Bette Robin, DDS, JD 877 DrRobin
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
TRANSITION TERRORS... The Ultimate Nightmare
Dr. Hartleip probably thought he was easing towards retirement when
he sold his urology practice to Dr. Gernert. In fact, Dr. Hartleip may have
imagined he made a mutually good deal with a trusted colleague. The
case of James E. Gernert, M.D., et al. v. Duane Hartleip, M.D., et al. (L.
A. Superior Central, BC 126513) proved nothing could have been
further from the truth.
The transition was consummated in August 1990. However, as time
went on, the deal turned ugly. Dr. Gernert sued claiming Dr. Hartleip
breached the covenant not to compete, stole patients, defamed him,
and unfairly competed in the practice of urology. Dr. Gernert further
contended the names and addresses of the patients were ‘trade
secrets, that Dr. Hartleib made a ‘promise to retire’ from the practice of
medicine in the Los Angeles area as part of the sales agreement.
However, the written contract did not state or make any reference to
these points.
The terms of these doctors’ written agreement was silent on too many
issues to successfully handle adversity. The contract did include a three
year covenant not to compete; but ignored differences in treatment
modalities between the doctors, ignored patient record issues, and in
general was limited in scope and nature. Initially this was not a problem
in that the terms of the agreement included an provision for Dr. Hartleip
to stay on with the practice and work for Dr. Gernert for the entire period
of the non-competition clause.
On the face of the contract, Dr. Hartleip honored the written terms and
conditions of the sale. The problem came when Dr. Hartleip decided to
leave the employ of Dr. Gernert after the covenant had expired and ‘set
up a new practice in the immediate vicinity of the old office.’ Dr. Hartleip
notified the patients he had been treating of this change of address.
Allegedly, 400 patients followed Dr. Hartleip to his new location.
The court came down with a defense verdict in favor of Dr. Hartleip with
an allowance for attorney’s fees. The court found that a ‘deal is a deal’,
especially between doctors with like bargaining power, education and
access to professionals for advice. This case makes many points as to
a practice sale, some of the major ones I will discuss briefly below:
1. Covenants not to compete are almost always legally upheld during
the stated term in the contract . Assuming, that is, the covenant is
reasonable in scope, distance and nature. In California, distance and
scope are very limited due to the large number of practicing
professionals in the same geographic area.
Do not confuse a covenant not to compete in a practice sale document
with the same clause in an employment agreement. A covenant not to
compete in an employment agreement is valid only during the term of
the employment and not after. Such a clause is viewed by the courts as
a restriction on trade and are specifically non-enforceable in the state of
California.
2. ‘Bad-mouthing’ your seller or your buyer can cause you a multitude of
legal problems. Not only do you expose yourself to a defamation
lawsuit, but sellers can enforce various remedies and provisions to
accelerate payments, to force a sell-back at a greatly reduced price,
and can sue various torts including interference with prospective
economic advantage, etc. Your sales contract should provide for
diagnostic and treatment differences between doctors. Specifically
address and agree in advance what to do in the event ‘re-makes’ of
crowns or bridges are deemed necessary by the purchasing doctor.
Who pays the lab bill?, Who does the labor?, Who makes the decision
as to the necessity of the re-make???
3. Patients are not legally ‘owned’ by a doctor. Patients are not owned
by a doctor, and patients legally have a right to access and copies of
their patient records. A doctor changing practice location has the right
and even the responsibility to notify patients of his or her new location in
order to avoid claims of patient abandonment. Records must be
transferred to a patient, regardless of whether a balance is owed or not.
Health and Safety Code sec. 1795.12. You may charge a maximum 25
copying fee per page and the actual cost of a duplicate radiograph;
however you may not withhold records should a patient inform you he or
she is unable to pay for whatever reason. I believe it is good practice to
transfer the original records and maintain a copy for yourself to ensure
the records are indeed useable by the new treating doctor.
4. Be careful about your contract!
a. If it’s ‘no big deal’, a ‘gentleman’s agreement’ and you completely
trust your buying or selling doctor, then put it in writing. That will be no
big deal either!
b. Each party should have their own attorney. Attorneys can legally act
as a mediator and put the whole transition together, but in that event the
attorney has a legal responsibility to disclose the pros and cons of each
point of the transaction to both parties. This may be of benefit if the
buyer and seller plan are continuing to practice together, but is almost
never a good strategy when the agreement involves a complete break
of the seller from the practice.
c. Realize that management consultants and companies are not usually
lawyers and do not create adequate legal documents. Such
professionals can provide a valuable service by negotiating terms of a
transaction that the attorney(s) has previously set forth to be negotiated.
But I believe management consultants are effectively and best used
only in that capacity. When it comes to putting the agreement in writing,
use an attorney. For example, I just reviewed an extensive management
consultant ‘deal’ that had as part of the terms of the agreement : ‘We
agree to have clean and happy teeth in this office.’ Oh yeah? Can you
imagine a judge or jury reading that one? Or how about the agreement
that sold the accounts receivable in one section and expressly did not
sell the accounts in another section? So, if you do decide on that
course of action for your transition - against my unrequested advice -
read the contract, read the contract and read it again to be sure what
your obligations and responsibilities are.
© Bette Robin, DDS, JD 11/96
he sold his urology practice to Dr. Gernert. In fact, Dr. Hartleip may have
imagined he made a mutually good deal with a trusted colleague. The
case of James E. Gernert, M.D., et al. v. Duane Hartleip, M.D., et al. (L.
