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Restrictions on Pharmacy Locations

Jesse C. Vivian, BS Pharm, JD
Professor, Department of Pharmacy Practice,
College of Pharmacy and Allied Health
Professions, Wayne State University,
Detroit, Michigan

5/18/2007

US Pharm. 2007;32(5):66-70.

It is time to dream. Imagine a lifelong yearning to be your own boss in your own chosen profession operating your very own pharmacy. You can set your own hours, take vacations when you want to, and go to professional meetings when you like. You have decided that you're going to make a grab at the golden ring. How do you go about it? How are you going to decide where to operate, and what licenses and leases or building permits are you going to need? You have performed a market analysis, and you find the perfect location. This is the central touchstone of any business: location, location, location. But what happens when an organization, be it a government body or a private person, tells you that you cannot operate a pharmacy in that spot? Maybe it's just a coincidence, but it is enough of a sign that this issue should be reviewed when three cases from three separate jurisdictions, decided within 15 days of each other, all deal with the same issue--whether a pharmacy may operate in a particular location.

First Case
This situation arose when the owners of a gift shop in Isla­ morada, Florida, wanted to sell their property to an agent that would lease the property to Walgreens for purposes of operating a pharmacy.1 The couple who ran the store were unable to continue operating it due to their age and physical condition. Even so, this was not some little mom-and-pop tourist trap off a sleepy road on a tropical island. This was a 12,000-square-foot, full-service department store located on the superbusy Highway 1 on one of the larger islands that make up the Florida Keys. The property is zoned for commercial use. A typical Walgreens store is 14,000 square feet. The agreed-upon selling price was to be $2,650,000.

The village elders put up a roadblock in the form of an ordinance that limits "formula retailers" from setting up shop within the confines of the village. The ordinance defines "formula retail" as:
A type of retail sales activity or retail sales establishment (other than a "formula restaurant") that is required by contractual or other arrangement to maintain any of the following: standardized array of services or merchandise, trademark, logo, service mark, symbol, decor, architecture, layout, uniform, or similar standardized feature.2

The ordinance goes on to state:
A formula retail establishment shall be approved only as a major conditional use and must meet the following criteria: (1) shall not have a street level business frontage of greater than 50 linear feet; and (2) shall not exceed 2,000 square feet of floor area.3 Establishments that are not formula retailers are not subject to these limitations.1

When the property buyer sought an operating permit using the same footprint of the gift shop, the village director of planning and development refused to issue it. At his deposition, the director testified that "the only reason I was aware of, for the adoption of the Formula Retail Ordinance by the Village of Islamorada, was to keep the small town atmosphere."1 Another village official, when asked about the intent of the ordinance, stated, "We didn't want none of them darn chain stores coming to town. That's what it was all about, in plain words. My words anyway. So the thought was how do we stop that. We wanted to do something to prevent that."1

The deal fell through, and the gift shop owners sued the village, claiming the ordinance violates the Commerce Clause of the U.S. Constitution because they were denied a constitutionally protected right to sell their property. In just a few words, the Commerce Clause states: "Congress shall have Power ... [t]o regulate Commerce ... among the several States...." It has been said that "the Commerce Clause presumes a national market free from local legislation that discriminates in favor of local interests."4 It has been interpreted not only as an authorization for congressional action, but also, even in the absence of a conflicting federal statute, as a restriction on permissible state regulation.5

The matter was set to be heard by a jury trial in a federal district court in Key West. When enough jurors could not be found, the case had to be rescheduled as a bench trial, meaning the judge acted as both the jury and the judge.6 Probably, nowhere else but in Key West would a federal judge give up so quickly on summoning jurors to a courthouse. Maybe that is why they call it "Margaretville."

The judge noted that the only other pharmacy located on the island had been an Eckerd store that operated well before the village was incorporated in 1997. CVS bought out Eckerd in Florida and changed the name and signage to reflect the new ownership sometime in 2004, just before the sale of the gift shop was to have taken place. The judge also noted that "two members of the five-member Village Council that adopted the Ordinance owned businesses in the Village (one, a local restaurant; the other, a local grocery store)," within the categories protected from chain competition by the Ordinance. No doubt, this fact was important under the Commerce Clause because it appears the ordinance in question does favor local interests over a national free market of competitor businesses.

