PROTECT YOUR GOODWILL WITH WELL DRAFTED ASSOCIATE AGREEMENTS
We have had a number of dental transactions in the last year that were terminated or had difficulties because of there being no associate agreements. The following brief fact situations reflects the importance of having proper associate agreements, especially from the principal’s point of view:
1. In one situation, a long-term associate of a dentist principal did not have an associate agreement. She decided to leave her principal’s office to set up her own dental office and sent out announcements to the patients. The result was that a large number of patients followed the associate to her new dental practice as the patients, over the years, only dealt with the associate. This led to threatening communications between the parties and possibly legal action in the future but more important it impaired the value of the Principal’s goodwill.
2. In a number of situations in the past year our clients intended to sell their practices but either could not or had to take sizable discounts as a result of not having associate agreements in place. In this situation, a buyer would be very concerned whether patients would stay in the practice following closing or would follow the associate if the associate left. This is even more of a problem where the principal wanting to sell either is not full time in the practice or worse, is an investor dentist, where none of the patients actually know the principal.
3. We have also been asked on a number of occasions whether an associate who is leaving is entitled to send out an announcement notifying the patients of the departure and where the associate will be practicing. Often the answer is YES depending on the wording of the associate agreement - we always review the agreement to determine whether the associate has contracted out of such right (see below Smilecorp Inc. v. Pesin).
A principal dentist is playing with fire if he or she retains an associate without having the associate sign a strong, binding associate agreement that protects the Principal’s goodwill.
The main purpose of the Associate Agreement is to protect the Goodwill of the Principal. There are business terms such as term of the associate relationship, percentage sharing of billings, etc. but protecting the Goodwill should be number one.
What clauses should be in an associate agreement to protect the goodwill of the Principal dentist:
1. Non-competition covenants
The non-competition covenant attempts to protect the Principal from having the associate set up his or her own practice in a defined geographic area (e.g. 5 kilometers’ radius of the Practice) and for a defined period of time (e.g. 3 years). However, as many of our clients are aware, the courts are loath to prohibit an associate from carrying on a practice. This is not the case where the associate has sold the practice to the Principal Dentist and is continuing on as an associate – in this case the courts will, most likely, enforce the non-competition covenant. See the discussion of the Smilecorp v. Pesin case below where there was no non-competition covenant but a very strongly worded non-solicitation covenant – as it is very difficult to enforce a non-competition covenant it may be preferable to not have one but ensure that the non-solicitation covenant is very strong.
2. Non-solicitation covenants
The courts, in most cases, where there are non-solicitation covenants, will enforce these covenants in favour of the Principal Dentist on the condition that the covenants are well drafted. We would suggest that you add the following additional clauses in your non-solicitation covenant:
(a) Insert a provision that the Associate will not treat the patients of the Practice at any location other than the Practice office, will not solicit (including communicate) with the Patients and will not solicit the employees and independent contractors of the Practice.
(b) You may want to insert a damage clause in the contract providing that if the Associate breaches the non-solicitation covenant and treats a patient the Associate will be liable for pay damages to the Principal in a set amount, e.g. $850.00 per chart.
3. Acknowledgement of the Ownership of the Goodwill
(a) Define the Goodwill and ensure to insert an acknowledgement and covenant of the Associate that he or she acknowledges and agrees that the goodwill is the sole property of the Principal and that the Associate has no interest in the goodwill and that breach of the non-solicitation, confidentiality and announcement clauses will impair the goodwill of the Principal and cause the principal substantial damages;
(b) Insert a provision that the Associate, in order to protect the goodwill of the Principal, will not send out announcements and there are no obligations on the Principal to advise Patients where the Associate is presently practicing (see below under the heading Dentistry Act, Ontario and RCDSO). There should be a prohibition on marketing to or communicating with the patients of the Practice;
4. Confidentiality Covenant
(a) Provide for a strong confidentiality covenant by the Associate;
5. Other clauses To Protect the Principal’s Goodwill
(a) Insert a provision that the Principal has the right to apply to the court to obtain an injunction enjoining the Associate from breaching his or her covenants.
