In this episode, hosts Brad and Michael share the story of a plastic surgeon who paid the price of not having formal agreements with his “business partner.” Without clear legal terms, the partnership led to patient loss and operational setbacks. Tune in to learn why having a legal framework and protective agreements, like non-competes and NDAs, is key to protecting your practice from business fallouts.
Listen to the full episode using the player below, or by visiting one of the links below. Contact ByrdAdatto if you have any questions or would like to learn more.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season’s theme is Unintended Consequences. We sometimes find ourselves in a situation that can be traced back to a seemingly inconsequential or unrelated decision.
Brad: Now, Michael, as you said, this season’s podcast really diving into the theme of Unintended Consequences. And I thought, what better way to really get today’s show going, but by speaking about classic examples from movies.
Michael: Of course, Brad, and I’m sure by movies you mean eighties movies.
Brad: Maybe, I don’t know, maybe. I mean, let’s just start with the random one. [00:01:00] Do you remember the movies Raiders of the Lost Ark? And there’s a famous scene in the marketplace where Indy pulls out his gun.
Michael: I do, because I’m old like you. And so for our gen Xers out there, they probably know what you’re talking about. I don’t know if you lost the younger crowd, Brad, but yeah, the one with the sword wielding guy.
Brad: The same guy, yes. He is ready for a big showdown instead and he just pulls out his gun and shoots a sword wheeling guy and just drops him dead. It’s classic. And the unintended consequences, and he just turns this really climatic scene and dual into really on a kind of total joke.
Michael: Well, I definitely remember it’s an iconic scene. I’m not sure that’s an unintended consequence. Wasn’t that just a clever way to show how exhausted he is?
Brad: Well, you thought it was, but the real story is Harrison Ford, who was playing Indiana Jones in the movie, was suffering from a real bad case of the stomach bug, [00:02:00] and he could not be on the set for very long. So he was supposed to have this huge fight scene with the whip and the swords and everything. But instead, the poor sword guy apparently who was well-trained, he couldn’t do it because Ford was too sick, so they had to keep the movie going at the pace they were supposed to do. So the simple solution was just pull out the gun and shoot him, and it’s basically was unscripted in the actual, the movie itself.
Michael: Wow. Okay. Well, the fact that he was sick and went unscripted, that does seem like an unintended consequence, Brad.
Brad: And believe it or not, that scene now has been made into movie history and other movies have copied it, kind of made fun of it. It’s now kind of go, has a life its own. So let’s go onto another one. How about Jaws? It’s in that movie, the mechanical shark was built for the movie was actually never tested in saltwater. And when they dropped it in the saltwater to start shooting the movie, it kept breaking down, leading to these iconic scenes where they had to deal with the problem. [00:03:00] They had to continue then shoot the movie, but they didn’t have a shark. So they actually started kind of building up with terror. As such, like the camera was used throughout the water for almost the entire first half of the movie and no shark.
Michael: Okay, I’ll buy it, Brad. I know my audience, you with the dad joke?
Brad: Yes. So you think about it, they ramped up this tension instead of creating an entirely different dynamics because you didn’t know the unintended consequences, the viewers really were left on the edge of their seats because they really didn’t know what this horrible creature really looked like. It just kept attacking swimmers, and it just brought a whole new reason for fear.
Michael: Okay, I’m starting to warm up to where you’re going with this. Do you have anything a little more modern?
Brad: Okay. I’ll leave the eighties if that’s more modern. How about in 2015? If that’s modern, then yes. A great modern example of offscreen issues leading to funny unintended consequences can be found in the production of Jurassic World. During the filming, there is a [00:04:00] notable incident involving a scene with the [00:04:03] Raptors, one of the Raptors animators it broke down unexpectedly during filming, forcing the actors to kind of improvise around this malfunction.
Michael: What did they do?
Brad: Well, as a result, Chris Pratt, who played Owen Grady, who was the main star, had to adlib some lines to keep the scene flowing smoothly while reacting to this unresponsive raptor. The result was not only a memorable moment in the film, but also provided comic relief, amend the tension, again, tensions being built up, showcasing how something went wrong, but could lead to unexpected humor. Humorous outcome.
Michael: Okay. Brad, you did a decent job illustrating our theme through movies, so little gold star for you, but I think it was time to jump into today’s story.
Brad: So no more movie talk?
Michael: I think we’re good. We can go into story now.
Brad: Okay. You know, Michael I’ve been [00:05:00] thinking a lot about partnerships lately, and it’s interesting how it kind of can be a double edged sword.
