Lawsuits involving dental practice transactions are more common than one might imagine. In addition to the monetary and reputational costs of litigation, the mental, and even physical toll of a lawsuit is significant. Given the stakes, this article aims to highlight some ways dentists can avoid litigation pitfalls as they contemplate or prepare for a dental practice transaction such as buying, selling, or partnering with a dental service organization. An appellate case decided just this summer is illustrative of some important points.
The Case Study: Selective Insurance Co. of Am. v. Singer
In Selective Insurance Co. of Am. v. Singer, the court held that three insurers did not owe coverage to a group of dental practices for lawsuits a management services company brought in connection with intellectual property rights that were purchased in a prior asset sale between the management company, the dental practices, and its owners. The factual background pertaining to the parties’ original transaction is particularly relevant.
Between 2002 and 2011, two brothers, a dentist and a non-dentist, formed seven dental practices and a company named BDC Management LLC, or BDC. The brothers later partnered with a private equity investment firm to expand their practices and form BDC Management Services LLC, or DSO. Subsequently, the DSO entered into an acquisition agreement with BDC, the brothers, and their dental practices, wherein the DSO acquired essentially all the practices’ nonclinical assets, including the practices’ intellectual property rights such as trademarks and domain names. The selling practices also entered into a management service agreement, or MSA, with the DSO.
After the parties’ transaction closed, one of the brothers opened eight more dental practices using the same intellectual property as the original practices. However, the brother did not execute MSAs with the DSO for the new practices. In 2015, both brothers ended all agreements between themselves and the DSO but continued to use the DSOs trademarks and domain names. Thereafter, the DSO sued the brothers and their dental practices in New York and New Jersey for breach of contract, trademark infringement, conversion, bad faith, and unjust enrichment, among other claims. The brothers filed claims with the practices’ general liability insurers, but the insurance companies disclaimed coverage for these suits. Ultimately, one case was settled, and in the other, the trial court held that the dental practices were not entitled to insurance coverage due to provisions in the policy that excluded coverage for injury arising out of infringement of trademark or other intellectual property rights, and a second provision that barred coverage for claims involving parties that owned a certain percentage of the practice.
Key Takeaways for Dentists
This case demonstrates a myriad of important take aways for a dentist looking to avoid issues that can result in litigation in connection with a DSO transaction.
- Identify the Scope: A dentist should carefully identify what is being sold to a DSO, considering limitations on clinical assets.
- Understand MSA: Understanding the services a DSO will provide pursuant to an MSA and the practices’ limitations thereunder is important.
- Clear Future Plan: A dentist should not enter into any dental transaction unless they have a clear plan for the future that is compliant with the terms of the DSO agreements.
- Insurance Coverage: Choose insurance coverage carefully, understanding policy exclusions, coverage limits, and deductibles.
Successful dental practice transactions are exciting and a substantial accomplishment for all parties involved. But litigation arising from such transactions can quickly become costly and complicated. The good news is that these suits are avoidable. That is why careful and comprehensive understanding of a transaction’s details is critical for all parties to maximize a deal’s benefits.