In answer to the putative "small town atmosphere" intent of the ordinance, the judge concluded:
No Goal, Objective or Policy of the Village's Comprehensive Plan mandates, or is implemented by, the Ordinance. Nor did the Council receive and consider evidence in the adoptive process: No supportive data were presented, and the Village neither conducted nor relied upon studies to establish a need for, or the probable effect of, the Ordinance. Islamorada has a number of "formula retail" businesses, including gas stations, a national-chain drug store, and other formula retail businesses, which were in existence prior to passage of the Formula Retail Ordinance. Photographs of numerous "formula retail" stores were introduced into evidence by Plaintiffs, and demonstrate that U.S. Highway 1 (the Village's "main street") accommodates many of the same chain stores (e.g., CVS, Burger King, Outback Steakhouse, Ace Hardware, Tom Thumb, True Value Hardware) that one might see on major thoroughfares anywhere in America. The Village has no Historic District, and there are no historic buildings in the vicinity of [the gift shop] property. The Ordinance is not necessary for preservation of the historic characteristics of any buildings in the Village.

Summarizing the judge's objections to the ordinance, he wrote:
The Formula Retail Ordinance effectively prevents the establishment of new formula retail stores within the geographical limits of the Village. A facility limited to no more than 2,000 square feet or 50' of frontage can not accommodate the minimum requirements of nationally and regionally branded formula retail stores. A facility subject to those limitations is unmarketable to formula retail operators. The Ordinance, as applied, has kept prospective formula retail operators, including Publix and Walgreens, from operating retail stores in the Village.

In his opinion, the judge did note that, in general, preserving a small-town community is a legitimate purpose. However, in this case, there was no small-town character to preserve. He noted that Islamorada is not uniquely relaxed or natural, nor is there a predominance of natural conditions and characteristics over human intrusions. In fact, it is bisected by Highway 1, a busy thoroughfare fronted by a large number of retail establishments, including well-known chain stores, such as CVS Pharmacy and Ace Hardware. Hence, in this judge's mind, any unique character or natural relaxed atmosphere of the village had already been diminished. He then concluded, "The purpose of this ordinance and its practical application is economic protectionism. This kind of local protectionism is ‘the very sort of protection against out of state competition that the Commerce Clause was designed to prohibit.'" For these reasons, the ordinance was found to be unconstitutional.

In all likelihood, the judge wanted to send a crystal-clear message to the village when he ordered it to pay the interest (approximately $600,000) that the plaintiffs could have earned on the purchase price, along with attorney fees and costs for the trial. Indeed, an expensive lesson.

Second Case
The city of Brea in California developed a plan for mixed-use commercial and residential space in an area known as the Brea Street Promenade Shopping Center or, more simply, Brea Downtown. The contractor who would build this complex agreed to a "Declaration of Covenants, Conditions and Restrictions for the Brea Downtown Owners Association" (CC&Rs), designed to provide for the "ongoing comprehensive marketing, enhanced levels of service, and property and assets management functions of the Brea Downtown."7 The declaration listed 46 uses for the various retail spaces. One of the spaces was leased to Tower Records, a nationally known music retailer. Tower Records declared bankruptcy and sought an order from the Bankruptcy Court to assign its lease to Walgreens for operation of a pharmacy. Two of the tenants objected, claiming the CC&Rs do not permit the operation of a pharmacy within the confines of the 46 permitted uses. One permitted use is retail sales of "health supplies."

Walgreens argued that "health supplies" should be interpreted broadly to include the operation of a pharmacy. The judge disagreed, stating that while Walgreens clearly sells merchandise that may be construed by the reasonable person as health supplies, such as vitamins, medical equipment, and personal care merchandise, its primary business is operating a retail pharmacy. According to this judge, for the past three years, over 63% of Walgreens' net sales has been generated through prescription drug sales. He noted that while it is unclear from the wording of the CC&Rs whether the parties intended "health supplies" to include a drugstore or pharmacy, the testimony of several witnesses, as well as the Development Agreement, helped him determine that "health supplies" does not include a drugstore or pharmacy. In coming to this conclusion, he considered that prior to the creation of the CC&Rs, the original developers and the city entered into the Development Agreement, which set forth approximately 40 permitted uses for Brea Downtown that included "drugstore" and "pharmacy." It was essential to observe that when the CC&Rs were formulated several months later, those same parties revised the permitted uses to intentionally omit "drugstore" and "pharmacy." The attorney for the city and the Brea Development Agency who participated in the negotiation and drafting of the CC&Rs testified that the omission of "drugstore" and "pharmacy" was a very specific and intentional exclusion negotiated by the city. Additionally, the attorney claimed that it was his understanding that the term health supplies did not contemplate prescription drugs or the operation of a pharmacy. The judge concluded that if the drafting parties wanted to include "pharmacy" as a permitted use, they would not have omitted it from the CC&Rs. The judge ruled in favor of the city and developer and against permitting Walgreens to operate a pharmacy at the former Tower Records site.