Michael: Yeah. I mean, I know what you mean. I am partnering with you, right? Yeah. Are you thinking about any specific partnership?
Brad: Yes. Not ours though, but now you got me thinking about ours. It’s great. Kennedy, I can’t stop thinking about it now. I don’t even if I can keep going with a show now. Why should we think? I’ll refocus perhaps. So today’s story is about a plastic surgeon who will just randomly call Dr. Ford and his experience with a med spa he opened with an esthetician who we’ll call Mrs. Pratt. They’re acquaintances who had met at different cosmetic trade shows over the years, and they seemed to like each other and they decided it would be kind of fun to work together to build a more robust non-invasive services at Dr. Ford’s practice.
Michael: So you did continue the movie. Talk a little bit through your names, [00:06:00] but we’ll say okay, we’ve got Dr. Ford and Mrs. Pratt. But I do want to touch Brad on, you mentioned the non-invasive services, and we have of course talked about this many times throughout our podcast seasons. It’s important to really understand what’s happening with this story, to understand that you have a plastic surgeon that’s been trained for surgery, and so through their view of the world, they’re spending their time in the operating room – so invasive surgical. And yet, it’s also common, even predating this term medical spa that you hear, to have noninvasive services kind of inside a practice or as a part of a practice. And so the idea of building out the service line is essentially the same thing as saying, we’re going to add medical spa services inside the practice, whether it’s literally [00:07:00] inside or just adjunct to it. it sounds like from the story that Dr. Ford and Mrs. Pratt decided that they wanted to do this together. Brad, do we need to talk about scope of practice for an esthetician for the show, given that she’s going to be a partner?
Brad: It’s a fair question, but no, we’ve discussed it enough shows and it’s really not going to be as relevant to this. But if a physician is delegating medical service to esthetician, there are some traps that the physician would have to work through, but not for today’s show.
Michael: Okay. Well, just for the audience’s sake, it’s important to know that scope of practice is state dependent, and generally speaking, an esthetician board of cosmetology, they are in most States, really limited on what they can do from a medical perspective. So, you really have to look closely at that and see if there’s a path through kind of the physician’s license that would allow those services to be delegated. [00:08:00] But tell me, how did this new relationship go?
Brad: Well, after a year of working together, Mrs. Pratt suggested that Dr. Ford really invest heavily into this new, non-invasive side into a new med spa space. Dr. Ford agreed and they rented out a bigger area in the office or kind of took down some walls really, and has spent a lot on this new buildup with new supplies, furniture fixtures, and equipment, new staff, but the catch, Dr. Ford did all the financial heavy lifting.
Michael: So I’m guessing when you say heavy lifting, that Dr. Ford was the money person, brought the capital to the partnership and not Mrs. Pratt. And then you said staff, tell me more about who did Dr. Ford hire?
Brad: Yeah. First, you’re correct. Yeah, Dr. Ford did bring all the dinero to the deal. Dr. Ford hired a full-time nurse practitioner to help clear the patients and treat them at the med spa, and a full-time receptionist to help with the surgical scheduling that was getting busy and the non-invasive schedule.
Michael: [00:09:00] Okay. And again, another thing we’ve touched on, but context to talk about. Hiring a full-time nurse practitioner, you said clear the patients. Audience, we’ve talked before, talks about the good faith exam. NPS can play a really important role because they have a pretty robust scope of practice for what happens inside of a med spa. So they’re able to give a, a diagnosis and treatment plan for new patients. They’re actually able to do the procedures themselves. And so particularly with an esthetician involved, this seems like an important role. Did they have any legal framework in place that Dr. Ford and Mrs. Pratt for their partnership, or did they have an employment agreement?
Brad: You know, we can discuss legal documents later, but understand they’re friends, they’re running and gunning and breaking things, moving really fast. They really want to get this new med spa off the ground. [00:10:00]
Michael: Okay. It feels a little like foreshadowing, but I also am getting the picture right. Like, we know you got a busy surgeon who is probably focused on the operating room. They’re, like you said, breaking things, getting things going, and so things are moving fast. Who was responsible for what?
Brad: Yeah, so Mrs. Pratt really didn’t contribute to any of the updates or the debt. She was really essentially riding on Dr. Ford’s financial investment while presenting herself to the outside world as an owner on their website and to the patients.
