TLC Laser Eye Centers’ court decision may allow broader rights to non-medical entities

The Illinois 1st District Appellate Court ruled recently that a corporation can enforce a non-competition clause.

CHICAGO — A court has decided that a business entity has the right to enforce a non-competition clause against physicians.

In June 1999 the Illinois State Appellate Court handed down a decision that granted TLC Laser Eye Centers partial rights to enforce a non-competition agreement against two formerly associated ophthalmologists.

TLC is touting the decision as significant because it recognizes that non-physicians and non-medical corporations may have the right to protect their investment and the disclosure of confidential information by means of a reasonable non-competition agreement. However, TLC still acknowledges that a company cannot compete directly with physicians in the practice of medicine.

TLC is one of the largest laser vision correction providers in North America. The company was established in 1993 and operates more than 50 centers in 25 states and provinces across the U.S. and Canada, in conjunction with a network of more than 11,000 ophthalmologists and optometrists.

The precedent setting case was between TLC and defendants Midwest Eye Institute II Ltd. (MEI and MEI II), Midwest Eye Physicians, P.C., Herman D. Sloane, MD, Allen M. Pielet, MD, et al.

While TLC is claiming victory for winning the right to control doctors in the non-medical area of a surgical practice, in fact, all three court decisions ultimately went against the laser center: the doctors were granted release from their contract due to its invalidity stemming from fee-splitting issues in the contract.

“I’m elated with that decision. I’ve always believed in the independence of the physician,” Dr. Sloane said.

The appellate decision was made after an earlier case that TLC originally had lost. In the original lawsuit, the lower court had ruled that the physicians and their new companies were not bound by the non-compete clause. However, the 1st District Circuit Court of Appeals reversed parts of that ruling on June 15, 1999.

In the beginning …

The ongoing case of TLC and Midwest Eye Institute began in December 1996 when TLC purchased substantially all of the non-professional assets of MEI and MEI II, located in Palos Heights and Westchester, Ill., respectively, from its shareholders, which included Drs. Sloane and Pielet.

According to court reports,. among the assets were the leasehold interests of the two facilities and the rights, titles, interests and trade names of each. The facilities remained Midwest Eye Institute and Midwest Eye Institute II, and Drs. Sloane and Pielet were granted the right to practice under those names.

At no time, however, would TLC have control over patient care, according to the agreement. Drs. Sloane and Pielet would retain sole and exclusive control of all aspects of their practice of medicine and the delivery of medical services at the TLC facility. TLC’s role was only as a marketing and business administrative entity. TLC took care of the business incidental to the practice, such as bookkeeping, billing and purchasing, according to the agreement.

In return TLC would train the doctors and their staffs to use excimer laser technology at TLC’s expense and would equip their Westchester, Ill., facility with the excimer laser surgery equipment.

In January 1997 Drs. Sloane and Pielet entered into a confidentiality and non-competition agreement with TLC. According to the contract, “during the two years after the date hereof [Sloane and Pielet] shall not without the prior written consent of [TLC], provide excimer laser surgical professional or technical services within a 30 mile radius of the [TLC surgical premises].”

However, according to TLC, in the summer of 1997, Drs. Sloane and Pielet began reducing the numbers of hours they were working at TLC without good reason. In court documents TLC even accused Dr. Sloane of feigning a hand injury. Although Dr. Sloane says he has medical documents that support his claim of a hand injury.

TLC officials said they believed that the doctors were attempting to create a backlog of patients at the TLC facility, in the hopes of diverting those patients to a new facility they created in December 1997 called Midwest Eye Physicians (MEP), also located in Westchester.

TLC also contended that the doctors purposefully created the name to be similar to Midwest Eye Institute, in the hopes of confusing patients and referring physicians. TLC attempted to enjoin the doctors under the Illinois Anti-Dilution Act of 1994. TLC said they believed the doctors attempted to ruin the reputation of TLC and its services. Court reports also indicated that TLC also sought an injunction against the doctors under the Illinois Uniform Deceptive Trade Practices Act of 1994 for both their practices and the name of their new facility.

Finally, TLC charged the doctors with violating their non-competition clause and the service agreement by performing excimer surgery within the restricted territory and by disclosing TLC’s confidential and proprietary in formation in their formation and operation of MEP, according to court documents.

The three previous charges made up Counts I, II and IV of TLC’s eight-count appeal against the doctors and their facilities. In March 1998, a lower court decided in favor of the defendants on all counts.

Both TLC and Drs. Sloane and Pielet countered with the several documents that backed up their positions. Most notable were affidavits by TLC that explained that if they were forced to move their facilities because of MEP they would incur losses greater than $600,000. They also explained that TLC used specific and unreproduced marketing tactics that generally were not known outside the company.

But TLC officials said that because only 2% of the myopic population was expected to undergo excimer surgery in the next 10 years, they needed to protect their facility. Competition with too many laser surgery physicians in the same general area would dilute an already small pool of prospective patients, they said.

The final affidavit TLC produced was from a former coworker of the defend ants who said the two doctors compiled a list of TLC’s referring physicians and had taken a majority of the patient files from the TLC facility. The coworker, who had worked with the doctors for 6 years, also stated that it was believed that TLC’s had brought in seven new referring doctors to the practice.

Dr. Sloane countered with arguments that they had only sold TLC the non-medical, non-professional side of the business, not their practice or the patient records. He added that he had already had extensive training in excimer surgery before TLC had entered the picture.

