This is the fourth blog I’m writing about how dentists and DSOs (dental service organizations) have gotten into trouble in the U.S. In the first blog, I talked about some Colorado cases that came out in 2007 and which found business services arrangements between dental service organizations and dentists to be illegal and unenforceable. In the second blog, I took a look at Washington State. Interestingly, some new legislation came out in that state that helps make the business relationships between DSOs and dentists more balanced and transparent. In the third blog, I took a look at the State of Texas (historically, not in favour of DSOs); new legislation was passed to require dentists doing business with DSOs and DSOs themselves to register with the Secretary of State and disclose certain information. In other words: the State can keep a watchful eye on DSOs operating therein.
In this blog, I’m going to look at Georgia cases involving dentists and DSOs that actually ended well for the DSOs. You’ll see from the 2 cases below that, because the Courts were looking at Georgia State laws (different from other states and akin to Ontario, Canada) and the specific facts of the case, it came to a completely different conclusion about the legality of the business services arrangements – namely, they were enforceable!
Georgia (2004): Legal
In T. Barry Clower, D.M.D., P.C. and T. Barry Clower v. Orthalliance, Inc., 337 F. Supp. 2d 1322; 2004 U.S. Dist. LEXIS 20038 (decided September 24, 2004), a Georgia Court upheld as legal a business arrangement between a non-dentist management corporation, Orthalliance, Inc. (“Orthalliance”), and Dr. Barry Clower and his professional corporation. In that case, the business arrangement between the parties involved: (1) Orthalliance purchasing and merging with Dr. Clower’s professional corporation (note: Dr. Cower was paid in cash and stock in Orthalliance), (2) Dr. Clower creating a new professional corporation (the “New PC”), (3) Orthalliance leasing equipment and leasehold interests back to the New PC, (4) Orthalliance and the New PC entering into a Service Agreement whereby Orthalliance handled all financial and administrative affairs for the New PC for seventeen percent (17%) of the practice’s adjusted gross revenue as a service fee, while leaving the New PC to “retain control over all aspects of and decisions directly affecting the course of treatment of any patients”, and (5) Dr. Cower entering into a five (5) year employment agreement with the New PC. Dr. Clower, disappointed with the performance and value of Orthalliance’s stock and facing various personal difficulties, walked away from the business arrangement. Among other things, he claimed that that agreement with Orthalliance was illegal, as it allowed Orthalliance to practice dentistry, contrary to Georgia law.
The Court examined the jurisprudence and found the business arrangement legal and enforceable. George law prohibits the practice of dentistry without a license. Dr. Clower argued that Orthalliance’s control over the assets and personal of his practice was so extensive that Orthalliance was implicitly practicing dentistry through him and his professional corporation. Furthermore, Orthalliance’s control over the gross receipts of the practice allowed it to control both Dr. Clower and his professional corporation. The Court rejected these arguments. First, the Court noted that, while similar litigation involving Orthalliance and the business services agreement has been decided against Orthalliance in other states, “decisions are all highly dependent on the specific state laws in question”. For its part, Georgia law defines the practice of dentistry as performing operations on the human oral cavity or associated structures, tooth extractions, crown fillings, repairing appliances used on teeth, undertaking a physical examination of a patient. But Dr. Clower did not argue that Orthalliance actually performed any dental services. Furthermore, Georgia law prohibits corporations from employing dentists. But the Service Agreement made it very clear that Orthodontic did not intend, and in fact did not, employ Dr. Clower to carry out its own dental practice; rather, Dr. Clower’s professional corporation was given exclusive control of all dental care (including selecting equipment, employees and hygienists). The Court concluded: “Accordingly, Georgia case law counsels this court not to void this contract for illegality”.
Georgia (2007): Legal
In Re: OCA Inc. et al., v. Hector M. Bush et al., 78 B.R. 493; 2007 Bankr. LEXIS 3496 (October 9, 2007), the Bankruptcy Court for the District of Louisiana had to determine whether a BSA was illegal under Georgia law concerning the regulation of dentistry. Under the BSA, a non-dentist management company, OCA Inc. and its wholly owned subsidiaries (“OCA”) provided administrative support-type services to Dr. Bush. This includes, for example, leasing offices, equipment, furniture and improvements to Dr. Bush. OCA was also to provide, maintain and service computer systems as well as bookkeeping, billing, collections, bill payment and accounting services. OCA was to purchase and maintain inventory subject to Bush’s sole authority over and responsibility for all decisions concerning the inventory and supplies to be utilized by the practice. Dr. Bush was to retain control over all decisions relating to office personnel and hours of practice. The BSA was littered with language the clearly indicates that Dr. Bush is to retain control over all aspects.
The Court noted that the BSA is practically identical to the BSA in Clower v. Orthalliance, Inc., 337 F. Supp. 2d 1322 (N.D. Ga. 2004), where the Court found that the practice management company had not engaged in the unlicensed practice of dentistry as a result of the BSA with the dentist and his professional corporation.
Based on the evidence before it, the Court found that “Bush ran his own show”. He developed special protocols for his offices that were different from what OCA suggested. He disagreed with OCA policy promoting greater intervals between patient visits and resisted implementing that policy. He held a leadership position with OCA as a board member and doctor who helped OCA determined good methodologies for other doctors to follow. He impressed the court as a strong willed and successful orthodontist. The Court was not convinced by Dr. Bush’s arguments that OCA controlled his practices.
Next, Dr. Bush argued that the BSA was illegal because it contained language in a public filing that stated that OCA is an orthodontic practice. But this public filing turned out to be made in error and OCA tried to correct it (but could not because OCA was no longer publicly traded). The Court found the testimony of the chief accounting officer and interim chief financial officer credible, and the circumstances surrounding the erroneous filing understandable. The Court did not find that the erroneous statements were enough to show that OCA was engaged in the illegal practice of dentistry in Georgia.
Next, Dr. Bush argued that the BSA is illegal because partnership between an orthodontist and a corporation are prohibited, and the arrangement between Dr. Bush and OCA constituted a partnership. This argument is largely based on the language contained in old letter agreements between the parties, as well as public filings by OCA. But the Court rejected these arguments. The old letter agreements were superseded by the OCA (which clearly states that the relationship is not a partnership). And the Court previously dealt with the aberration that was erroneously filed. Furthermore, evidence was adduced to show that the parties did not share the risk: when opening certain offices, OCA bore 100% of the risk for the first two years of operation. If those officers were profitable, Bush was required to pay back some of the costs of construction. Expenses were not shared. Although OCA actually paid the bills, Bush was responsible for funding 100% of the operating expenses of his office. There was no joint control over the business. Although many decisions made with both parties’ input, Bush ultimately retained the control over final decisions. There was no joint ownership of capital. OCA owned the assets of the orthodontic offices and leased them to Dr. Bush, and Dr. Bush was required to purchase his practices from other orthodontists to pay some of the start-up costs of the new professional corporations if they were successful. The parties did not file partnership tax returns. And finally, at the relevant time, it was not the intention of the parties to be partners. As such, the relationship between the parties was not an illegal partnership between a corporation and an orthodontist in violation of Georgia law.
This is the third blog I’m writing about how dentists and DSOs (dental service organizations) have gotten into trouble in the U.S. In the first blog, I talked about some Colorado cases that came out in 2007 and which found business services arrangements between dental service organizations and dentists to be illegal and unenforceable. In the blog, I took a look at some at cases for Washington State which resulted in Courts declaring business services agreements to be invalid and unenforceable; in that article, I also talked about a new Washington Law that came out that made clear that dentists were allowed to contract with DSOs so long as DSOs didn’t interfere with the dentist-patient relationship in a number of ways.
