NJ Appellate Court Gives DSOs a Much-Needed “Win”
DSOs, their private equity sponsors and dentist entrepreneurs in New Jersey scored a much‑needed victory this summer in the appellate court decision in Galkin v. SmileDirectClub, LLC, No. A-2867-19 (N.J. App. Div. June 11, 2021).
The ruling offers helpful guidance on the scope of New Jersey’s corporate practice of dentistry prohibition and, perhaps most notably, the court dismissed allegations by the plaintiff that a succession agreement between SmileDirectClub (SDC) and the owner of the New Jersey dental practice it supports granted SDC unlawful control over the practice.
In a per curiam opinion, the Appellate Division affirmed a decision by the lower court which granted summary judgment to SDC and dismissed claims alleging that it had violated New Jersey’s corporate practice of dentistry laws by controlling a supported dental practice in New Jersey.
Citing the controversial 2017 New Jersey Supreme Court case, Allstate Ins. Co. v. Northfield Med. Ctr., the plaintiffs argued that SDC’s use of a DSO structure -- including the use of a succession agreement addressing ownership of a New Jersey dental practice entity -- was a “sham” meant to allow SDC to control the practice in violation of corporate practice of dentistry laws.
The Appellate Division rejected this perspective, and instead found that the agreements at issue had critical “safeguards” to ensure SDC did not unlawfully control the practice: specifically, (i) the succession agreement required the practice to be owned only by a New Jersey-licensed orthodontist or dentist, and (ii) the management agreement stated that nothing therein would allow the SDC to interfere with clinical practice nor engage in the practice of dentistry. Based on these provisions, both courts concluded that the plaintiffs made “no credible allegations” that the arrangement was a sham transaction or that SDC unlawfully controlled the practice or was otherwise engaged in the illegal practice of dentistry.
The case represents a significant win and welcome departure from the Allstate decision in 2017, which had considered a more extreme, one-sided set of facts and documentation that lacked the safeguards and careful attention to state law requirements that have become customary in documentation by more sophisticated DSOs and physician practice management companies. The case is also one of the first in the country to favorably address a more modern form of succession agreement in a direct manner.
As a word of caution, the court distinguished past case law in part based on the fact that the dental practice at issue was not a plenary medical practice and did not bill insurance. For now, groups that bill insurance or operate in the medical space should continue to temper their expectations and remain cautious in their risk expectations for any investment in New Jersey.