Michael: Wait, as an owner? Okay, well I need to ask the question for context. Was this a CPOM State? And before you answer, let me give a little bit of context again for something we’ve talked a ton about. Corporate Practice of Medicine is a law that’s in many states that says if you’re a business and you’re providing services that are considered the practice of medicine, [00:11:00] then that business has to be owned by physicians, which you have someone claiming to be an owner here, so it just makes me wonder if we have CPOM issues.
Brad: Because an aesthetician’s not a physician?
Michael: Yes, Brad. Second gold star.
Brad: Yes, was catching up, making sure I was paying attention. But actually it’s well done. Michael. It sounds like you’ve actually spoken about CPOM before, but under today’s story, although again, an important question and one of which Dr. Ford and Mrs. Pratt never really discussed, it will not be relevant for today’s unintended consequences. At this time, Mrs. Pratt was not an owner, although it was discussed that Mrs. Pratt could get ownership in the med spa.
Michael: If she’s not an owner, despite calling herself one on the website, I guess this would legally make her an employee.
Brad: Correct. She was a full-time W-2 employee. As time passed and the med spa gained popularity, Dr. Ford was really, again, was going back to what you said earlier, was really swamped with the surgical procedures and really didn’t have time to really focus and manage the med spa. [00:12:00] With the med spa being so busy, Mrs. Pratt had finally came to Dr. Ford and said I’d like a significant raise, because again, she’s just been treated as an employee and I really want some actual ownership.
Michael: What did Dr. Ford say?
Brad: Well, he explained that the med spa wasn’t generating enough revenue to justify the raise, especially with the salaries he was already paying at this point. Remember he had to hire two new full-time people, and it was still work in progress. There was lots of work happening, but based on the overhead, almost no profit coming out of the med spot at this point.
Michael: This is really common, and I can kind of picture Mrs. Pratt is probably working her tail off making it happen, feeling like an owner. But from a business perspective, running a business, you have overhead that goes into it. You have a bunch of capital that was put into it, and so a lot of times at the start of a business, even if things have some traction and money’s coming in, [00:13:00] your P&L may not really be showing something yet – a profit. And so, there is a difference between busy and being profitable. I guess my follow up question is, did she deserve an ownership share?
Brad: Yeah. Before I answer that, I mean, a good point to make on the P&L also is understanding the profit margins on the surgical side tend to be much higher than the profit margin on the non-invasive side. So even though it looked like they were probably really busy, they were accounting for the profitability on the med spa side differently than on the surgical side, so important part to make because that’s where the money was being spent. Back to your question about the ownership; it started getting complicated. Mrs. Pratt really wanted to buy in for half of the med spa, but at a fraction of what Dr. Ford had already invested into the business.
Michael: Okay. Another follow up question. Was the med spa a separate entity or was this actually part of the surgical [00:14:00] practice because that obviously would make a huge difference on how they would set up an ownership model.
Brad: Hey, Kennedy, cut my mic. I don’t want Michael to hear this or maybe cut it off. He’s correct again, audience members, but unfortunately Michael, it’s not relevant to today’s story.
Michael: Wow. You say I’m correct, but not relevant?
Brad: I feel better about that statement now.
Michael: So what happened next?
Brad: Well, Dr. Ford said he would consult with the CPA to explore options, but before he could really act, Mrs. Pratt pulled the fast one and moved down the block to open her own med spa with another plastic surgeon, and she took the full-time receptionist and nurse practitioner with her.
Michael: Yikes. Oh, that had to be a massive blow to Dr. Ford. He funded it all, ended up with a shell of what he built together. Now I’m really curious, when did we get involved?
Brad: Well, the CPA that was working with Dr. Ford recommended that Dr. Ford call us to disclose legal model for adding in an esthetician, [00:15:00] Mrs. Pratt in this case, to the CAP table. We had one discovery call and discuss options with Dr. Ford. And the very next day is when we got a frantic phone call from Dr. Ford letting us know that Mrs. Pratt has left and was calling all the practice patients and had hired that NP again, receptionist, and he needed help to stop this bleeding.
Michael: Oh, wow. So just quick context for the audience – Being added to the CAP table is kind of a fancy way of saying becoming an owner – in a partnership, there’s a CAP table that shows the percentage of ownership. We don’t need to spend much more time on that though, because she’s gone.
Brad: She’s gone.
Michael: All right. Well, let’s go to commercial and discuss the unintended consequences of their partnership and learn what happened with Dr. Ford and Mrs. Pratt.
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Brad: Well, welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd. Now Michael, as you heard, this season theme is Unintended Consequences, and we left off with Dr. Ford and asking for help as it relates to the patients and staffing and everything else that was happening. But maybe you can refresh our audience a little bit on the story again.