A. Superior Central, BC 126513) proved nothing could have been
further from the truth.
The transition was consummated in August 1990. However, as time
went on, the deal turned ugly. Dr. Gernert sued claiming Dr. Hartleip
breached the covenant not to compete, stole patients, defamed him,
and unfairly competed in the practice of urology. Dr. Gernert further
contended the names and addresses of the patients were ‘trade
secrets, that Dr. Hartleib made a ‘promise to retire’ from the practice of
medicine in the Los Angeles area as part of the sales agreement.
However, the written contract did not state or make any reference to
these points.
The terms of these doctors’ written agreement was silent on too many
issues to successfully handle adversity. The contract did include a three
year covenant not to compete; but ignored differences in treatment
modalities between the doctors, ignored patient record issues, and in
general was limited in scope and nature. Initially this was not a problem
in that the terms of the agreement included an provision for Dr. Hartleip
to stay on with the practice and work for Dr. Gernert for the entire period
of the non-competition clause.
On the face of the contract, Dr. Hartleip honored the written terms and
conditions of the sale. The problem came when Dr. Hartleip decided to
leave the employ of Dr. Gernert after the covenant had expired and ‘set
up a new practice in the immediate vicinity of the old office.’ Dr. Hartleip
notified the patients he had been treating of this change of address.
Allegedly, 400 patients followed Dr. Hartleip to his new location.
The court came down with a defense verdict in favor of Dr. Hartleip with
an allowance for attorney’s fees. The court found that a ‘deal is a deal’,
especially between doctors with like bargaining power, education and
access to professionals for advice. This case makes many points as to
a practice sale, some of the major ones I will discuss briefly below:
1. Covenants not to compete are almost always legally upheld during
the stated term in the contract . Assuming, that is, the covenant is
reasonable in scope, distance and nature. In California, distance and
scope are very limited due to the large number of practicing
professionals in the same geographic area.
Do not confuse a covenant not to compete in a practice sale document
with the same clause in an employment agreement. A covenant not to
compete in an employment agreement is valid only during the term of
the employment and not after. Such a clause is viewed by the courts as
a restriction on trade and are specifically non-enforceable in the state of
California.
2. ‘Bad-mouthing’ your seller or your buyer can cause you a multitude of
legal problems. Not only do you expose yourself to a defamation
lawsuit, but sellers can enforce various remedies and provisions to
accelerate payments, to force a sell-back at a greatly reduced price,
and can sue various torts including interference with prospective
economic advantage, etc. Your sales contract should provide for
diagnostic and treatment differences between doctors. Specifically
address and agree in advance what to do in the event ‘re-makes’ of
crowns or bridges are deemed necessary by the purchasing doctor.
Who pays the lab bill?, Who does the labor?, Who makes the decision
as to the necessity of the re-make???
3. Patients are not legally ‘owned’ by a doctor. Patients are not owned
by a doctor, and patients legally have a right to access and copies of
their patient records. A doctor changing practice location has the right
and even the responsibility to notify patients of his or her new location in
order to avoid claims of patient abandonment. Records must be
transferred to a patient, regardless of whether a balance is owed or not.
Health and Safety Code sec. 1795.12. You may charge a maximum 25
copying fee per page and the actual cost of a duplicate radiograph;
however you may not withhold records should a patient inform you he or
she is unable to pay for whatever reason. I believe it is good practice to
transfer the original records and maintain a copy for yourself to ensure
the records are indeed useable by the new treating doctor.
4. Be careful about your contract!
a. If it’s ‘no big deal’, a ‘gentleman’s agreement’ and you completely
trust your buying or selling doctor, then put it in writing. That will be no
big deal either!
b. Each party should have their own attorney. Attorneys can legally act
as a mediator and put the whole transition together, but in that event the
attorney has a legal responsibility to disclose the pros and cons of each
point of the transaction to both parties. This may be of benefit if the
buyer and seller plan are continuing to practice together, but is almost
never a good strategy when the agreement involves a complete break
of the seller from the practice.
c. Realize that management consultants and companies are not usually
lawyers and do not create adequate legal documents. Such
professionals can provide a valuable service by negotiating terms of a
transaction that the attorney(s) has previously set forth to be negotiated.
But I believe management consultants are effectively and best used
only in that capacity. When it comes to putting the agreement in writing,
use an attorney. For example, I just reviewed an extensive management
consultant ‘deal’ that had as part of the terms of the agreement : ‘We
agree to have clean and happy teeth in this office.’ Oh yeah? Can you
imagine a judge or jury reading that one? Or how about the agreement
that sold the accounts receivable in one section and expressly did not
sell the accounts in another section? So, if you do decide on that
course of action for your transition - against my unrequested advice -
read the contract, read the contract and read it again to be sure what
your obligations and responsibilities are.
© Bette Robin, DDS, JD 11/96
DrRobin@BetteRobin.com
17482 Irvine Blvd., Suite E
Tustin, CA 92780
Tustin, CA 92780
Tele:
877 DrRobin
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DrRobin@BetteRobin.com
17482 Irvine Blvd., Suite E
Tustin, CA 92780
Tustin, CA 92780
877 DrRobin
Tele:
714.421.4407
Fax:
714.398.8808