Now, in this article, I’m going to review some Texas cases wherein the Courts invalidated business services agreements between dentists and non-dentists.
Importantly, in September 2015, the Texas legislature passed SENATE BILL 519, which increased transparency between dentists and DSO dealings. For example, under that law, DSOs were defined to include providing 2 or more dental support services to a dentist (e.g. providing office space, facilities, assets, staff, inventory management, regulatory compliance, information systems, legal services, financial services, billing services, payroll services, insurance services and marketing services, etc.). DSOs are required (after Feb 1, 2016) to register with the Secretary of State and identify those dentists it is supporting and pay a set fee. That information can be shared with the State dental board. A DSO that fails to file can be fined $1,000 a DAY! At the same time, the State dental board can find out from dentists if they have contracted with a DSO and if they have an ownership interest in a DSO.
Interesting, another Bill was introduced in 2015 (NOTE: it hasn’t gone anywhere and IT IS NOT the law in Texas) that is related to a dentist’s right to choose a service provider. That Bill, for example, says that a DSO would not be presumed to have engaged in illegally practicing dentistry if it leased space based on a “fee or amount that is reasonably related to the fair market value of the office space at the time the lease or other arrangement is entered into”. Also, a DSO would not be presumed to be illegally practicing dentistry if it sold or leased dental equipment, instruments and supplies so long as the dentist maintains “the complete care, custody and control of the dental equipment, instruments and supplies and the lease does not provide for a payment or fee based upon a percentage of the revenues received by the dentist or the dental practice”. And again a DSO would not be presumed to illegally practicing dentistry if it leased non-technical equipment like phones, computers, software, and general office equipment at “reasonable, market-related fees”.
Bottom line: Texas is currently keeping an eye on DSOs and historically, the legislation and the courts have not shown a lot of love for DSOs:
Texas (2003): Illegal
In Robert C. Penny, et al., v. Orthalliance, Inc., 255 F. Supp. 2d 579; 2003 U.S. Dist. Lexis 4719 (decided March 26, 2003), the Texas District Court had to determine whether a series of agreements (Purchase and Sale Agreement, Service Agreement, and Employment Agreement) are illegal and therefore invalid because their interrelationship allows a non-dentist management company Orthalliance Inc. (“Orthalliance”) to practice dentistry without a license in violation of the Texas Dental Practices Act. Under that Act, a person may not practice dentistry without a license. A person practices dentistry if, among other things, he or she “owns, maintains, or operates an office or place of business in which the person employs or engages under any type of contract another person or persons to practice dentistry”.
The Court applied rules of statutory interpretation to give effect to this prohibition. The Court found that “owns, maintains, or operates” are well defined and commonly understood. These unambiguous terms also prohibit a dentist’s employment or engagement under any type of contract at an office owned, maintained, or operated by non-licensed persons.
Based on this interpretation, the Court found that the Agreements violated the Dental Practices Act and are therefore illegal because: “(1) the Purchase and Sale Agreements transfer title in all of the tangible assets of the orthodontic offices to Orthalliance, thus transferring ownership of the offices to Orthalliance; (2) the Service Agreements obligate Orthalliance to operate and maintain the orthodontic offices; and (3) the Employment Agreements require that the Individual Plaintiffs remain employed at Orthalliance’s offices for a term of years, therefore Orthalliance employs or engages the Individual Plaintiffs. The interrelationship of the Agreements thus permits Orthalliance to own, operate, and maintain the offices in which it employs or engages the Individual Plaintiffs to practice dentistry.”
Given that the illegal and legal activities were so comingled that the illegal provisions could not be severed, and given that the entire contractual scheme was developed to do indirectly that which they could not do directly, the Court held the entire contractual scheme invalid (as opposed to severing the illegal provisions from the legal ones).
Texas (2005): Illegal
In David Becka, D.D.S., et al. v. Orthodontic Centers of America, Inc., et al., 2005 U.S. Dist. LEXIS 46904 (March 31, 2005), the Texas District Court found a BSA illegal on the basis that it allowed a non-dentist management corporation, Orthodontic Centers of America Inc. and its subsidiary (“OCA”) to practice dentistry without a license in violation of the Texas Dental Practice Act. As per that Act, a person may not practice dentistry or dental surgery unless they are licensed. Among other things, a person is considered to practice dentistry if they own, maintain, or operate an office or place of business in which they employ or engage under any type of contract another person to practice dentistry. The Court cited and followed the decision in Penny v. Orthalliance, Inc., which found that BSA was illegal and unenforceable because it allowed OCA to engage in the illegal practice of dentistry.
First, the Court found that the terms of the BSA clearly showed that OCA had exclusive ownership rights in the office. For example, OCA agreed to lease, maintain and sublease to Dr. Beck the office space and other facilities to operate his practice. OCA acquired exclusive ownership rights in, and custody of and control over all the furniture, fixtures, equipment and leaseholds needed for the practice’s operations. Finally, OCA agreed to pay all license fees, assessments, charges, and taxes for the ownership, leasing, sale possession or use of the equipment required for the practice.
Next, the Court found that OCA actually operates and maintains Dr. Becka’s office. Under the BSA, OCA was responsible, and the exclusive agent, for providing the business and administrative support and services required by Dr. Becka for day-to-day operations of the practice. OCA also retained signatory authority over the practice’s accounts for processing payments and invoices. OCA employs and provides all of the practice’s staff and sets the minimum hours and days when the practice must be open for business. OCA also sets uniform and dress code guidelines for the practice and Dr. Becka may only use computer, management information and business systems recommended or approved by OCA.
Next, the Court found that OCA was responsible for maintaining the practice’s office in good working order, condition and repair. OCA had to provide business and administrative support and services for the day-to-day operations of the practice; OCA also acquired the facilities used by the practice and was responsible for maintaining the equipment used in the practice, as well as paying all insurance costs, fees, assessments, charges and taxes imposed upon its ownership of the equipment. OCA also had almost complete financial control over the practice. It had an exclusive special power of attorney and was appointed Dr. Becka’s exclusive true and lawful agent and attorney-in-fact for all billing, collection and depositing of funds generated by the practice. OCA had signing authority over the practice’s account and had exclusive authority to disburse funds from the account. Dr. Becka could not withdraw funds from the account without OCA’s prior written consent. Funds disbursed from the account would go first to repay loans and reimburse OCA for expenses and services; remaining funds are disbursed to Dr. Becka.
Finally, the Court found that Dr. Becka was an employee of OCA, contrary to the Dental Practices Act. Dr. Becka practiced orthodontics at offices owned, operated and maintained by OCA. OCA provides the business and administrative support and services reasonably required for the Practice’s day-to-day operations. OCA sets the Practice’s minimum hours and days of operation and sets minimum uniform and dress codes for Dr. Becka and his staff. OCA retains the authority to bind Dr. Becka to contracts. OCA maintains exclusive control over all funds coming into and being disbursed from Dr. Becka’s offices. OCA measures Dr. Becka’s salary under a formula tied directly to the Practice’s revenue and compensates Dr. Becka by issuing payroll checks from the Practice’s account, which OCA controls. For these reasons, Dr. Becka was considered an employee.
For these reasons, the Court held that the BSA is illegal and therefore unenforceable because it allows OCA to practice dentistry without a license in violation of the Dental Practices Act.
