Clower v. Orthalliance, Inc., CIV.A. 1:01-CV-1636-JOF.
| Decision Date | 24 September 2004 |
| Docket Number | No. CIV.A. 1:01-CV-1636-JOF.,CIV.A. 1:01-CV-1636-JOF. |
| Citation | 337 F.Supp.2d 1322 |
| Parties | T. Barry CLOWER, D.M.D., PC., and T. Barry Clower, Plaintiffs, v. ORTHALLIANCE, INC., Defendant. |
| Court | U.S. District Court — Northern District of Georgia |
Jefferson M. Allen, McGuire Woods, Atlanta, GA James Joseph Brissette, McGee & Oxford, Atlanta, GA.
Scott M. Clearman, McClanahan & Clearman, Houston, TX.
Brian A. Colao, Locke Liddell & Sapp, Dallas, TX.
Robert H. Espey, McClanahan & Clearman, Houston, TX.
Andrew J. Hinton, Hinton & Powell, Atlanta, GA.
Timothy Harold Kratz, McGuireWoods, Atlanta, GA.
Christopher M. LaVigne, Locke Liddell & Sapp, Dallas, TX.
Randy J. McClanahan, McClanahan & Clearman, Houston, TX.
Michael D. Myers, McClanahan & Clearman, Houston, TX.
This matter is before the court on Defendant's motion for partial summary judgment [85-1], Plaintiffs' motion for partial summary judgment [86-1], Defendant's motion for leave to file a response to claims of illegality [97-1], and Plaintiffs' motion for leave to file supplemental authority [109-1].
Plaintiffs, T. Barry Clower, D.M.D., and T. Barry Clower, D.M.D., P.C. ("PC"), filed suit against Defendant Orthalliance, Inc., in the Superior Court of Fulton County, alleging breach of contract and fraud. Defendant removed this case to federal court on June 22, 2001 and filed a motion to dismiss the claim of fraud on June 29, 2001. On February 27, 2002, this court granted Defendant's motion to dismiss the fraud claim unless Plaintiffs amended their complaint to cure the defect within twenty days. Plaintiffs duly submitted a more detailed claim of fraud, and Defendant filed its second motion to dismiss, which this court granted on March 25, 2003. A conference pursuant to Rule 16 of the Federal Rules of Civil Procedure was held on May 28, 2003. In addition to disposing of discovery disputes, the court also granted leave to the parties to amend the complaint and counterclaim, respectively. Plaintiffs filed their amended complaint on June 9, 2003, and Defendant its counterclaim on June 30, 2003. At the close of discovery, on December 1, 2003, both parties filed partial motions for summary judgment.1 Further pending before this court are Defendant's motion for leave to file a response to Plaintiffs' claims of illegality, raised in Plaintiffs' motions, and Plaintiffs' motion for leave to file supplemental authority in support of its motion for partial summary judgment.
Plaintiff Clower, a Georgia orthodontist, along with his wholly-owned professional corporation,2 entered into an arrangement with Defendant, a practice management company, in which Defendant was to handle all financial and administrative affairs for the orthodontics practice and leave Dr. Clower free to focus on orthodontics. To that end, on or about August 26, 1997, Plaintiffs and Defendant entered into the three separate contracts that served to structure this cooperative relationship. In the first of the agreements, the Agreement and Plan of Reorganization (the "Plan"), Defendant contracted with Plaintiff Clower and his professional corporation to set up the bifurcated business arrangement. In return for a payment of cash and stock in Defendant corporation totaling $1,575,509.00, Plaintiff's professional corporation merged into Defendant and thereby transferred the great majority of the practice's tangible assets, including lease interests and orthodontic equipment, to Defendant. Plaintiff Clower simultaneously created a new corporate entity, Plaintiff PC, which entered into a Service Agreement with Defendant. The Service Agreement established the terms of the relationship between Defendant and the orthodontic practice. Defendant leased the assets of the practice back to Plaintiff PC, and agreed to provide business management and administrative services, in return for specified fees payable out of the practice's revenues. Finally, Plaintiff PC entered into a five-year employment agreement with Plaintiff Clower. It is through Plaintiff PC, and not through Defendant, that Plaintiff Clower provides orthodontic care.
