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How DSOs get in trouble in the U.S. (Part 3)…

By July 7, 2017October 3rd, 2019Dental Service Organizations

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.

Texas: Illegal

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.