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How DSOs Didn’t Get In Trouble In the U.S. (Part 4)

By July 13, 2017June 27th, 2023Dental Service Organizations

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.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.