NJ Supreme Court Decision Has Implications for the DSO Industry

Michael W. Davis, DDS


On May 4, 2017, the New Jersey Supreme Court ruled on Allstate Insurance Company vs. Northfield Medical Center, et al.1 The plaintiff Allstate prevailed in the court’s decision, in which the New Jersey Dental Association filed an amicus brief in support of the insurer.

The case centered on allegations that the defendants, the Northfield Medical Center and associated companies and individuals, established a sham business structure in violation of state statutes that require medical care strictly be delivered by physician-owned and physician-controlled clinics.

The court ruled that the non-physician management company was truly the practice’s beneficial owner. It went to lengths in elucidating the defendants’ misrepresentations and deceitful business practices, determining that the defendants:

“extensively promoted a professional practice structure that a fact-finder could reasonably conclude was little more than a sham intended to evade well-established prohibitions and restrictions governing ownership and control of a medical practice by a non-doctor.”  

The court added: 

“That structure was found by the trial court to have violated the requirements governing ownership, control, and direction of a medical practice. The trial court reached its conclusions based on those harsh facts, having heard the witnesses and examined the structure of this practice design, formulated in such a way as to make it appear that a medical doctor was ‘in charge’ of the Northfield practice.” 

The ruling specifically cited that a valid licensee (doctor) has the right to terminate management contracts for legally permissible reasons. The ruling additionally stated the relationship of a doctor entering into an agreement with a management company that provided “coercive influences” including space leasing, equipment leasing, and management services was “highly imprudent.”

Also cited was the “need to neuter any coercive influences by cautioning that, at a minimum, ‘each such contract should be separate and without any interlocking features.’” The dangers of the management company generating above-market loans to the practice, a potential mechanism to exact clinic profits for an unlawful beneficial owner, also garnered the court’s notice. Plus, the court drew attention to the lawful necessity of the doctor to be the majority shareholder in the clinic. 

The NJ Supreme Court affirmed the earlier trial court’s opinion: 

“(The defendants) promoted what they knew was essentially a lie. The business model they promoted was intended to appear one way and yet, in reality, be another way. (The defendants) were motivated to provide to the (non-physician owner) the ability to manage a practice which included medical doctors. (The defendants) knew that a (non-physician) could not own a majority interest of a multi-disciplinary practice since his California corporation was established so that he was a minority shareholder himself.” 

The earlier trial judge ruled, which the NJ Supreme Court upheld:

“at best, defendants had exhibited ‘willful blindness’ to the illegality of the (business) model at issue.” 

Further affirming the trial court’s decision by the state supreme court: 

“The trial court demonstrated clarity of vision in recognizing both the letter and spirit of the (Medical) Board’s rule.”


“Moreover, the lengths that defendants went to in shielding the true controller of this practice from view undermine any basis for interfering with the trial court’s assessment of the mixed question of fact and law that was presented to the court.”

Potential Relevance to the Insurance Industry and Medicaid & Medicare

Allstate, the prevailing party, argued that any payments by it for patient services were unwarranted. An unlawful business structure of non-doctor beneficial clinic ownership and control was established. This unlawful business structure precluded Allstate from rendering insurance payments to entities operating outside the rule of law.

The court ruled that the defendants also violated the New Jersey Insurance Fraud Protection Act (IFPA). Allstate was awarded a $4 million judgement.

Implications extend beyond this specific legal case. Any healthcare management company that misrepresents true clinic control and ownership is on thin ice. States that mandate doctor control and ownership could subject management companies to fiscal clawbacks or non-payments by insurance companies or by state and federal Medicaid and Medicare administrators. Under New Jersey’s IFPA, there exist provisions for both civil and criminal penalties. Violators potentially face significant incarceration time, in addition to monetary fines. 

Implications for the DSO Industry 

This legal decision might have great impact on certain dental service organizations (DSOs). Those that misrepresent true clinic ownership and control, especially in New Jersey, are most legally vulnerable. In numbers of other states, non-dentist clinic supervision, control, and ownership are also specifically restricted by statute. The insurance industry and Medicaid administrators may have solid ground to seek reimbursements and/or decline payments.

An initial defendant in the Allstate vs. Northfield case was Dr. J. Scott Neuner. He was granted immunity in exchange for testimony against other defendants, who set up the scheme of the management company, and their beneficial control and ownership of the medical practice.

Practice profits were fed to the management company through a scam of overpriced lease and service agreements. Alleged physician practice owners were “shams” or figureheads. These doctors held no real control or ownership of the practice. Terms of the contracts allowed the management company to replace these figurehead “owner” doctors at will, which was evidenced at trial.

Dentists should be cautioned prior to entering into agreements with DSOs. Acting as a deceptive sham owner, as was apparent by Neuner’s actions, could expose one to potential civil and criminal liabilities. Helping a DSO circumvent statutes relating to lawful clinical practice control and ownership is in itself unlawful. An alleged ignorance of statutes as expressed in Allstate vs. Northfield by the defendants was frowned upon by the court and totally refuted.

As was quite apparent from the Allstate case, numbers of DSOs are structured and operate outside the rule of law. Parties that may possibly seek restitution or punishment include state and federal government bodies, insurance companies, and state regulatory boards. Expert legal counsel for DSO contract review is essential to mitigate legal risks for dentists prior to entering into agreements with the DSO industry.


1. Allstate Insurance Company v. Northfield Medical Center PC (076069) (Morris County & statewide). Docket no. A-27-15 (N.J. 2017); Supreme Court of New Jersey: filed May 4, 2017.

https://www.courtlistener.com/opinion/4390103/allstate-insurance-company-v-northfield-medical-center-pc076069/ (accessed 11/29/17)

Dr. Davis practices general dentistry in Santa Fe, NM. He serves as chair for his district dental society’s peer review committee and is active in state dental protections for the public interest. Dr. Davis also works as expert witness on dental malpractice and fraud legal cases. He may be reached at mwdavisdds@comcast.net.

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