By Geoff Bloom, Partner, Dr Teresa Nicoletti, Partner and Tania Jashnany, Paralegal
The dispute arose after the Pharmacy Council of NSW (Council, First Defendant) refused to register a pharmacist’s ownership interest in a pharmacy on the basis that Blooms the Chemist Management Services Ltd’s (Blooms, Plaintiff) Optimised Service and Licence Agreement (“OSLA”) and Loan Agreement effectively gave the company a prohibited financial interest, contrary to the National Law.
Blooms sought declaratory relief that its commercial arrangements with Tran Pharmacy (Cronulla South) Pty Ltd (Tran Pharmacy, Second Defendant) did not give it a “financial interest” under Schedule 5F of the Health Practitioner Regulation National Law (NSW) (National Law).
Justice Rothman found that Blooms had not demonstrated that it lacked a financial interest in Tran Pharmacy and that, on the evidence before the Court, the arrangements between Blooms and Tran Pharmacy conferred an interest in the profitability and value of the business. His Honour therefore sided with the state regulator, dismissing Blooms’ application for declaratory relief and awarding costs to the Council.
On 24 February 2023, the Council refused to register Tran Pharmacy’s proposed financial interest in the pharmacy business under clause 12(7) of Schedule 5F of the National Law on the basis that the arrangements would effectively give Blooms a “financial interest” in the pharmacy business, contrary to the restrictions in Schedule 5F. With limited exceptions, the National Law effectively prohibits anyone other than registered pharmacists from holding a financial interest in a pharmacy business.
Blooms sought internal review of the Council’s decision on 20 April 2023, which reaffirmed the original decision. Tran Pharmacy also applied to the NSW Civil and Administrative Tribunal (“NCAT”) for administrative review of the Council’s decision.
The NCAT proceedings were adjourned by consent once Blooms commenced proceedings in the Supreme Court under ss 69 and 75 of the Supreme Court Act 1970 (NSW) (Supreme Court Act) seeking a declaration that registering Tran Pharmacy’s would not cause Blooms to obtain a financial interest for the purposes of Schedule 5F to the National Law.
Blooms is a pharmacy franchise that provides management services to pharmacies within its ‘Banner Group’. As Blooms is not a registered pharmacist, it is not permitted to have a ‘financial interest’ in a pharmacy business. Blooms’ general structure involves a Working Partner registered pharmacist, who operates the business and owns 50% of the business, and a Consulting Partner registered pharmacist, who owns the remaining 50% and is not usually required to work in the pharmacy.
Tran Pharmacy is a body corporate that entered into arrangements with Blooms, including an Optimised Service and Licence Agreement (OSL Agreement) to operate under the Blooms brand and a Loan Agreement for the purpose of acquiring and operating the pharmacy business. Tran Pharmacy sought to acquire a 50% interest and was loaned the entire amount necessary for the purchase ($520,000) by Blooms.
The Council refused to register Tran Pharmacy’s ownership interest on the basis that the combined effect of the OSL Agreement and Loan Agreement meant Blooms would obtain a (prohibited) financial interest in the pharmacy business. Specifically, the Council reasoning for refusing registration was based on:
The Court took a broad approach to the meaning of “financial interest” in clause 2 of Schedule 5F of the National Law, which includes both “direct and indirect monetary or financial interests”. Justice Rothman emphasised that the concept is not limited to proprietary rights and may arise even where a person or entity has no role in the day-to-day management of the pharmacy.
Consistent with previous authorities,[1] the Court affirmed that whether a person has a financial interest is a question of “fact and degree”, determined by reference to the “real and effective relationship” between the parties, rather than their formal or theoretical legal relationship.[2]
In assessing that relationship, the Court considered the OSL Agreement and Loan Agreement together, within their broader commercial context. Although the OSL Agreement stated that the supply of goods was “at the request of the Partnership”, Justice Rothman found this to be illusory, as it was “wholly impractical” for the pharmacy not to make such requests. The base fee payable to Blooms applied regardless of the services used, meaning that a pharmacy would be paying for services even if it did not use them. Accordingly, while the agreement described those services as optional, they were mandatory in effect.
The OSL Agreement also gave Blooms substantial influence over the pharmacy’s operations, including core merchandise, purchasing, marketing materials, proprietary systems, and branding. Tran Pharmacy was required to obtain Blooms’ consent before stocking competing products, and Blooms could terminate the agreement if the pharmacy acted “contrary to Blooms’ values and strategy” or “adversely to the interests of Blooms.” The Court was not satisfied that Blooms did not control the operation of Tran Pharmacy, including its sales, pricing, and product range.
As to the Loan Agreement, the Court noted that Blooms’ ability to recover the loan depended on the increasing (or at least stable) value of the pharmacy. Because Blooms’ financial return was tied to the pharmacy’s market value and profitability, His Honour found that Blooms held an indirect financial interest in Tran Pharmacy.
Different banner groups have different proposed relationships with the pharmacy businesses that they support but, in the past 10+ years, to our knowledge, the Council has refused to register the transfer of financial interest to a number of different pharmacies with a number of different banner groups on the basis that the banner group would acquire a financial interest in the pharmacy business.
This has been a substantial impediment to the operation of the banner groups, which had no doubt hoped that the Blooms case would support their interpretation that their arrangements did not constitute a financial interest.
We are aware of banner groups which propose arrangements with their pharmacy businesses with less control and less of what is arguably a financial interest in the pharmacy business than the arrangement in Blooms. The Council rejected those arrangements too. While the case law is clear that every banner group arrangement must be viewed on its own facts, the judgment in the Blooms case is likely to be received with disappointment by banner groups generally.
Previous cases have suggested that franchise arrangements do not necessarily constitute a financial interest in the franchisee, however, judgment in the Blooms case suggests that it may be difficult to create a franchise arrangement that does not create a financial interest for the banner group franchisor.
[1] Attorney General for the State of NSW v Now.com.au Pty Ltd [2008] NSWSC 276.
[2] White v District Court of New South Wales (1998) 45 NSWLR 31.
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