(b) Limit the Associates ability to copy charts and confidential information including patient names and personal contact information. Always be aware if you find the Associate making copies of records. Speak to your IT provider to ensure that charts cannot be copied except by you.
(c) Ensure there is a clause permitting the Principal to assign the benefits of the obligations of the associate agreement in the event there is a sale of the Practice; and
(d) Ensure that the Principal has the right to terminate the contract with or without cause.
The Dentistry Act, Regulation 853/93, Section 6 – Associate Leaving Principal’s Office
Section 6 of the Regulation provides that when an associated member and a principal member cease to engage in practice with each other,
(a) a principal member shall provide to any patient who requests it the business address and telephone number of the associated member or partner, provided the principal member has or could reasonably obtain the information;
(c) except as otherwise agreed in writing, an associated member shall not solicit or cause or permit the solicitation of the principal member’s patients. This does not include sending an announcement announcing the commencement or change in location of the associated member’s or partner’s practice to patients treated by the associated member or partner, provided that the announcement contains only information that is reasonably necessary to enable a patient to determine the location and nature of the practice of the associated member or partner. O. Reg. 853/93, s. 6.
If the Associate has worked at the Principal’s office for many years the patients, to a great extent, see the Associate as their dentist and not the Principal with the result that if the Associate leaves the Patients will, in many instances, follow the Associate, eroding the Goodwill of the Principal. This clause in the regulation is often quoted by the RCDSO.
Can the Principal refuse to provide a Patient with the forwarding address and phone number of the Associate and prohibit the Associate from sending out an announcement?
Smilecorp Inc. v. Pesin
This is an Ontario Court of Appeal case concerning the enforcement of a non-solicitation covenant given by an associate dentist. Under this case the associate (Dr. Pesin), in 2009, agreed to assume the responsibility for the existing dental practice of Smilecorp. Smilecorp terminated the associate
arrangement in 2011. Shortly before his receipt of Smilecorp’ s notice of termination and without
Smilecorp’ s prior knowledge or consent – Dr. Pesin made copies of all patient lists at the Practice. Dr. Pesin subsequently set up his own practice approximately 5 kilometers from the Smilecorp practice and took the list with the intention of informing the patients of the fact and location of his new dental practice. Smilecorp took the position that Dr. Pesin’ s copying of the patient lists, his removal of the lists and his plan thereafter to contact patients violated terms of the parties’ associate arrangements including a non-solicitation covenant in favour of Smilecorp given by Dr. Pesin. Smilecorp applied to the court for an interim injunction until 2013 to restrain Dr. Pesin from (1) soliciting, contacting, inviting or encouraging any current or past patient of the Smilecorp practice to seek dental treatment at any location other than the Dental Corp. practice; and
(2) sending any announcement, advertising flyer, notice or any communication to the patients or announcing the change in location of Dr. Pesin’s practice be enjoined.
The agreements entered into by Dr. Pesin and Smilecorp contained, amongst many other covenants an agreement by Dr. Pesin that the Principal does not and cannot represent and warrant that the agreement is not in violation of any rules, regulations or by-laws that may govern the practice of dentistry in Ontario.
Furthermore, the agreements did not contain a non-competition covenant by Dr. Pesin.
The court granted the injunction, ordered all confidential information removed by Dr. Pesin including records and patient lists and contact information be returned to Smilecorp. Dr. Pesin appealed the order. The court of appeal noted the following points:
1. The court noted that nothing in the agreement prevents Dr. Pesin from advertising generally concerning his relocation of his practice, i.e. Dr. Pesin can advertise generally but only prevented Dr. Pesin from communicating with those patients treated by him at the Smilecorp practice;
2. The court noted that there was no restriction on the location of any new dental practice to be established by Dr. Pesin and specifically noted “There is nothing to stop Dr. Pesin from opening a business right next door to Smilecorp.”
3. The court found the provisions of the Dentistry Act, Regulation 853/93, Section 6 described above inapplicable due to the wording of the agreement which overrode the rights in the Act.
4. The Court of Appeal upheld the decision of the lower court and in effect found that Dr. Pesin was bound by his covenants.
For the protection of your Goodwill we strongly recommend that you always enter into strong enforceable associate agreement with your associates. This blog post is for informational purposes only and should not be construed as legal advice.