Texas (2006): Illegal
In David S. Turner, D.D.S., M.S. Inc. et al. v. OCA, Inc. et al., 2006 U.S. Dist. LEXIS 98129 (December 5, 2006), Dr. David Turner sought to have the Texas District Court declare a BSA invalid and unenforceable under Texas law. To begin, the Court found that the BSA was illegal and unenforceable because it allows OCA, Inc. and its wholly owned subsidiaries (“OCA”), to practice dentistry without a license in violation of the Texas Dental Practices Act. A person practices dentistry if he or she “owns, maintains, or operates an office or place of business in which the person employs or engages under any type of contract another person or persons to practice dentistry” [see: TEX. OCC. CODE ANN. § 256.003(a)(4)]. In this respect, the Court found that OCA owned, operated and maintained dental offices pursuant to the terms of the BSA. The latter, for example, provided that OCA would be the sole and exclusive agent for providing Dr. Turner with the business and administrative support and services, staffing, offices and equipment, and financial services. Furthermore, in exchange for providing those services, the BSA required Dr. Turner to pay OCA a monthly service fee that included a dollar-for-dollar reimbursement of expenses incurred by OCA, a flat fee to cover consulting, and a performance fee equal to fifty percent (50%) of the practice’s Net Operating Margin. The BSA also required OCA to maintain the dental offices for an extended period of time. In light of these and other provisions, the Court found that the express purpose of the BSA was to allow OCA to control the functioning of or manage the dental offices, as well as to maintain dental offices.
Furthermore, the Court found that OCA had employed or engaged Dr. Turner to practice dentistry at the offices which they operate and maintain, in violation of the Texas Dental Practices Act. The Court pointed to the following provisions of the BSA to support this finding. For example, the BSA requires Dr. Turner to be employed at the office for an initial term of seven (7) years and OCA issues him payroll checks from the account it administers on a bi-weekly basis. Furthermore, the BSA states that all monies collected for Dr. Turner are deposited into an account containing the name of Dr. Turner’s professional corporation but which OCA has signing authority over and for which OCA has retained responsibility for making disbursements from. In light of these and other provisions, the Court concluded that OCA employs or engages Dr. Turner.
Texas (2010): Illegal
In Robert Packard D.M.D., M.A., Packard Orthodontics PA v. OCA, Inc.,624 F.3d 726, 730 (5th Cir. 2010) [on appeal from Packard v. OCA, Inc., 2009 U.S. Dist. LEXIS 91955 (E.D. Tex., Sept. 25, 2009)], a non-dentist management corporation, OCA, Inc., (parent company) and Orthodontic Centers of Texas Inc. (subsidiary) (collectively, “OCA”), sought to recover money owed by Dr. Robert Packard pursuant to a BSA. Importantly, the BSA had previously been declared illegal by a Texas appellate court [see: In re OCA, Inc., 552 F.3d 413, 424 (5th Cir. 2008)]. What was unique in this case was that OCA sought to recover money based on non-contractual equitable claims – in other words, claims that could survive a determination of contract illegality under certain circumstances. Among other things, OCA sought recover on the basis that the public interest in ensuring that Dr. Packard was not unjustly enriched at the expense of OCA outweighed the public interest in refusing to aid OCA in skirting the law. The Texas appellate Court rejected this argument for a number of reasons. The public’s interest in preventing the unlicensed practice of dentistry by OCA outweighed OCA’s ability to recover monies it paid to do so. Importantly, “[t]hat Packard is also a fellow wrongdoer and may have violated his duties as a dentist during the course of the OCA-Packard relationship is of no consequence to determining whether the public’s interest would be furthered in allowing OCA to recover”. Finally, allowing OCA to recover from Dr. Packard would not serve the higher public right by discouraging future illegal arrangements like the BSA. For these reasons, the Texas appellate Court dismissed the case against Dr. Packard.
In Orthodontic Centers of Texas, Inc. v. D.D.M. Michael Wetzel et al., (2011), 410 Fed. Appx. 795, a non-dentist management corporation, Orthodontic Centers of Texas Inc. (“OCT”), sought to recover money owed by Dr. Michael Wetzel pursuant to a BSA. Importantly, that BSA had previously been declared illegal by a Texas appellate court [see: In re OCA, Inc. 552 F. 3d 413]. What was unique in this case was that OCT sought to recover money based on non-contractual equitable claims – in other words, claims that could survive a determination of contract illegality under certain circumstances. Among other things, OCT sought recover on the basis that the public interest in ensuring that Dr. Wetzel was not unjustly enriched at the expense of OCT outweighed the public interest in refusing to aid OCT in skirting the law. The Texas appellate Court rejected this argument and affirmed the finding in Robert Packard D.M.D., M.A., Packard Orthodontics PA v. OCA, Inc. Specifically, the Texas appellate Court found that the public policy against assisting a wrong-doer (namely, OCT, which was found to have engaged in the unlicensed practice of dentistry) was more important than allowing Dr. Wetzel to be unjustly enriched at the expense of OCT. The appellate Court reasoned that OCT was a “sophisticated party that should have been aware of the risk that this agreement with Wetzel posed”. It actively pursued its business model despite the known risks and should bear the consequences when such strategies fail. Finally, allowing OCT to pursue its claim “would not discourage corporations like OCT from entering into agreement to practice unlicensed dentistry in the future”. For these reasons, the Texas appellate Court dismissed the case against Dr. Wetzel.
This is the second blog I’m writing about how dentists and DSOs (dental service organizations) have gotten into trouble in the U.S. In the first blog, I talked about some Colorado cases that came out in 2007 and which found business services arrangements between dental service organizations and dentists to be illegal and unenforceable. In this blog, I’m going to look at cases for Washington State. While 3 / 4 cases resulted in business service arrangements being declared illegal (and the 1 / 4 case being so narrow in application that it’s not really giving anyone a green light on fee splitting), what’s important is that the courts repeatedly said that they would look beyond what was written to determine if the non-dentist was practicing dentistry in reality.
So here we go… by the way, you can scroll down to the bottom to see the NEW LAW (called SUBSTITUTE SENATE BILL 5322 that was passed in Washington State a few months ago (and which takes effect this month) that confirms dentists’ rights to contract with DSOs for business support and reaffirms existing state law that prohibits unlicensed persons and non-professional entities from interfering with a licensed dentist’s independent judgment on patient care. Importantly, SSB 5322 was a compromise Bill between DSOs and those who wanted to restrict them. Among other things that Bill defines the unlicensed practice of dentistry as interference with a licensed dentist’s independent clinical judgement. This could include a non-dentist doing things like imposing time limits for patient procedures; limiting or imposing requirements on a dentist’s decision regarding a patient’s course of treatment; requiring or limiting the use or choice of a laboratory, materials or equipment in patient treatment; limiting or imposing requirements on the referrals by dentist to a specialist or any other practitioner; interfering with a dentist’s access to patient records; and interfering with a dentist’s decision to refund payments made by a patient for treatment performed by the dentist.
It also prohibits a non-licensed person or entity from employing or contracting for the services of licensed dentists, licensed dental hygienists, licensed expanded function dental auxiliaries, certified dental anesthesia assistants and registered dental assistants. The legislation gives the state department of health and the attorney general authority to investigate and enforce the law, up to and including issuance of cease-and-desist orders to prohibit continued operation by those who violate those conditions. Violation of this law is a misdemeanour for those non-dentists that get in the way between a dentist and their patient.
Importantly, this new Bill says that there’s nothing here to prevent a non-dentist from: owning or leasing assets used by a dental practice except dental records of patients; employing people (other than those health professionals noted above); providing business and support services and management services to a dental practice and receiving fees for these “calculated as agreed to by the dental practice owner or owners”.
