Imagine this: You built a successful specialty dentistry practice in two states and have practiced consistently for the past 25 years. Now, you find that those hours of standing by the patient’s chair have finally caught up to you. A team of loyal associate dentists helps pick up your slack in the schedule, but you need an exit plan — and soon.
Interested buyers offer prices over $10 million. However, a dental support organization (DSO) offers the highest price at $18 million to manage the business aspects of the practice.
What is a DSO?
A DSO is an organization that provides support services like marketing, patient acquisition, staff hiring and training, billing and insurance claims, compliance, IT support, and overall practice operations. The pitch is that, by taking over these back-office functions, the DSO allows dentists to focus primarily on patient care.
The DSO operates by basically discounting the profits from the practice to make a cash payment upfront. DSOs usually require the dentist to keep working for five years, to give the DSO a chance to recover its original investment and replace the dentist. If the dentist meets productivity targets, the dentist will receive additional payments and sometimes stock options in the DSO.
Although the DSO claims it will leave the dentist free to focus on patient care, the reality is more complicated. Licensing regulations make the dental director — usually the selling dentist — responsible for a host of office-management tasks. These include everything from posting auxiliaries’ licenses to keeping the first-aid kit stocked, and ensuring that billing is done correctly, the gasses are properly labeled and stored, staff emergency training is done and documented, and Occupational Safety and Health Administration and Centers for Disease Control and Prevention regulations are followed, and a host of minutiae that the DSO cannot fully take off the dentist’s hands. While the DSO claims it will handle staffing, it is the dentist who is there full time supervising both the medical and the clerical crews. Dentists complain that they have lost control of their own practice and their own schedule while remaining responsible for most aspects of running the practice.
Importantly, the DSO can’t practice dentistry. The value of a practice is in the work of the dentist’s hands and their supervision of the clinical staff. The practice isn’t worth much without an owner willing to stay on and experienced associates to do the work.
Initial discussions and signing the NDA
After signing a nondisclosure and nonsolicitation agreement (NDA), you will share financial and productivity records with the DSO, including, for example, associate productivity and compensation, practice-management software, bank records and taxes. In our hypothetical — which is based on a real case I handled — the DSO shares something too: they are affiliated with a competing practice nearby in the same specialty, and the owner intends to stop practicing before the end of their earn-out period. The DSO plans to combine the two practices under one leader and seeks an associate dentist who is “ownership material.”
You enthusiastically recommend your top associate, Dr. Chan, who has basically been running your practice recently. The DSO seems very interested in Dr. Chan’s leadership qualities, business sense and productivity. They request more information on this terrific associate. After you supply this information, the DSO sends a short email saying they have decided to go in another direction. At about the same time, Dr. Chan announces she is leaving to become part-owner of the DSO’s affiliated competing practice. The loss of Dr. Chan will hurt your practice profitability, and thus its potential value to a buyer, and could force you back into the full-time practice of dentistry, with all its physical demands that you no longer can sustain.
The DSO’S argument: ‘It wasn't us’
How could this happen? The NDA prevented the DSO from soliciting any employee “with whom such Party has had contact solely in connection with its evaluation of a possible transaction between the Parties.” It also permitted the DSO to use the practice’s confidential information “only for the purpose of evaluating a potential transaction between the Parties” and to disclose that information only to “its personnel (including contractors and professional advisors, and such personnel of its subsidiaries) [who are] informed that the Disclosing Party’s Confidential Information is strictly confidential and subject to this Agreement and should not be used or disclosed except as provided herein.”
Your lawyer fires off a letter pointing this out. Counsel for the DSO states that Dr. Chan responded to a “general solicitation.” The competing practice did not learn about her “solely” because of the negotiations between your practice and the DSO. This turns out to be untrue, but it is not really the point.
The DSO’s main argument in support of this position is that it had not been the one soliciting Dr. Chan. The DSO argues that the competing practice is a separate corporation and not a party to any of the agreements between your practice and the DSO. The DSO argues that: (a) the DSO does not practice dentistry or employ dentists or other clinical staff; (b) the entity hiring Dr. Chan is a legally distinct dental practice that is not owned or controlled by the DSO; and (c) the competing dental practice is not a party or signatory to, nor otherwise bound by, the nonsolicitation agreement between your practice and the DSO. Notwithstanding these distinctions, counsel for the DSO also represents the “legally distinct” competing practice and its owner.
Avoiding pitfalls involving the NDA
What can dentists do to keep a DSO from soliciting staff? Before trusting the DSO with their business information, dentists should insist on more restrictive language in the NDA, which would prevent the DSO, or any practice to which the DSO provides services, from hiring any dentist listed on an appendix attached to the NDA. The dentist can attach a list of employees. NDA contract language offered by the DSO can always be modified as part of negotiations — although the commissioned salesperson with whom you are negotiating will resist any changes to the “standard” language. Given the pitfalls described above, dentists should consider retaining counsel to carefully review the NDA — as well as the whole deal — before business information is disclosed.
Arguments in response to DSO solicitation
The situation we have described is not as unusual as you may think. A dental practice is worthless without a dentist, and DSOs are hungry for associates to replace dentists at the end of their earn-out terms. If this happens to you, here are some arguments you can make:
1. The DSO violated the nondisclosure provisions by informing the competing dental practice about your associate;
2. The competing dental practice tortiously interfered with the contract between your practice and the DSO;
3. The competing practice is an affiliate or subsidiary of the DSO (as described during initial discussions), and you are entitled to pierce the corporate veil and enforce the NDA against it; and/or
4. Even if your associate responded to a general solicitation, the competing practice made sure she received it because you had told them about this associate — and the DSO based its hiring decision on information it had no right to possess — so it engaged in an unfair competitive practice when it misused the confidential information.
In conclusion, in sales of dentistry practices, dentists should be wary of offers from DSOs that appear to far exceed the going market rates offered to them, and of initiating discussions with the DSO without thorough review of the NDA.
Joel Rosen is the founding partner of Rosen & Goyal PC. He represents medical professionals in licensure, malpractice, insurance, employment and real estate disputes.