Michael: I mean, the biggest highlight from the story was Brad recognizing that I was right a couple of times.
Brad: I don’t remember that part of the story.
Michael: But short of that, kind of the quick recap, of course. We have Dr. Ford, who’s a plastic surgeon, and Mrs. Pratt an esthetician [00:17:00] and they were running and gunning and decided to start offering med spa services together, non-invasive services or what they were calling it. Worked together for about a year, it was going well, and they decided to really double down, build out some space and have a separate true med spa. And really, legally nothing changed. They were just going fast. Mrs. Pratt was calling herself a partner on the website, but at the end of the day, it sounds like she was just a W-2 employee, which is relevant later. I’m betting we’re about to find out because she left and took everybody with her. Dr. Ford was left with this beautiful space, but no team to work with. I don’t think you answered my questions from earlier though. I said, what legal framework did they have as it related to this arrangement?
Brad: If I said zero, it would’ve been the answer, [00:18:00] but you said this earlier, it’s not as uncommon as you think. There was nothing in place, there were no employment agreements, there were no company agreements. He was a very super busy physician. He was partnering with someone that he was friendly with and he was excited about this idea about opening a med spa. And they were kind of, we said moving fast, but they’re creating something new and exciting and they could always clean it up later, Michael.
Michael: I can understand even in many practices it’s common for estheticians not to have an employment agreement. But here, Dr. Ford was spending significant resources to open a med spa with Mrs. Pratt. And even though she was an employee, I’m surprised that she doesn’t even have an employment agreement.
Brad: Yeah, correct. No employee agreement, no employee handbook, no non-disclosure agreement, no letter of intent. There’s really nothing but a handshake.
Michael: Wow. And so, context for audience, employee handbook would have some guidelines [00:19:00] and policies and usually some requirements on confidentiality. Same with a non-disclosure agreement, so none of that’s in place. And then it really sounds like a classic case of miscommunication and misplaced trust. And if they had set those boundaries and expectations early on, things might have turned out differently.
Brad: Yeah, absolutely. So when Dr. Ford did call us back, he wanted us to immediately send a cease and desist letter to Mrs. Pratt.
Michael: Yeah. So commonly, when you’re a business or in this case a practice and you have an employee doing things that they shouldn’t be doing when they leave, and it could be anything from non-compete to taking company information, et cetera, a common step is a cease and desist letter. And it’s basically a letter articulating what they’re doing and what’s wrong and telling them to stop immediately or they’re going to get sued. [00:20:00] I am curious here, because I don’t know what the basis of the cease and desist would be based on what you’ve just described to
Brad: Me. Well, you’re not far off. I mean, the discussion with them was what initially what documentation do you have, because that’s going to be based on what we can develop the cease and desist letter on because that’s what you need to then help enforce it. And so Michael, let me kind of take a step back and step out of this story. But let’s talk about what are some of the common ways to prevent something like this. Some people might say, and I’ve heard people use this term loosely, they should just use a non-compete.
Michael: Yeah. A non-compete can be an effective tool. And it is definitely another example of something that’s state dependent and can vary too by the type of professional that you have involved. So you have states like Texas, California, and New York, and the enforceability of these agreements just across that sampling varies significantly. [00:21:00]
Brad: So let’s pretend that this person may have been in Texas. So how would it have worked in Texas?
Michael: Yeah. So Texas has an actual statute on non-competes that says, this is how you do them. And there’s a lot of, we can really get weighted down by the legal jargon, but it has a bunch of steps that are required to have a non-compete, technical steps about it has to be inside of an employment agreement or some similar type of agreement. And then like many states that allow them, there has to be reasonable restraint on trade, geography, scope, and kind of what you’re preventing them from doing, but they generally, if done right are enforceable.
Brad: Okay. Well, that sounds reasonable. It sounds like the State of Texas has built out a way for if it does work, if you want to have a non-compete. Well, what about, let’s just pretend they were in California. What would happen there?
Michael: Yeah, I mean, the word on the street, which is mostly true, is that that non-competes are banned in California. [00:22:00] It is true as it relates to an employment relationship. If you are a partner or a co-owner in a business or you buy a business, they can be enforceable in those kind of circumstances.
Brad: Perfect. Well, that makes sense because if you’re an owner versus an employee, they’re different covenants you might want to think about. So let’s go on to other things. Someone might say, word in the street, could they have focus on other protective measures, like maybe confidentiality agreements?