Also, that Bill noted that dentists should be able to determine the dental practice model would allow them to best serve the needs of their patients. Dentists should have the option to contract for administrative support services and dentists should also be able to lease real or personal property in a manner that meets their individual business needs. The legislature intends that these contract decisions must not interfere with the independent clinical judgment of the dentist entering the contract.
In other words: WOW!
BY THE WAY, on January 22, 2015, House Bill 1514 had been introduced (though it never went anywhere other than to get significantly watered down in Senate Bill 5322) that would have put SIGNIFICANT RESTRICTIONS on DSOs operating in that State. For example, that Bill would have prohibited unlicensed persons from having an ownership interest in the dental practice (although they could own equipment / leaseholds) or sharing in the revenues / profits / proceeds of a dental practice (including compensation for services that included a share of the revenues or profits of the practice). That Bill would have also limited agreements to 1 year, forbid non-competes, and required copies of all agreements be provided to the State Dental Board upon request. DSOs could now own patient charts or hire dentists or hygienists or otherwise interfere with a dentist’s independent clinical judgment. Dentists could also cancel their contracts at any time.
Now, let’s get on with the caselaw (which had to decide on laws that applied at that relevant time):
Washington (1950): Illegal
In State et al. v. Boren et. al., (1950) 36 Wash.2d 522, the State of Washington started an action against two individuals – A. E. Boren and W. W. Shepherd – for illegally practicing dentistry in that State. The State of Washington also commenced an action against two dentists in that state, C. D. Harlow and R. T. Stickels, for aiding and abetting Boren and Shepherd in such illegal practice of dentistry.
By way of background, Boren and Shepherd were partners. Their business was called Dental Management Company. It operated offices throughout Washington. One such Seattle practice was sold to Dr. Bergman, a licensed dentist. Dr. Bergman died and the business was eventually returned back to the partnership, which entered into a conditional sales contract with Dr. Harlow for $55,000. Dr. Harlow agreed to pay $750 / month on the contract. As part of that deal, Boren was employed as a manager at $500 / month. Boren managed the office, buying the supplies and watching the charts and making the accounts and payments, and general manager, and looking after the advertising.
Under this arrangement Dr. Harlow also drew a salary of $500.00. So we find that in addition to the ordinary costs of operation, there was each month paid out of the business, the following: To Dental Management Company, on the contract, $750.00; to Dr. Harlow, salary, $500.00; to Mr. Boren, salary, $500.00.
But for a period of time, there was paid to Boren ‘bonuses’ totaling thousands of dollars. Dr. Harlow testified that these amounts were given ‘in appreciation of the increase in business’. No explanation was given as to why this money was not paid to the partnership in reduction of the contract obligation.
From all of the foregoing, the Court found that Boren and Shepherd, with the knowledge and consent of defendant Harlow, owned, managed and operated that dental office in Seattle, contrary to Washington law.
The Court also addressed a constitutional challenge made by the defendants to that law on the basis that it restricted ownership of property (a natural right). In a previous case, State v. Brown, 37 Wash. 97, the Court found that a prohibition on one who doesn’t have a license to practice dentistry from owning, maintaining or operating an office for the practice of dentistry was a violation of the constitution of Washington.
But a majority of the Court in this case OVERRULED that decision in the following paragraph:
But there is a clear distinction between the right of the state to interfere with the owning and managing of property, as such, and its right, under its police power, to protect the health of its people. Experience has shown that the care and treatment of the teeth requires, not only skill, but the personal relationship between dentist and patient. It requires the services of a trained expert, learned in his profession. The care and treatment of the teeth is not a business. It is not a commercial transaction. It is a profession. A person may own and sell dental equipment and supplies. But the state, in the exercise of its policy power, has said that he cannot, without a license, practice dentistry. The state has said, in its wisdom, that a person practices dentistry ‘who owns, maintains or operates an office for the practice of dentistry.’ There can be no question but that the activities of Boren and Shepherd come within this definition. The state has decided that such a practice does not adequately protect the health of its people. Clearly, such a regulation is a reasonable exercise of its police power. For the reasons hereinabove assigned, the decision in State v. Brown is hereby overruled [emphasis added].
Washington (1951): Legal
In Prichard v. Conway, (1951), 39 Wash. 2d 117, the Court approved quasi-profit-sharing between a dentists and a non-dentist. Just keep in mind that this was a very limited situation involving a dentist’s widow (Constance Conway) who had sold her deceased husband’s practice to another dentist (Dr. James M. Prichard). Mrs. Conway reserved the right to manage the office, to receive instalment payments of the purchase price for 10 years, and to receive net profits of 70 percent the first year, 60 percent the second year, and 55 percent for years three through five. Thereafter Dr. Prichard was to have all of the net profits. It is to be noted that, before any profits were to be divided, $300 was to be paid on the purchase price and Dr. Prichard was to draw $750 each month, in addition to the payment of all other operating expenses. It is to be noted, further, that, without any investment on his part, Dr. Prichard was taking over an established dental practice.
Upon viewing these profit-sharing provisions in context of the entire transaction, the Court concluded that this arrangement was entirely lawful as a means of transferring the good will of the practice. Furthermore, the seller’s involvement in the office management was limited to tasks routinely performed by non-professional employees and was intended to facilitate transfer of the practice’s business operations to the buyer. For his part, Dr. Prichard, pursuant to the agreement, was to spend his whole time to the professional care of the office and have exclusive control over professional conduct and practice in the office. The Court basically found legitimate reasons for incorporating profit-sharing provisions.
In coming to its decision, the Court review the aforementioned State v. Boren case, and distinguished it from the present case. The Boren case, for example, dealt with non-dentists who, having a chain of dental offices, were ostensibly selling one of them to a licensed dentists but were actually pocketing all the profits from the operation through bonus payments. And in the present case, Mrs. Conway was allowed to own the property and interests which she sold to Dr. Prichard and didn’t employ a dentist to take over her late husband’s practice and operate it for her. As to whether the agreement between Mrs. Conway and Dr. Prichard was void for being against public policy, the court found that “it is a bona fide contract of sale calculated to protect and to benefit both parties, and none of the provisions of that contract brand it illegal or contrary to public policy. The fact that Mrs. Conway was to have a relatively large percentage of the net profits during the first five years does not establish that she owns, maintains, or operates an office for the practice of dentistry, but, rather, that she and Dr. Prichard had agreed upon a formula for arriving at a value of the ‘going business,’ which we conceive to be the good will of the established dental practice.”
The Court also noted that the delineation in the contract, between professional conduct and practice (which was Dr. Prichard’s domain) and the business management of the office (which Mrs. Conway was to superintend), at first may have supported the view that Mrs. Conway was not practicing dentistry illegally. But it was Mrs. Conway’s conduct – instead of anything written in a contract – that helped convince the Court that she was going beyond what was proper for non-licensed personnel to constitute practicing dentistry.
the fact that the same details are supervised by one who, instead of being an employee, is selling the practice under a conditional sales contract, does not of necessity constitute such ownership, maintenance or operation of an office for the practice of medicine or dentistry as is contemplated by [the statute], although it could well be, a factor requiring a closer scrutiny of the entire transaction to determine whether it is actually what it purports to be or, instead, is a scheme or subterfuge to violate the law.”
Bottom line: parties should be cautious about relying upon the Prichard case in support of fee-splitting between dentists and non-dentists.
Washington (2004): Illegal
In Ghorbanian v. Fallahzadeh, No. 50766–4–1 (Wash.Ct.App. Jan. 5, 2004), the Court of Appeals had to determine whether the combined effect of a rental agreement and a non-dentist’s discretionary power over a dental practice’s funds and physical assets resulted in that non-dentist illegally owning, operating or maintaining an office for the practice of dentistry (contrary to Washington law).