Section I of the Service Agreement specifies Defendant's obligations to Plaintiffs. The Service Agreement covers Defendant's obligations as to facilities and equipment, personnel and payroll, business systems and procedures, information systems, accounting, legal services, marketing, financial services, fund management, and record keeping. In return for these services, the Service Agreement obligates Plaintiff PC to employ orthodontists to provide patient care, enter into an Employment Agreement with all employee and stockholder orthodontists, and keep confidential all trade secrets communicated by Defendant. Defendant is allowed to claim seventeen percent of the orthodontic practice's adjusted gross revenue as its service fee, and was also tasked with the responsibility for paying all practice expenses out of those revenues. Once all obligations are thus settled, Defendant is to return all remaining revenues to Plaintiff PC. The Service Agreement also provides a termination mechanism through which Plaintiffs may notify Defendant of an alleged breach of its obligations under the Service Agreement. Under § 5.2(b), Plaintiff is required to inform Defendant of its alleged material default, provide specific details of that default, and allow Defendant ninety days to cure the default.
The Service Agreement also discusses the exercise of control over the orthodontic practice. The Service Agreement recites in general terms that it is the orthodontic entity that will provide all orthodontic and patient care, and subsequent passages of the Service Agreement shape the contours of Plaintiff PC's control. While specifying Defendant's responsibilities, the Service Agreement states in § 1.1 that Plaintiff PC "shall retain control over all aspects of and decisions directly affecting the course of treatment of any patients." Similarly, §§ 1.2, 1.3, and 1.4 provide that Plaintiff PC maintains complete control over those aspects of facilities and equipment, and personnel and payroll, which affect patient care, and provide that Defendant will only establish business systems and procedures for operating the practice after consultation with Plaintiffs. The Service Agreement places the responsibility for employment of persons rendering patient care on Plaintiff PC, except that termination of an orthodontist other than for cause must be approved by a majority of Defendant's Board of Advisors. Section 6.1 of the Service Agreement gives Plaintiff PC control over all professional services and provides that Defendant has neither the authority nor the ability to perform any orthodontic functions. Further, § 6.4 provides that no part of the Service Agreement is intended to or will be interpreted to interfere with Plaintiffs' ability to exercise independent professional judgment. Finally, § 7.5 of the Service Agreement states:
To the extent any act or service required of [Defendant] in this Agreement should be construed or deemed, by any governmental authority, agency or court to constitute the practice of dentistry or orthodontics, the performance of said act or service by [Defendant] shall be deemed waived and forever unenforceable and the provision of Section 7.12 shall be applicable.
Section 7.12 provides that Defendant and Plaintiff PC will amend the Service Agreement if made necessary, among other reasons, by judicial decision.
As well as setting forth the framework for working relations between Plaintiffs and Defendant, the contracts also contain restrictive covenants. Section 2.9 of the Service Agreement contains a covenant not to compete between Defendant and Plaintiff PC, which provides as follows:
During the term of this Agreement, the Orthodontic Entity, and any of its shareholders, agrees not to establish, develop or open any offices for the provision of orthodontic services within a ten (10) mile radius of any of the Centers covered by this Agreement (the "Area of Dominant Influence") without the express written consent of Orthalliance. For a period of two (2) years following the termination of this Agreement, the Orthodontic Entity and any of its shareholders shall be prohibited within the Area of Dominant Influence (i) from advertising in print (except for yellow page advertising and announcements for the opening of a practice) or electronic media of any kind, (ii) from soliciting in any manner patients, orthodontists or staff associated with the Centers, and (iii) from soliciting any referrals from any dentist who referred one or more patients to the Center within the three (3) years prior to the date of such termination. In the event the Orthodontic Entity terminates this Agreement pursuant to section 5.2(b), then this Section 2.9 shall be void and of no further effect; provided, however, the remainder of this Agreement shall remain in full force and effect.
Section 2.6 of the Service Agreement obligates Plaintiff PC to enter into such an Employment Agreement with all affiliated orthodontists as Plaintiff Clower was to sign contemporaneously with the signing of the Service Agreement. The restrictive covenant contained in § 5 of the Employment Agreement between Plaintiff PC and Plaintiff Clower provides as follows:
For a period of two years following the termination of your employment, you may not (i) engage in any newspaper, print, radio, television, or electronic advertising for your orthodontic or dental services in the broadcast coverage area of television stations in the market area where the center covered by this agreement is located, without orthodontic entity's prior written consent, (ii) actively solicit or directly market your orthodontic or dental services (or those of any other orthodontic entity with which you are affiliated or employed) to anyone who...
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