Orthodontic Centers of America, Inc. (NYSE: OCA) today announced that the U.S. District Court for the Northern District of Indiana has held that a Service Agreement between OrthAlliance, Inc. and one of OrthAlliance's affiliated practices was valid
and enforceable, in that the Service Agreement did not violate Indiana laws prohibiting the unauthorized practice of dentistry. In a decision rendered on April 22, 2002, the court also ruled that OrthAlliance was a third party beneficiary of portions of the Employment Agreements between the practice and its orthodontist-owners, including the orthodontists' covenant not to compete.
OrthAlliance, Inc. is a wholly-owned subsidiary of OCA. As previously reported, a number of OrthAlliance's affiliated practices and orthodontists have filed lawsuits against OrthAlliance, in which they seek to invalidate their Service Agreements and Employment Agreements based on alleged illegality under state laws governing the practice of dentistry.
Bart Palmisano, Sr., Chief Executive Officer of OCA, remarked, "We believe that the court's rulings in Orthodontic Affiliates send a clear message that our contracts are valid and enforceable. We view the federal court's ruling as a positive development and a testimony to the strength of our legal positions in these cases."
In the case, entitled Orthodontic Affiliates, P.C. v. OrthAlliance, Inc., f/k/a U.S. Orthodontic Care, Inc., the professional corporation alleged that its Service Agreement called for OrthAlliance to engage in the practice of dentistry unlawfully, thereby rendering the Service Agreement invalid and unenforceable. In rejecting the professional corporation's position, the court characterized the relationship between the parties as "truly symbiotic,"
with the orthodontists benefiting from OrthAlliance's "expertise (and resulting efficiency) in business management, which allows the practitioner more time to ply his/her trade and to see more patients."
The court found that the Service Agreement did not call for OrthAlliance to engage in the unauthorized practice of dentistry; rather, the court found that OrthAlliance had a contractual obligation under the Service Agreement to provide business services and business personnel to the practice, without
violating Indiana laws regulating the practice of dentistry. The court confirmed that OrthAlliance does not control the orthodontic practice, noting that one of the orthodontist-owners of the practice, Dr. Randall A. Schmidt, had made statements that indicated his understanding that he and the other orthodontist-owner, Dr. Thomas W. Surber, "retained exclusive control" over their practice.
The court also held that OrthAlliance was a third party beneficiary of provisions in the Employment Agreements between the practice and its orthodontist-owners that were intended to benefit OrthAlliance. Specifically, the court noted that the noncompetition provisions in the Employment Agreements were clearly intended to benefit OrthAlliance, and that the practice and its orthodontist-owners may not amend those provisions without
OrthAlliance's consent if OrthAlliance has approved, sued upon or justifiably relied on the provisions. OrthAlliance has filed an amended counterclaim with the court, which OrthAlliance believes clearly indicates that it has met these requirements. A trial date for the remaining issues in this case has not been set.
In closing, Bart Palmisano, Sr. stated, "We are encouraged by the court's rulings and will continue to pursue and vigorously defend each of the similarly baseless actions that selected professionals have elected to bring against OrthAlliance. The court's rulings affirm our view that we have meritorious defenses and counterclaims in these cases."