By way of background, Dr. Abraham Ghorbanian partnered with a senior member of the Persian American community, Akbar Fallahzadeh (who was not a dentist) to buy a building which would house Dr. Ghorbanian’s dental practice. They had a lawyer prepare a lease agreement providing for Fallahzadeh to lease the building to the practice in exchange for rent in the amount of 50 percent of the practice’s net profits. Net profits were defined as all profits after deducing ordinary operating expenses but before deducting the mortgage payment or Dr. Ghorbanian’s salary.
Fallahzadeh was also involved in Dr. Ghorbanian’s acquisition of the dental practice: Fallahzadeh signed a $200,000 personal guarantee for Dr. Ghorbanian to buy the dental practice. Fallahzadeh also became an office manager for the practice. As office manager, Fallahzadeh had check-writing authority and handled the practice’s accounts. Fallahzadeh periodically deposited personal funds into the accounts as loans to the practice. He routinely transferred funds, which included loan repayments, rent, and his $5,000 monthly salary, from the practice’s accounts to his personal accounts.
Dr. Ghorbanian soon became concerned with Fallahzadeh’s withdrawals from the practice’s accounts. He eventually called the police to report possible embezzlement and instructed Fallahzadeh not to return to the office, effectively terminating his employment. Fallahzadeh did not return.
When Dr. Ghorbanian stopped paying rent allegedly due, Fallahzadeh sued. In defence, Dr. Ghorbanian argued that their lease agreement was illegal and invalid. A lower court found the lease to be legal. But on appeal, the Court of Appeal disagreed and found that the lease agreement between the practice and the landlord constituted an illegal partnership between a professional and a non-professional and was thus not enforceable.
In come to its conclusion, the Court started off by stating that, pursuant to Washington law, any person who “owns, maintains or operates an office for the practice of dentistry” is engaged in the practice of dentistry: RCW 18.32.020(3). Furthermore, unlicensed persons and entities may not engage in the practice of dentistry. For his part, Dr. Ghorbanian argued that the “reality” of the parties’ business relationship resulted in an illegal partnership between a dentist and non-dentist.
Against this, however, Fallahzadeh argued that it is common commercial practice to include rent provisions based upon a percentage of the tenant’s profits and that these arrangements are legal and enforceable, as long as the tenant retains complete professional control. In support of this, Fallahzadeh pointed to a number of non-Washington cases upholding percentage agreements applicable to professional service providers – such as Bd. of Optometry v. Sears, Roebuck & Co., 102 Ariz. 175, 427 P.2d 126 (Ariz.1967) (holding that rent provision for 20 percent of optometrist’s gross sales, repair work, and services was not an illegal employment agreement); Wyoming State Bd. of Examiners of Optometry v. Pearle Vision Ctr., Inc., 767 P.2d 969 (Wyo.1989) (holding that 8.5 percent “franchise fee” on gross revenues did not violate statute prohibiting fee-splitting); and Bronstein v. Bd. of Registration in Optometry, 403 Mass. 621, 531 N.E.2d 593 (Mass.1988) (holding that 15 percent rent provision for gross receipts over $500,000 did not constitute illegal fee-splitting).
But the Court rejected these cases on the basis that they didn’t involve a percentage as high as 50%, didn’t involve tenants-in-common, and didn’t address the issue of whether a lease violates Washington’s statute prohibiting a non-dentist from owning, operating, or maintaining an office for the practice of dentistry.
Instead, the Court cited Boren (discussed above) and found many similarities – such as Fallahzadeh assuming sole responsibility for handling the practice’s finances to the extent that he routinely would transfer loan repayments, rental payments, and salary payments from practice accounts to his personal accounts.
Fallahzadeh argued that he was not involved in the delivery of professional services, but the court found that this was not determinative and that he still retained “a substantial beneficial interest in the practice’s profits”. Fallahzadeh also had significant rights under the lease as a landlord to control certain aspects of Dr. Ghorbanian’s practice, such as making physical improvements to the premises which might be needed for patient care.
What seemed to irk the Court in this particular case was that Fallahzadeh has offered no explanation for why he and Ghorbanian agreed to a rent amount that grossly exceeded the market rate. For the first six months of the agreement, monthly rent for the building averaged at $21,916, based upon the special master’s calculations. The market rate for the building during this period was determined to be approximately $3,700. When this disparity is viewed together with Ghorbanian’s inability to deduct standard expenses, such as the mortgage payment or his salary, from his monthly profits before paying rent, it is clear that the lease enabled Fallahzadeh to obtain a financial interest in the partnership in violation of Washington law.
Washington (2004): Illegal
In Engst v. OrthAlliance, Inc.,2004 WL 7092226 (U.S. District Court, W.D. Washington), the Washington District Court had to determine the legality of various types of agreements entered into between a group of orthodontists and their associate professional services corporations (the “Ortho Entities”) and Orthalliance, Inc., a non-dentist management company. Pursuant to these agreements (namely, purchase and sale agreements, consulting / business services agreements, employment agreements and personal guarantees), Orthalliance, Inc. was supposed to provide office facilities and equipment, personnel and payroll, business systems, procedures and forms, purchasing and inventory control, accounting services and financial reporting, legal services, marketing assistance, planning for the opening of offices in new locations, billing / collection services payment and disbursements of funds and record keeping. Orthalliance, Inc. actually assisted in staff scheduling and consulting with and advising the Orthodontic Entities about their equipment and office needs and efficient configuration of its office space. In return, the Orthodontic Entities paid Orthalliance a year fee of the greater of $194,703 or 17% of their Adjusted Gross Revenue.
With respect to the employment agreements, they were entered into by the individual orthodontists and their respective Orthodontic entity. In those agreements, the orthodontists agreed to be employed for a period of five (5) years, subject to renewal for successive one (1) year terms after that. The orthodontists also agreed not to practice orthodontics at any other facility or for the benefit of any other patients. Orthalliance, Inc. wasn’t a party to those employment agreements.
With respect to the personal guarantees, executed by the orthodontists and Orthalliance, Inc., the Orthodontists personally guaranteed payments of the amounts due to Orthalliance, Inc. from the Orthodontic Entities for a period of five years.
The orthodontists sued to get out of these arrangements complaining, among other things, that Orthalliance, Inc. had failed to provide services as required. Plus, they claimed that there were illegal covenants not to compete. Finally, they claimed that their relationship violated Washington’s law against the corporate practice of dentistry.
On the orthodontist’s motion for summary judgement, the court reviewed the jurisprudence. First, the court noted that Washington courts had previously ruled against non-medical corporations practicing medicine by employing licensed professionals because it was contrary to public policy. The court noted that this wasn’t necessarily the case here since the orthodontists were employed by their own Orthodontic Entities; but the court looked at the entire relationship with Orthalliance, Inc. and held that there was a de facto relationship between the parties ( based on the effect and purpose of the contractual agreements between the parties). This was supported, for example, by Orthalliance Inc. which stated that it could, as a third-party beneficiary, enforce the employment agreements (particularly the non-compete clauses).
In applying the law, the court found that, even though Orthalliance, Inc. had no involvement in delivering patient services, it was still in contravention of the law. First, the services that it was supposed to provide was beyond what was customary for an office manager, office secretary or bookkeeper. Next, Orthalliance, Inc. tried to claim that the dentist was free to select which services it wanted; this troubled the court because Orthalliance, Inc. was charging minimum amounts and if no services were selected by the dentist, it would be charging in exchange for providing nothing! The court also found that Orthalliance, Inc.’s claim to be a third party beneficiary of the employment agreement (and attempt to enforce non-competes there), combined with the personal guarantees of the orthodontists had the effect of putting Orthalliance, Inc. in the position of a virtual employer of the orthodontists and to enable Orthalliance, Inc. to retain a beneficial interest in the profits from the practice of dentistry. With respect to the minimum fees it charged, although the 17% was much lower than what other courts had observed, it was simply a percentage floor and not determinative of what could be charged; also, the $194,703 minimum could exceed the entire amount of “adjusted gross revenue” realized by the Orthodontic Entities in a given year!