Michael: Yeah, so a confidentiality agreement, or sometimes you’ll hear the term non-disclosure agreement, they accomplish the same thing, is built around this idea that the company has this important information that they want to maintain as being protected. So it’s proprietary information or patient lists, business strategies. And the idea with these agreements is, you the employee are going to receive these things and you agree to maintain the confidentiality [00:23:00] of that, both while you’re employed and after you leave. And so, that does have some teeth to it to deter them if they go and join or start a competing business and would give you something to hold onto if you were wanting to draft a cease and distance letter as you mentioned above in our story.
Brad: All right. So let’s just apply it now. So how would that work in practice then?
Michael: Yeah, so the agreement itself has to kind of define or outline what is confidential information, and have consequences for violating the agreement. And I’ll say this, I mean, as a general rule, all employees should be subject to a confidentiality agreement. In fact, you even see those in handbooks a lot of times. Or having as part of the employment packet, they sign off to one of those things. And in a practice where you have HIPAA responsibilities, it becomes even more important. [00:24:00] And then if you’re in a state like California where you can’t have a non-compete, it becomes even more critical to have something to protect yourself.
Brad: Yeah, makes sense. What about enforcement? So now we talked about the different tools out there. If someone does breach this agreement, how can it be enforced?
Michael: Yeah, I mean, you can take a legal action. So the cease and desist is really a first step towards that. It’s like a warning shot saying you better stop. But then at that point you’re filing a lawsuit and probably seeking an injunction where you have a court intervene and make them stop. But there may be underlying damages that you’re seeking, depending on what was taken and how it was used and how it affected or hurt the business. But they’re generally pretty enforceable documents if the employee actually did take confidential information.
Brad: So what if they challenge it in court, like the employees?
Michael: [00:25:00] Yeah. I mean, I think that when you’re talking about confidentiality agreements, it really is going to come down to some technical things, like is what you claim to be confidential information, actually confidential information? So did you treat it that way? Or was it something that anybody could get access to and do others in the public domain have it? And then of course you got to prove that the employee actually has it. But like I said, generally speaking, they’re enforceable. There’s a burden to essentially establish, yes, it’s confidential and yes, the employee took it.
Brad: Sounds like there are a lot of good ideas out there that they could have done. Do you have any other safeguards that I didn’t ask about that the practice could have utilized?
Michael: Yeah, I mean, it is a general rule when you’re looking at the employee relationship, there really is a care and a stick approach that we’re talking about the stick approach, [00:26:00] which is how do you protect? How do you restrict the patient from doing things that can hurt the practice? The flip side, which might have happened had there been ownership given earlier on would be the carrot, which is how do you keep them from leaving in the first place?
Brad: Right. Sure. Well, good points. This obviously feels like cautionary tale about importance of clear grievance in business, especially when you’re working with employees and as a minor, that just because you have a good relationship with a potential partner doesn’t mean you can skip all the legalese.
Michael: Yeah, agree. So curious, Brad, what ended up happening with Dr. Ford and Mrs. Pratt?
Brad: Well, because there was no documentation at all to prevent Mrs. Pratt from joining a doctor down the block or recruiting the patients and employees, Dr. Ford really didn’t have any mechanism to help enforce the protective covenants you to discuss so well earlier. Oh, scratch that. No, I meant that other guy who, or who was on the podcast discussing it earlier, as such, unfortunately he was stuck with this empty [00:27:00] beautiful med spa that I didn’t have any patients or employees.
Michael: Oh, man, that’s really sad, Brad. So what did Dr. Ford do next?
Brad: He needed to regroup and he started working with the consultant on how to salvage what was left for the med spa, or even pivot to focus solely on the surgical practice. He need to rethink his approaches, and obviously with partnership in the future and nothing else, it reminded him as a good way to have a solid plan in place before executing on something.
Michael: Yeah. And I’d say kind of as a wrap up comment, Brad, it’s really common when business owners have a new idea to kind of test it out, get a little proof of concept, roll with it a little bit and then you start going fast. But there is risk if you don’t pause to make sure that you’re protected in what you’re trying to build. And in this case, the unintended consequence [00:28:00] was they made a connection and started rolling, and then he’s unprotected at the end, and paid dearly for it.
Brad: No doubt. Well, Michael, we’re back. Next Wednesday’s show, we’ll have our series regular and partner Jay Reyero on it, where he talks about the unintended consequences NIL is having in the medical world. Thanks again for joining us today, and remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
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