The physicians also claimed that they had terminated the practice management agreement because of TLC’s failure to provide financial information regarding fees and expenses as required by the PMA. In addition, the physicians refute the allegation they reduced the number of hours they worked for TLC.

Dr. Sloane also stated that the marketing of the business was general in nature and contained no unique approaches, nor was it treated as confidential.

Fee splitting

The most damning piece of evidence, however, was introduced to prove a charge of fee splitting, and it was the doctors who made the charge. Drs. Sloane and Pielet submitted copies of their payment schedules. The first schedule, titled Allocation of Purchase Prices, stated that “Goodwill” was purchased for $1. However, the second schedule — in the practice management agreement — established an annual fee the doctors would pay to TLC, over and above reimbursement for expenses, based on revenues generated by the doctors.

If the doctors said if they had revenue of $0 to $999,999 the doctors would pay a fee of $200,000. From there the fee moved up in staggered increments, for example: if revenue was $2,500,000 to $2,999,999, the doctors paid a fee of $800,000. If revenue was $7,000,000 to $7,999,999 the fee to TLC was $2,200,000. This staggered fee schedule reached a ceiling at $10,000,000 and above, where the doctors would pay TLC a fee of $3,000,000.

Drs. Sloane and Pielet contended that because this constituted improper fee-splitting, it rendered the practice management agreement void and also voided the restrictive covenants. In addition, the practice of fee splitting also violates the Illinois Medical Practice Act of 1987.

TLC General Counsel Ron Kelly, JD, said the Illinois law was absurd, considering that corporate management of medical practitioners is common place in the U.S. now. But he did note that the laws of every state are different regarding practice management and management fees, and that Illinois and California have the most stringent laws.

The results

On appeal the superior court found in TLC’s favor on the first two counts. The court agreed that TLC had not formed a relationship that would constitute the corporate practice of medicine, but that it did create a business entity that could be protected. The court also found that the use of the MEP name and its proximity to TLC held the potential for a large loss on their significant investment.

Al though the court did say that the penalty is always placed on the physicians who enter into a fee splitting arrangement, it was determined that the service agreement was void and unenforceable as a matter of law as a fee splitting agreement. Because TLC was not able to enforce the service agreement, the doctors were not bound by the restrictive covenant and the non-competition agreement. The court also rejected TLC’s challenges to the physicians’ use of the name Midwest Eye Physicians.

Chicago-based TLC trial lawyer Daniel P. Hogan, JD, of the law firm Ross and Hardies said he was “upset” by the court’s decision, principally because the issue of fee splitting was never brought up in the original court case, an assertion the physicians’ attorneys deny.

The case was appealed to the Illinois State Supreme Court by TLC on the issue of fee-splitting, in the hope of reclaiming the non-competition agreement, the injunction and monies still believed to be owed to TLC.

TLC claims that the Illinois Appellate Court’s decision has significance for non-physician managers and investors in medical practices. The decision recognizes that even though non-physicians and non-medical corporations may not compete directly with physicians in the practice of medicine, they have the right to protect their investment and their disclosure of confidential information by means of a reasonable non-competition agreement.

However, in December 1999 the Illinois Supreme Court declined to hear the appeal of the TLC case thereby allowing the lower court’s decision to stand. This essentially closed the case.

Mr. Hogan explained that in Illinois when a court decides that a contract is voided on the basis of fee-splitting, then the entire contract is immediately voided — including all claims and obligations that may lie within the contract.

Because of the voiding of the contract, both TLC and the doctors are unable to receive any monetary relief from the case as well. TLC said they were owed money by the doctors for various services that were rendered, and the doctors were asking for some of the fee money to be returned to them.

While he did not say specifically how much money the doctors were asking for, Mr. Hogan did say it was “a fairly significant sum.” For TLC that was one of only two bright spots. When a contract is voided in Illinois, whomever holds the money by the end of the case keeps it.

Therefore regardless of the fact that the court recognized TLC’s right to enforce a covenant of non-competition against doctors, the fee-splitting negated the entire contract. Although TLC does have some common law claims still pending against the doctors, that were not dismissed by the ruling of the appeal.

“It’s an odd case and rulings,” Mr. Hogan said. He said the fee-splitting claims were hardly classic examples and that it was obvious that the intent of the parties was not to have the entire contract voided should the practice management agreement be declared null. That was the very reason why the covenants for non-competition were kept separate from the practice management agreement part of the contract, another assertion the physicians deny.

In the end, TLC did win the right for corporations to hold doctors accountable to non-competition agreements, even if TLC lost that same right by engaging in fee splitting.

TLC may have a second problem to worry about. Dr. Sloane said he believes the TLC business model may prove difficult to continue. “I think that probably there are other physicians who may be more confident to discuss their discontent (with TLC) and rearrange their contractual obligations,” he said.

Dr. Sloane is also opening another office, called In Focus Laser Center. It will be located near his practice in Westchester, Ill.

Regardless of the doctors’ victory, both Mr. Kelly and Mr. Hogan say the case is precedent setting and can be considered to be the leading case in the nation regarding corporate practice management.

For Your Information:

• A transcript of the Illinois State First District Appellate court’s decision regarding the TLC The Laser Center vs. MEI II appeal can be accessed at www.state.il.us/court/appellates/1999/1982648.htm.