For these reasons, the court found that Orthalliance was illegally practicing dentistry. It also noted the agreements were contrary to public policy and won’t be enforced. The Court refused to sever those parts of the agreements that were contrary to the law because it found the “entire relationship between the parties which is in contravention of the law”. For these reasons, the agreements were “void as illegal and against public policy”. Orthalliance, Inc. was ordered to retain ownership of the assets it obtained through the purchase and sale agreements; the orthodontists were ordered to retain the payments they received from Orthalliance, Inc. under those agreements. No party has any other obligation to the other party under the consulting and business services agreements.
There’s no denying that Dental Service Organizations (DSOs) will continue to “affiliate” with dental practices in Canada much faster than ever before. David Mayzel and I just returned from the definitive DSO conference in the U.S. (New Orleans) a few weeks back and we want to share our knowledge on the topic with Canadian dentists. We are neither for or against DSOs. It’s up to dentists if they want to work for or sell their practices to DSOs. We just want to make sure that all parties understand the legal framework that currently exists for dentists and DSOs so that we can avoid the mishaps and pitfalls that have plagued our U.S. neighbours.
So with that said, I figured it would be a good idea to start talking about how DSOs have gotten into trouble in the U.S. Let’s start with Colorado, shall we? And let’s take a look at some court decisions that came out over a decade ago in Colorado.
Colorado (2007): Illegal
In Mason v. Orthodontic Centers of Colorado, Inc., 516 F. Supp. 2d 1205, 2007 U.S. Dist. LEXIS 68121 (decided September 14, 2007), Dr. James H. Mason sought to have the Colorado District Court declare a BSA invalid and unenforceable under Colorado law because it was contrary to public policy. Pursuant to the BSA, a non-dentist management company – OCA, Inc. and its wholly owned subsidiaries (“OCA”) – provided various dental office management services (e.g. hiring and managing staff, leasing office space and equipment, providing bookkeeping, collections and other administrative services) in exchange for a certain percentage of the office’s monthly fees. Dr. Mason argued that this constitutes illegal sharing of fees. OCA responded by saying that the law only prohibited the sharing of referral fees, that the fees payable are for marketing services as permitted by law, and that any professional discipline imposed on Dr. Mason for improperly sharing fees should not void the BSA.
The Court rejected all three of OCA’s arguments.
First, interpreting fee sharing to only prohibiting the sharing of referral fees was not grounded in any authority, was at odds with the dictionary definition of “fee splitting”, and was nonsensical (if permitted, it could allow a dentist to enter into an agreement to share patient fees with their landlord, barber, etc. so long as it was not based on patient referrals – which was not the object of the statue).
Second, OCA’s claim that the fees payable were for marketing services (which was an exception to the fee-splitting prohibition) was rejected because OCA received monthly service fees for other categories of service not related to marketing. As per the court: “The marketing services the Defendants provide are a relatively small component of the overall package for which they are compensated, particularly compared to such services as office rent and equipment leasing. Thus, even if some portion of the Plaintiffs’ fees are devoted to advertising, the bulk of the monthly service fee is impermissible fee sharing.”
Finally, the Court noted that, although the laws against fee-sharing affect Dr. Mason, it would be contrary to public policy to enforce an illegal contract. First, disciplining a dentist for fee sharing was not an exclusive remedy (i.e. voiding a contract could be a further penalty). The Court conducted a thorough analysis of when public policy could void private contracts. After weighing all the factors (e.g. the parties’ justified expectations, any forfeiture that would result if enforcement were denied, any special public interest in the enforcement of a particular term, the strength of the public policy at issue, the likelihood that refusal to enforce will further that interest, the seriousness of the misconduct involved and its willfulness, and the directness of the connection between the misconduct and the agreement). Based on these factors, the Court found that: OCI had some justifiable expectation that the BSA would be enforced, OCI could however seek an equitable claim for unjust enrichment if the BSA was voided, public policy dictates that non-dentists not interfere in professional decision-making (which could result in a significant penalty to the dentist involved), the BSA does allow fee-splitting and voiding the BSA would promote the public policy of prohibiting fee-splitting, and the legislature never intended agreements such as the BSA to be enforceable (logically, OCI cannot seek to enforce the BSA into the future, as doing so would force Dr. Mason to continuously violate state law. As such, public policy would permit the BSA to be voided retrospectively). Accordingly, upon full consideration of all the relevant factors, the Court finds that the public interest prohibiting fee splitting outweighs any private interests OCI might have in enforcing the payment term of the Agreement. The public interest is a strong one, and the conduct contemplated by the Agreement directly contravenes the purposes that the public policy advances. Although voiding the contract works some degree of inequity upon OCI, they are not unreasonably prejudiced, as the law likely permits them to recover the reasonable value of the services they have provided to Dr. Mason. Thus, the Court finds that the portion of the agreement that permits fee splitting — namely, the formula for calculating the monthly service fee — is void as against public policy.
The Court then went on to discuss whether OCI was a “proprietor of a place where dental…services are performed”, and therefore illegally engaged in the practice of dentistry, contrary to Colorado law. A “proprietor” is defined as someone who “places in possession of a dentist… such dental material or equipment as may be necessary for the management of a dental office on the basis of a lease or any other agreement for compensation for the use of such material, equipment or offices”. A “proprietor” is also someone who “retains ownership or control of dental equipment or material or a dental office and makes the same available in any manner for use by dentists”. Based on this prohibition and definitions of “proprietor”, the Court found that OCI was engaged in the practice of dentistry as “proprietors” of a dental office. Among other things, the BSA required OCA to acquire equipment reasonably required for the operation of the practice and then lease the equipment back to the dentist. The BSA also stated OCI owned the equipment at all times. Finally, OCI leased or otherwise arranged for the offices and premises of Dr. Mason’s practice and subleased the offices to Dr. Mason. As such, OCI was considered “proprietors” of a dental practice”. The Court was somewhat sympathetic to the poorly drafted definition of proprietor (which could include a landlord as someone who could be engaged in the practice of dentistry), but the Court suggested that any such drafting problems were better directed at the legislature, not the Court.
For these reasons, certain portions of the BSA were deemed void as against Colorado public policy (e.g. the fee splitting formula and the provisions that require OCI to lease all the furniture and equipment, and to obtain and sublease offices, to Dr. Mason and his professional corporation), leaving it to the parties to determine the appropriate course of conduct to follow as a result.
Colorado (2007): Illegal
In Theresa L. Shaver, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al., 2007 U.S. Dist. Lexis 71615 (September 26, 2007), Dr. Shaver asked the Colorado District Court to declare a BSA illegal under Colorado law. The Court noted that other Colorado courts have both issued orders in favour of dentists like Dr. Shaver in almost identical circumstances: namely, Mason v. Orthodontic Centers of Colorado, Inc. and Weinbach v. Orthodontic Centers of Colorado Inc. The Court found that the opinions and orders issued in those cases are “thorough and sound, and that the reasoning in those Orders applies equally to the BSA at issue in this case. Accordingly, I adopt the reasoning in those Orders and find that portions of the BSA at issue (those portions which can be interpreted to require fee sharing or which provide for maintenance of a dental proprietorship by the defendants) are illegal as against Colorado public policy.”
