The Infamous Operating Agreement, Part 4

Make sure you have read Part 1, Part 2, and Part 3 before you read on.

This fourth and last (and longest!) post about our operating agreement probably contains one of the most critical sections – the details on how we agreed to run the show day to day. You’ll also find our agreements about indemnity (snoozefest, but still important), non-competes and other restrictive covenants, and some miscellaneous agreements that we felt were important. Schedule B and C toward the end were the agreements that each of our spouses signed.

ARTICLE XI: INDEMNITY

11.1 Indemnity Rights. The Company shall indemnify each Member, or Manager who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of his or her actions as a Member or Manager or by reason of his or her acts while serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, and against judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit, or proceeding, provided that the acts of such Member or Manager were not committed with gross negligence or willful misconduct, and, with respect to any criminal action or proceeding, such Member or Manager had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of no contest or its equivalent shall not, in and of itself, create a presumption that the Member or Manager acted with gross negligence or willful misconduct, or with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

11.2 Professional Responsibility. Notwithstanding anything in this Agreement or any other Company document to the contrary, pursuant to A.R.S. § 29-846, each Member, Manager and employee performing professional services shall remain personally liable for any results of negligent or wrongful acts, omissions or misconduct committed by him or her or any person under his or her direct supervision and control while performing such services on behalf of the Company. The liability of a Member, Manager or employee is several only; the Company, a Member, Manager or employee shall not be vicariously liable for the liability of another Member, Manager or employee unless such other individual was acting under his or her direct supervision and control while performing professional services on behalf of the Company. Each Member and Manager (“Releasing Party”) agrees to release, indemnify, defend and hold harmless the Company and each of the other Members and Managers from all claims, demands, causes of action, liability, responsibility, costs and expenses arising, directly or indirectly, from the Releasing Party’s negligent or wrongful acts, omissions or misconduct committed by the Releasing Party or any person under his or her direct supervision and control while performing professional services on behalf of the Company.

11.3 Notice and Defense. Any Member or Manager who is or may be entitled to indemnification shall give timely written notice to the Company, the Members and Managers that a claim has been or is about to be made against him or her, shall permit the Company to defend him or her through legal counsel of its own choosing, and shall cooperate with the Company in defending against the claim. One hundred percent (100%) of the Members other than the Member or Manager seeking indemnification shall have the sole power and authority to determine the terms and conditions of any settlement of the claim.

11.4 Other Sources. The indemnification provided for herein shall apply only in the event, and to the extent that, the person is not entitled to indemnification, or other payment, from any other source (including insurance), and the Company’s indemnity obligations hereunder shall be in excess of any indemnification or other payment provided by such other source.

11.5 Survival. The indemnification provided for herein shall continue as to a person who has ceased to be a Member or Manager and shall inure to the benefit of the heirs, executors, and administrators of such person.

ARTICLE XII: COMPANY OPERATIONS

12.1 Allocation of Patients. The Company, Manager and Members shall make all reasonable and good faith attempts to allocate the Company’s patients evenly based on percentages of ownership if the Members work a total of 16 or less days per month. If the Members work more than 16 days per month, the members will unanimously agree on distribution of the work days.

12.2 New Patients. If a new patient of the Company specifically requests to be treated by one of the Members, such patient shall be assigned to such Member, unless that Member declines to provide services to the patient (in which case the other Member or Members shall have the option of rendering services to the patient, assuming the patient is agreeable). New patients who do not specifically request to be treated by one of the Members shall be assigned based on the Members’ availability.

12.3 Use of Facility and Work Schedule. Each Member shall be guaranteed nonexclusive and joint use of the Company’s place of business as agreed upon by the Members. Unless otherwise agreed upon by the Members, (first partner name) will work the first 2 business days of each calendar month in the first week where there are 4 or more working days in that week. For example, if the 1st of the month was on a Thursday, they will work the following Monday and Tuesday (or Tuesday and Wednesday), so that (second partner name) can work the following 2 business days which would be Wednesday and Thursday (or Thursday and Friday). This would help keep those first 4 working days in the same workweek. Following these days, (third partner name) will then work four of his days. (Second partner name) will subsequently work 4 within the third week of the month. Lastly, (third partner name) will work his last four within the fourth full week of the month. Note that the morning preparation and meeting will be from 7:45am – 8am. Patient hours will be between 8am to 5pm, with lunch from 1pm-2pm or 12pm-1pm (lunch hours will be at each member’s discretion on their work days) unless otherwise agreed upon by all members. Again, this would be the default schedule, but otherwise the owners can have flexibility in scheduling should everyone agree.

12.4 Staff. The Company shall make adequate support staff available for each of the Members so that each Member may perform services in a professional and competent manner. No Member shall hire or agree to hire any person for employment or contract with any person or entity as an independent contractor in excess of one (1) week or discharge any person without the unanimous consent of the all of the Members.

