis

Just as a rose is still a rose by any other name, a drugstore is still a pharmacy, no matter what it is called or where it is located. Because the supermarket relied on a very technical reading of the leases at stake, the Court of Appeals was forced to go beyond the words expressed in the agreements and look at the intent of the parties. As evidenced by the fact that the trial court judge took a radically different approach to interpretation than did the Court of Appeals, the question is not as close as it might seem on first blush.

Courts are often reluctant to enforce the kind of restrictive covenants contained in these leases because they do inhibit competition and infringe on the rights of parties to engage in the freedom of conducting appropriate business practices. Restrictive covenants in the form of exclusive rights are contrary to the notion of a free marketplace. Legitimate competition is often the cornerstone of consumer protection and the regulation prices and services. Yet, as important as these concepts are, the right to engage in an exclusive business within a reasonable geographical area can be an important tool for a landlord to attract certain desirable businesses to an area.

The Court of Appeals recognized the exclusive right to operate a pharmacy within the shopping center is not overly restrictive.

In this case, the Court of Appeals recognized the exclusive right to operate a pharmacy within the shopping center is not overly restrictive. It was also impressed by the fact that the chainstore lease carved out only a small portion of exclusive rights: the ability to conduct pharmacy and photo-developing services. The selling of cosmetics, nonprescription drugs and other sundries typically carried by both pharmacies and supermarkets was not affected. To the Court of Appeals, this seemed
to be a reasonable business scheme. A different result might have occurred were it not for these exceptions to the exclusivity parts of the lease.

The Court may have also been impressed by the fact that a pharmacy and supermarket co-existed in this shopping center for nearly two decades in relative peace and harmony. Trouble began only when the new supermarket owner went over the bounds of reasonable business practices to seek income from pharmacy operations. While the Court saw this as overreaching, its job of deciding what is fair under the circumstances was made more difficult because of the arguments advanced by the supermarket. But don’t blame the supermarket too much for taking “absurd” positions. It stands to lose over $30,000 per month in prescription sales. Desperation fuels absurdity in legal circles.

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