Colorado (2007): Illegal
In Jonathan R. Weinbach, D.D.S., M.S. et al. v. Orthodontic Centers of Colorado, Inc., et al., 2007 U.S. Dist. LEXIS 70614 (September 24, 2007). Dr. Jonathan Weinbach asked the Colorado District Court to declare a business management agreement (“BMA”) invalid and unenforceable under Colorado law. Pursuant to the BMA, a non-dentist management corporation, Orthodontic Centers of Colorado (“OCC”) was obligated to provide business and administrative support services reasonably required for the day-to-day operations of Dr. Weinbach’s practice. Those services included: (1) marketing support, (2) employment and training of all office staff, (3) providing and maintaining all necessary equipment and supplies (including dental equipment and dental supplies), (4) billing, collection, bookkeeping and other financial services, (5) processing and payment of accounts receivable and trade receivables, (6) preparation of statistical analyses and financial statements and (7) consulting advice. Under the BMA, Dr. Weinbach and his professional corporation appointed OCC as their “sole business manager” for the provision of the foregoing services. Furtheremore, OCC was appointed as Dr. Weinbach’s “true and lawful attorney-in-fact” to collect all payments made by Dr. Weinbach’s patients and all payments made by insurance companies. Such funds were deposited into an “Orthodontic Entity Account”, which OCC had signing authority over the and the exclusive right to make disbursements from. In exchange for its services, OCC was paid a monthly management fee that included, but was not limited to, fifty percent (50%) of Dr. Weinbach’s Net Operating Margin.
The Colorado District Court found that the BMA was illegal under Colorado law because it violated the fee-sharing prohibition of the Colorado Dental Practice Law. Under that Law, the State Board of Dental Examiners may discipline a dentist, among other things, for “sharing any professional fees” with anyone other than a dentist, except that a dentist may pay independent advertising agents for marketing services [see: Colo. Rev. Stat. § 12-35-129(1)(v)]. The Court held that the BMA creates an arrangement by which, for at least 20 years, OCC would be entitled to receive approximately fifty percent (50%) of Dr. Weinbach’s profits. In response, OCC argued that (1) the legislative history of that Law suggests it was intended to prohibit the sharing of referral fees and (2) OCN fit within the exception for entities providing marketing services to dentists. To the Court, however, neither of those arguments was convincing.
As in Mason v. Orthodontic Centers of Colorado Inc., 516 F. Supp. 2d 1205, 2007 U.S. Dist. LEXIS 68121., the Court in this case held that fees included “any professional fees” (not just referral fees), and that sharing fees of any kind is prohibited unless the dentist is sharing the fees with other dentists. With respect to the exception for paying independent advertising agents for marketing services, the Court simply referred back to the BMA to point out that OCC was obliged to do much more than just that (see above). As per the Court: “A small portion of the services specified in the BMA may fall within this exception, but the vast bulk of the services specified in the BMA do not fall within this exception.” As such, the BMA violated the fee-sharing prohibition of the Law.
Interestingly, OCC tried to argue that the Law does not declare agreements to share fees void or illegal, but merely unethical for the dentist. Here, the Court concluded that the public interest in preventing conflicts of interest between dentists and unlicensed entities such as OCC substantially outweighs OCC’s private interests in enforcing the payment terms of the BMA. To support this view, the Court adopting the ruling in James H. Mason, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al.
516 F. Supp. 2d 1205, 2007 U.S. Dist. LEXIS 68121, which involved similar facts and which had been decided a few days earlier. In that case, the Colorado District Court found that: (1) the rationale behind fee splitting includes the need for dentists to avoid financial conflicts of interest, the need for informed consent by the patient, and the necessity of avoiding non-professional interference in professional decision making, (2) voiding the BMA would further the public policy of prohibiting fee splitting, (3) the fact that the statute only proposed discipline against the dentist is not persuasive evidence that the legislature intended such agreements to be enforceable against the dentist and (4) any unfairness that results to OCC from voiding the BMA is largely mitigated by the available remedy of a claim for unjust enrichment (which could exist beyond the BMA).
Worth mentioning is that the Court found that the BSA was illegal because OCC was engaged in the illegal practice of dentistry, contrary to the Colorado Dental Practice Law. That Law only allows dentists to practice dentistry. It goes on to say that a “person shall be deemed to be practicing dentistry if such person… [i]s a proprietor of a place where dental operation, oral surgery, or dental diagnostic or therapeutic services are performed” [see: Colo. Rev. Stat. § 12-35-112(1).]. Here, a “proprietor” means someone who leases dental equipment to a dentist or someone who retains ownership or control of dental equipment and makes the same available in any manner for use by dentists. The Court reviewed the aforementioned terms of the BMA and concluded that OCC was a “proprietor” within the meaning of the Law. The BMA provided that OCC would lease equipment back to Dr. Weinbach but would still retain ownership of all the equipment and supplies used in the dental practice while making same available for use to Dr. Weinbach. The Court concluded that OCC had practiced dentistry, contrary to the Law.
Based on the above, the Court found the provisions of the BMA that require fee sharing and those portions that provided for the maintenance of a dental proprietorship by OCC were voided for being contrary to the public policy of the state of Colorado. As such, the BMA was declared to be illegal.
Colorado (2007): Illegal
In John Gentile, D.D.S., et al v. Orthodontic Centers of North Dakota, Inc. et al, 2007 U.S. Dist. LEXIS 72322 (September 27, 2007), Dr. John Gentile asked the Colorado District Court to declare a BSA invalid and enforceable under Colorado law. Pursuant to the BSA, a non-dentist management corporation, Orthodontic Centers of North Dakota Inc. (“OCN”) was obligated to provide business and administrative support services reasonably required for the day-to-day operations of Dr. Gentile’s practice. Those services included (1) marketing support, (2) employment and training of all staff (except dentists), (3) billing, collection, bookkeeping and other financial services, (4) consulting advice, (5) legal services, and (6) payment of taxes. The BSA also required OCN to sublease the office to Dr. Gentile’s professional corporation at the full lease price and acquire or otherwise arrange for all furniture and fixtures and equipment required by Dr. Gentile’s professional corporation. In return for its services, OCN was to be paid a “service fee” consisting of: (1) being reimbursed all expenses incurred for running the office, (2) a flat fee of twenty two dollars and twenty two cents ($22.22) for each hour or operating during which patients are being treated, and (3) a performance fee equal to fifty percent (50%) of the practice’s gross revenues, less the cost of running the office, the flat fee per patient hour, Dr. Gentile’s base compensation and fifty percent (50%) of the cost of any new fixed assets. The BSA states that the parties acknowledge that the fees provided for in the BSA “in no way represent a division, splitting or other allocation of fees”. The BSA accords Dr. Gentile’s professional corporation with complete control and sole responsibility for all professional aspects of the practice and provides that OCN is not authorized or qualified to practice dentistry under the applicable laws. Finally, the BSA states that it is OCN’s intention to act and perform as an independent contractor of Dr. Gentile and his professional corporation, and the BSA did not intend to create a partnership or employment relationship between them.
