When you think of a medical group, you tend to view it as an entity apart from its physician owners. And, most of the time that’s legally correct.
But sometimes it’s not, and other times, even if it is, it’s still not that clean in the real world.
That’s because a group’s plans for the future, whether a sale, a merger, a new joint venture, or just the next five years, depend on its physician owners. And any one of them may have signed something, somewhere else, in some perfectly legal side venture that gets in the way.
A lawsuit filed this month in Youngstown, Ohio shows how this might play out.
A Group Sale, and Two Partners’ Side Deal
This past summer, Youngstown Orthopaedic Associates, an independent orthopedic group set up as a limited liability company, signed a nonbinding letter of intent to sell its assets to Cleveland Clinic. Things appear to have progressed; at least press reports say the group is scheduled to join Cleveland Clinic on November 1st.
Two of the group’s members, that is, owners, have, for more than a decade, also been investors in a local physician-owned surgical hospital operated by Southwoods Health. As investors, they signed the hospital entity’s LLC operating agreement, which, like many such investment deals, contains a non-compete. Among other things, this one bars investors from employment with, or involvement in, a competing “Conflicted Facility” within 30 miles, for as long as they hold their units and for a period after they leave.
The hospital alleges that the two physicians’ involvement in the deal violates that covenant. Its board voted unanimously that the arrangement is a prohibited conflict. On October 1, the hospital sued the two physicians. On October 16, the court issued a temporary restraining order barring the two from participating in any letter of intent between their group and Cleveland Clinic, and from employment with a Cleveland Clinic facility in the area.
Keep It in Perspective
These are allegations. The physicians deny any breach. Their lawyers argue, among other things, that their group isn’t a competing facility, that nothing definitive has been signed, and that they would keep bringing cases to the hospital.
A TRO is a short-term stopgap, not a ruling on the merits. A hearing on a preliminary injunction is set for October 28, and whether one will issue is anyone’s guess.
For what it’s worth, I have serious doubts that a hospital can convert its investors’ employment by someone else into a “conflict” it gets to veto. I suspect the hospital’s reading won’t survive intact. But I’m not the judge, and, most importantly for the underlying lesson for you, litigation takes time that deals don’t have.
Why Every Group Should Care
Let’s generalize the discussion to any similar set of circumstances.
No matter the legal niceties, every buyer of a medical practice is really buying physicians and the patients who follow them. Depending upon the size of the group, if two of its physicians, especially those who are heavy hitters within the group, can’t come along, or can’t come along without a lawsuit following them, the buyer will ask what it’s really getting.
If those two physicians’ book of business is a meaningful part of what the buyer is paying for, a deal that looked done can be repriced, restructured, delayed, or blown up entirely. The rest of the physician-owners, none of whom entered into a problematic outside agreement, would be living with the consequences.
That’s the lesson here, regardless of who wins: a group’s business interests and aspirations can be held hostage by side deals its owners signed as individuals, years earlier or even years later, in documents the group never saw.
Vetting Your Owners’ Outside Deals
The fix isn’t complicated, but it has to be deliberate. A group needs to know what its owners have already agreed to, and it needs a say, or at least guardrails, in what they agree to next.
That starts at the door. When a physician is admitted as an owner, the group’s diligence should cover his or her outside investments and, especially, any non-competes or other restrictive covenants that come with them. And it has to continue: owners should agree not to enter into outside arrangements containing restrictive covenants without the group’s approval.
Ideally, that approval requirement would be limited to covenants that could actually affect the group. The problem, as the Ohio case illustrates, is that it isn’t always obvious which ones those are. Accordingly, the group, with its own counsel, should make that call, not the physician-owner making the investment.
And note what this isn’t about. It isn’t about one of your physicians having the ability to bind your group to a restrictive covenant. Your group’s deal may be blown, even if the physician bound only him or herself.
