Shoppers Drug Mart Corp. , reeling from profit-pinching drug reforms, says it has been hit by a $1-billion lawsuit from two of its drugstore owners alleging breach of contract.
The store owners, who operate much like franchisees, are seeking class-action status, claiming that Shoppers collected or kept money or benefits beyond what was permitted by their contracts.
Although Shoppers provided few details, such as identifying the store owners involved, lawyer David Sterns, an expert in class-action franchisee cases, said such disputes often are touched off by a change in a corporate business model.
"Whenever you have a material change to the business model, it's quite common that people go back and start looking at their agreements and start figuring out where it is they can perhaps try to change things in their favour," he said.
Toronto-based Shoppers moved quickly last summer to overhaul its business strategy after Ontario adopted generic-drug reforms that squeezed pharmacies' bottom lines. The changes banned an estimated $750-million annually in professional allowances that generic drug companies paid to drug stores in exchange for shelf space. Chains such as Shoppers counted on those fees to help bolster their profits.
To offset the financial pain, Shoppers has looked for cost savings at its stores. For example, it has increased the number of hours that the owner-pharmacists must work behind the counter to 32 hours a week from 28 hours, according to an analyst. Shoppers has also shaved capital costs by cutting other labor expenses and scaling back expansion plans.
The need for new initiatives became apparent in Shoppers' third quarter, the first to feel the squeeze of the Ontario drug reforms. Its profit fell 6.7 per cent to $159-million, while sales grew 2.6 per cent to $3.09-billion.
Although courts in the past have been reluctant to sanction class-action cases, recent judgments probably opened the door for franchisees to obtain class-action status, said Mr. Sterns, who is not involved in the Shoppers matter.
Quiznos franchisees, for example, obtained class-action status after the Ontario Court of Appeal ruled last summer that such system-wide franchisee disputes are "exactly the kind of case for a class proceeding." Mr. Sterns represents Quiznos franchisees.
Tim Hortons franchisees, meanwhile, have sued the restaurant giant after it changed its business model several years ago by introducing "flash freezing" of baked goods rather than making them from scratch in the stores.