The Colorado District Court found that the BSA was illegal under Colorado law because it violated various provisions of the Colorado Dental Practice Law. That Law only allows dentists to practice dentistry. And it goes on to say that a “person shall be deemed to be practicing dentistry if such person… [i]s a proprietor of a place where dental operation, oral surgery, or dental diagnostic or therapeutic services are performed” [see Colo. Rev. Stat. § 12-35-112(1).]. Here, a “proprietor” means someone who leases dental equipment to a dentist or someone who retains ownership or control of dental equipment and makes the same available in any manner for use by dentists. The Court reviewed the aforementioned terms of the BSA and concluded that OCN was a “proprietor” within the meaning of the Law. The Court noted that the law did not restrict landlords from renting space (so long as it’s not space outfitted as a dental office) or prohibit dentists from purchasing equipment themselves. The Court concluded that OCN had practiced dentistry, contrary to the Dental Practice Law and irrespective of the fact that the BSA expressly and repeatedly provided that OCN will not practice dentistry. “Call itself what it will, a space is a space”. The Court further noted that the Dental Practice Law prohibits the unlicensed practice of dentistry by corporate entities.
Worth mentioning is that Dr. Gentile sought to void the BSA on the basis that it created a profit-sharing arrangement, contrary to the Dental Practice Law. Under that Law, the State Board of Dental Examiners may discipline a dentist, among other things, for “sharing any professional fees” with anyone other than a dentist, except that a dentist may pay independent advertising agents for marketing services [See Colo. Rev. Stat. § 12-35-129(1)(v)] In response, OCN argued that (1) the legislative history of that Law suggests it was intended to prohibit the sharing of referral fees and (2) OCN fit within the exception for entities providing marketing services to dentists. To the Court, however, neither of those arguments was “even marginally available”.
The Court used Webster’s dictionary to define “share” as “to divide and distribute in portions” and “fee” as “compensation often in the form of affixed charge for a professional service”. As such, the Colorado Legislative Assembly, in enacting the Law, sought to deter dentists from dividing their professional compensation with non-dentists. The Court concluded that there was nothing in the statute to suggest that the sharing of fees ought to be limited only to referral fees; if the Colorado General Assembly had intended to bar only referral fees, it would have written the statute to reflect such intent (because it had done so with other regulated health professionals). The historical changes of the Law also revealed how it went from specifically prohibiting dentists from making referral fees to broadly barring a dentist from sharing any professional fees with non-dentists.
With respect to the argument that OCN fit within the exception for entities providing marketing services to dentists, the Court simply referred back to the BSA to point out that OCN was obliged to do much more than just that (see above). As per the Court: “While one small aspect of [OCN’s] obligations under the BSA might fit into that narrow exception, [OCN] cannot cram the myriad other aspects of the BSA into the exception like so many clowns into a Volkswagen Beetle.” As such, the BSA violated the Law’s fee-sharing prohibition.
Interestingly, OCN tried to argue that the Law does not declare agreements to share fees void or illegal, but merely unethical for the dentist. OCN further noted that it would be unfair to reward Dr. Gentile’s unethical conduct with the recision of the agreement. The Court acknowledged that the Law deals with conduct which dentists (rather than their contractual counterparties) may be professional disciplined. But it does not mean that a court must enforce a contract that requires conduct expressly barred by statute. And even if the BSA merely mandates unprofessional (as opposed to “squarely illegal”) conduct, the Court held that public policy warranted voiding the BSA: a contractual provision is void if the interest in enforcing it is clearly outweighed by a contrary public policy. In this situation, the Court concluded that the public interest in “preventing conflicts of interest between dentists and unlicensed entities such as [OCN] heavily outweighs [OCN’s] expectations under the BSA.” To support this view, the Court cited the ruling in James H. Mason, D.D.S., et al. v. Orthodontic Centers of Colorado, Inc., et al.
In the end, the Court would not save the BSA by severing the offending “fee sharing” provisions because doing so would, in effect, “eviscerate the core bargain” between the parties.
When David Mayzel and I gave a presentation a few months ago to a group of dentists at the Toronto Academy of Dentistry’s All Societies Night (which you can watch here), one of the questions that came up was: “Do Dental Consolidators Impose Production Quotas and Compensation Clawbacks on Dentists?” The answer: some do in certain situations.
“Dental service organizations” or “dental consolidators” (a term we use to describe dentists either acting alone or with non-dentist involvement) don’t typically impose production or EBITDA (earnings before interest, taxes, depreciation and amortization) quotas and compensation clawbacks on purely associate dentists. They don’t do it because it wouldn’t make much sense: an associate may / may not have the ability to impact EBITA (either from production / cost management). They also might not have access to the financial reporting of the practice. And they may not be the only one working there; so their contribution is much smaller. So they simply sign an associate agreement getting 40% (or whatever percentage) and the dentistry professional corporation takes the other 60%.
Some of the dental service organizations have, however, imposed EBITDA quotas and compensation clawbacks on dentists who sell their practices and continue to associate and / or manage the practice after the sale.
For example, in Dr. David Mady v. The Queen, the Court mentioned how Dr. David Mady had sold his practice and had signed legal paperwork that included an EBITDA quota and clawback mechanism. Here are the passages from the Federal Tax Court case that are relevant:
 Dr. Mady and [Dental Corporation of Canada Holdings Inc., hereinafter “DCC“] also executed a Professional Services Agreement in conjunction with the [share purchase agreement]. The Professional Services Agreement required Dr. Mady to continue to provide services for 5 years or to arrange for someone else to provide such services. He would be paid a set remuneration. He was required to guarantee a minimum profit level in the form of earnings before interest, tax, depreciation and amortization (“EBITDA”). If the minimum EBITDA was not met, Dr. Mady would face a clawback from his salary. If he exceeded the EBITDA target, he would receive a bonus. [emphasis added]
 Dr. Mady was required to execute a Professional Services Agreement. Under this agreement, Dr. Mady had to guarantee a minimum EBITDA (the “EBITDA Target”) or else face a clawback of his own salary. The clawback was to be effected automatically and according to a formula. There was no opting out. The only way the clawback would not operate was if Dr. Mady died or became disabled.
 The earnings projections that were used to set the EBITDA Target were reviewed by Deloitte in performing the due diligence on behalf of the purchaser.
 While the projected 2012 EBITDA Target was higher than prior year results, Mr. Van Essen described the target as “realistic” in an email to DCC because it was in line with Dr. Mady’s average revenue growth of 15% per year for the previous four years. The acquisition budget called for total revenue of $2.550 million, which was also the figure used in the Heads of Agreement. Higher EBITDA would also be achieved through savings in overhead costs, which DCC would be able to achieve after the acquisition. Mr. Van Essen admitted on cross-examination that he would not have advised Dr. Mady to accept the figure if it were not within the realm of possibility.
Note: this case had more to do with tax ramifications of restructuring than anything else; but it was interesting to see the court mention how Dr. Mady had agreed to a mandatory EBITDA Target and how we would be financially penalized for not achieving it.
A number of questions come from this:
I think there are lots of questions that dentists should be asking when faced with a contract that includes a minimum EBITDA that needs to be achieved for them NOT to be financially penalized.
Now imagine this: what if a dentist who signed an agreement with this clause no longer had a good relationship with the dental services organization and decided to leave and compete / solicit patients. The dental services organization sues the dentist for breaching their agreement; in their defence, the dentist says that the agreement was illegal and contrary to public policy in part because of the EBITDA Target and clawback mechanism. Now it’s up to a court to decide whether (1) the dentist was sophisticated / resourceful and knew what they were getting into so the contract should be enforced, (2) regulatory issues between the RCDSO and the dentist aren’t probably addressed in a court dealing with the interpretation and enforcement of a private agreement (that’s what happened in Dr. Daniel Pesin v. Smilecorp), or (3) like they often do in the U.S., the contracts should be declared illegal for being contrary to public policy and hence, unenforceable, either in whole or in part.
Things to think about as we head down the path of a greater dental services organization presence in Canada.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.