12.5 Procedures. The Company’s business telephone shall be answered in such a way that the Members agree. In the event the Members do not agree, their names will be used. The Manager and Members shall take all reasonable measures to ensure that the employees of the Company do not encourage a patient to request a particular Member. There shall be a concerted effort made by the Company and by employees of the Company to place a greater emphasis on the Company’s identity than on the individual Members’ identities.

(We also have an agreement that says we will all run things approximately the same way within the office pertaining to patient treatment/care – so when the initial sale happened, the incoming junior doc agreed to train up on how the senior docs were doing things – and we will unanimously agree to any major changes in our clinical systems/equipment/appliances/protocol.)

12.6 Weekend / Emergency Calls. Except as otherwise agreed upon by the Members, services related to emergency calls shall be performed by the Member who was working the week prior to the emergency call or by another practitioner mutually agreed upon by the Members.

12.7 Professional Fees and Payment for Services Rendered. The Company, by unanimous consent of the Members, shall, from time to time, set the fees for all professional services rendered by the Company through its Members. The Members shall adhere to the fees established by the Company. Each Member may provide orthodontic services without charge to any member of the Members immediate family (which shall be defined as the Member’s spouse, parent, child, or sibling (including in-laws)). No Member shall provide orthodontic services to any patient (other than immediate family members) unless such patient agrees to pay for such services by cash, check, or credit card at the time the services are performed, or agrees to pay on an installment basis as determined by the treating Member. No Member shall accept goods or services through bartering or trade with a patient in exchange for orthodontic services rendered by the Member to the patient without the express consent of all other Members.

12.8 Payment for Operating Expenses. The Company shall pay all expenses, which are ordinary, customary, reasonable and necessary to operate the Company’s business. Such expenses include, but are not limited to, the payment of salaries of employees, distributions to Members, supplies, office and equipment rent, laboratory fees, equipment purchases, advertising, personal property taxes, and equipment maintenance and repair expenses. The Company shall not pay or reimburse to Members any expenses of a personal matter which shall include professional liability insurance dues, continuing education, disability, health and life insurance premiums, automobile usage, personal promotion, business travel and entertainment even if such expenses are associated with the practice of orthodontics. The Members, by unanimous consent, shall determine from time to time those expenses which are partnership expenses and those expenses which are personal to the Members.

12.9 Handling Funds and Company Checking Account. The Company shall maintain a single Company checking account. All collections attributed to professional services rendered by the Members or the Company shall be deposited in the Company checking account on a weekly basis. All Company operating expenses and the Member’s distributions shall be paid from said account. The Company checking account shall be reconciled monthly, and each Member shall be provided with a list of all income and expenses. Any payment of expenses shall be made only by check or by Company credit card, and payments in excess of Five Thousand Dollars ($5,000.00) shall require the joint signatures or approval of all Members.

12.10 Outside Activities of Members. Any Member may engage in one or more businesses, other than the business of the Company, but only to the extent that this activity does not compete or materially interfere with the Company’s business of orthodontics and does not conflict with that Member’s obligations under this Agreement. Neither the Company nor any other Member shall have any right to any income or profit derived by a Member from any business activity permitted under this paragraph.

12.11. Duties of Members

A. Duty to Use Best Efforts. Each Member shall devote his best efforts to serve professionally the Company and the Company’s patients. Each Member shall devote substantially all of his or her normal business time to the Company business with the exception of time spent by each Member pursuing other employment with the prior consent of all other Members.

B. Duty to Maintain Confidentiality. To the extent permitted by law, each Member shall maintain the confidentiality of all financial, business and professional matters of the Company and the individual Members as well as the financial and clinical contents of all of the Company’s patient records. Notwithstanding the foregoing, each Member may discuss financial, business, and professional matters with his or her financial advisors, accountants and attorneys.

C. Duty to Disclose. Each Member shall disclose to the other Members and the Company such Member’s contracting or being exposed to any infectious or communicable disease which could materially affect any Member’s ability to practice orthodontics.

D. Duty to Maintain License. Each Member shall disclose to the other Members and the Company any actions threatened or taken by any state licensing authorities, individuals or entities which could impact any Member’s ability to practice dentistry.

E. Duty to Avoid Substance Abuse. Each Member shall disclose to the other Members and the Company any personal history of substance abuse or chemical dependency involving drugs or alcohol and shall refrain from any substance abuse.

F. Duty to Obtain Professional Liability Coverage. From time to time, but no less frequently than annually, the Members shall, by written unanimous consent, agree upon the amount of professional liability insurance that must be maintained by each Member, as well as the terms and conditions of such policies, and each Member shall acquire and maintain such coverage at all times during their Membership in the Company.

G. Duty to Supply Information. Each Member shall render on demand to the other Members true and complete information as to all matters relating to the personal, business and financial condition of such Member and all other information affecting the Company.