Third Case
A developer decided to build a shopping center. An entrepreneur bought one of the lots and opened a grocery store. The purchase agreement had a restrictive clause in it to the effect that the developer would not allow any other pharmacies to operate in its development if the supermarket tenant operated a pharmacy in its store. This non-compete agreement was to expire on the first of three contingencies to occur: (1) the passage of 30 years; (2) when the premises were no longer used as a supermarket; or (3) when the supermarket either ceased operating a pharmacy or reduced its size to less than 400 square feet of floor space.

This, of course, all seems simple and reasonable. The only problem is that the agreement failed to consider other contingencies that might render these clauses ambiguous and unenforceable. Here's what happened.

The grocery store opened in 1996 and operated without a pharmacy until 2004. Meanwhile, Thrifty Drug Stores opened and operated a pharmacy elsewhere in the shopping center. In 2004, Thrifty moved its store into grocery store premises. Another developer subsequently agreed to purchase lots from the original developer to open a competing pharmacy in the center. After learning of the restrictive covenant potentially barring its operation, this second developer filed a lawsuit seeking a judgment declaring the covenant null and void. The trial court concluded that the non-compete clause was ambiguous and therefore unenforceable.

In an appeal from that decision, Thrifty argued that the covenant clearly and unambiguously bars the operation of any other pharmacy in the shopping center when a pharmacy operates in the supermarket. In response, the second developer stated that he believed the covenant expired when the supermarket opened its store and operated without a pharmacy for eight years. The court described the agreement as an unambiguous "use it or lose it" provision and, alternatively, that the covenant is, at the very least, ambiguous and therefore unenforceable for that reason.

The Court of Appeals reversed the trial court findings and found that the restrictive covenant is enforceable because "its intent can be clearly ascertained from the language used. It unequivocally provides that the initial developer ‘will not allow any use of [its development property] for ... pharmacy sales if Buyer's Tenant has a pharmacy in its supermarket.' Once Thrifty moved into the supermarket space, the development was closed to all other pharmacies. No other interpretation of the quoted language is reasonably available. The restriction is clearly stated."8

Analysis
These cases demonstrate that it is essential for anyone wanting to open any kind of retail establishment, including a pharmacy, to carefully review zoning laws and any restrictions on the kinds of businesses that are permitted in certain areas. It is especially interesting to note that in the first and second cases, the towns had specific use restrictions, yet the results in the two decisions were diametrically opposed. Why? Because the Islamorada ordinance was designed to favor local merchants over regional or national retailers that were perceived as competitive threats. In addition, there were multiple national businesses already operating before the village was incorporated. In point of fact, there was already a CVS store near where the Walgreens was supposed to have operated. With no "small town atmosphere" to preserve, as applied, the ordinance ran afoul of the Commerce Clause. In the second case, there was no violation when the town described what kinds of businesses could be owned and operated within a specified business area. There was no competition to be thwarted and no discrimination to be found: The town did not want any pharmacies in this area. Why the town would want to exclude a pharmacy is a question that was not addressed and will therefore have to go unanswered for now. The third case, while similar in concept, dealt with a restrictive covenant that private parties agreed to. The case wound up in court because the parties failed to anticipate developments that would occur in the future that could cause ambiguities and uncertainties. The pharmacy that wanted to open in the same mall as the Thrifty Drugstore never even had the opportunity to compete.

All this is to say: Be careful in determining where your dreams may take you. Plan well in advance and always have backup alternatives.

References
1. Island Silver & Spice v. Islamorada, Slip Op No 04-10097-CIV-KING (February 28, 2007), 2007 US Dist Lexis 13939.
2. § 30-1264.
3. Ordinance 02-02, § 1.6.4.4, (2002).
4. C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383, 392, 114 S. Ct. 1677, 128 L. Ed. 2d 399 (1994).
5. Hughes v. Okla., 441 U.S. 322, 325-26, 99 S. Ct. 1727, 60 L. Ed. 2d 250 (1979).
6. Whatever you may have heard or read about the fine folk who inhabit the Florida Keys, it is probably true. Sitting on a jury is likely not a high priority for the residents of Key West. Here is a quote from the judge who issued this written opinion: panel of Keys residents summoned for jury duty at the United States Courthouse in Key West, Florida on May 22, 2006 fell short of the number needed to select a fair and impartial jury who had not learned of the case through prior media coverage and/or had formed opinions on the merits. After the entry of an agreed mistrial, the parties stipulated to waiving jury and proceeding to non-jury trial on August 28, 2006." See Note 1, supra.
7. In re: Three A's Holdings, Bankruptcy Chapter 11, Slip Op No 06-10886 (BLS) (March 5, 2007), 2007 Bankr Lexis 820.
8. ACE. Capital Group, LLC v. Nashfinch, Slip Op No. 2006AP1638 (March 15, 2007), 2007 Wisc. App. Lexis 254.

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