12.12. Reference to “Members”. Any reference in this Article 12 to “Member” shall include the Principal of any Member that is an organization or entity.

ARTICLE XIII: RESTRICTIVE COVENANTS

13.1 Restrictive Covenants and Stipulated Damages

A. Covenant Not to Compete. In order to assure all members the beneficial enjoyment of the goodwill of the other members and as a non-severable part of that goodwill, no member shall, during the term of this Agreement, and for a seven year (7) period after dissociating, withdrawing, selling or otherwise transferring all of his Ownership Interest in the Company and/or being employed by the Company, directly or indirectly, within ten (10) miles of the Company’s principal place of business at (address) own, operate, be employed by, or participate in the ownership, management or operation of any professional orthodontic practice other than that of the Company. However, any member may pay to the Company the amount of the stipulated damages set forth in Article 13.1.I.1, which is $500,000 to be forever released from this Covenant Not to Compete.

(We chose to put a cash penalty on breaking the non-compete, because these are much easier to enforce in our state than the actual location restrictions of the non-compete agreement. See Letter I, below.)

B. Covenant Not to Solicit. No member shall, during the term of this Agreement, and for a seven year (7) period after dissociating, withdrawing, selling or otherwise transferring all of his Ownership Interest in the Company and/or being employed by the Company, (a) directly or indirectly solicit, service, bid for or accept any business from patients in active treatment, interceptive appliances, or retention of the Company, (b) induce or in any way attempt to induce any patient of the Company to reduce their business with the Company or attempt to divert or take away any patient as defined above, or (c) disclose the names of past or current patients to any other person or entity for the purposes prohibited by this Article, unless required by law.

C. Covenant Not to Disclose. No member shall in any way disclose or communicate with any employee or patient of the Company the terms of this Agreement. Any such disclosure, unless expressly authorized by the other members, shall constitute a breach of this Agreement and shall entitle the other members to all remedies set forth in this Agreement and allowed in law or in equity. This covenant shall survive termination of this Agreement, as well as any member’s dissociating, withdrawing, selling or otherwise transferring all of his Ownership Interest in the Company and/or being employed by the Company. This covenant shall not apply to information a member is required to disclose by a court or other governmental agency of competent jurisdiction.

D. Best Efforts. All members agree to, at all times, faithfully and industriously perform all duties incident to the express and implicit terms and conditions of this Agreement and shall not act in a manner that may be contrary to or is in competition with the interest, welfare or benefit of the Company.

E. Covenant Not to Induce. Independent of any obligation under any other paragraph of this Agreement, during the term of this Agreement, and for a seven year (7) period after dissociating, withdrawing, selling or otherwise transferring all of his Ownership Interest in the Company and/or being employed by the Company, no member shall, directly or indirectly, induce any past, present or future employee, agent or representative associated with the Company to terminate association with the Company or to interfere in any manner with a contractual relationship between the Company and any third party.

F. Proprietary Information. The Company now owns, or may, in the future, own, substantial trade secrets, proprietary data and other confidential information, including without limitation, sensitive patient data, fee schedules, and patient lists (whether or not such information is protectable under laws dealing with patients, trade secrets or otherwise), which is referred to collectively herein as “Proprietary Information.”

1. As a necessary part of the performance of this Agreement, members have or will come into possession of Proprietary Information. The parties recognize the Proprietary Information is valuable to the business of the Company.

2. All members agree not to disclose Proprietary Information to any person or entity, except as required by law.

G. Remedies and Damages. All members agree that damages alone cannot adequately compensate in the event of a violation of the foregoing restrictive covenants, and he thereby consents to the Company (in case of violation of any of the foregoing restrictive covenants) having injunctive relief, without bond but upon due notice, in addition to such other relief as may be appropriate. No waiver of any violation hereof shall be implied to be the Company’s forbearance or failure to take action hereon. Said remedies shall be in addition to the Company’s right to seek and obtain injunctive relief, as well as any other relief that a court deems appropriate, including attorneys fee and costs incurred.

H. Severability; Modification. To the extent that any provision of this Article 13.1 is deemed unenforceable by virtue of its restrictiveness in terms of time, scope, distance or area, the parties agree that such reductions or limitations shall be made so that the same shall, nevertheless, be enforceable to the fullest extent permissible under the laws and public policies of the State.

I. Stipulated Damages. All parties agree that a violation of any provision of this Article 13.1 will cause such damage to the Company as will be irreparable and the amount of which will be impossible to ascertain. Therefore, the parties have agreed to the following stipulated damages:

1. Covenant Not to Compete: No member shall, during the term of this Agreement, and for a seven year (7) period after dissociating, withdrawing, selling or otherwise transferring all of his Ownership Interest in the Company and/or being employed by the Company, directly or indirectly, within ten (10) miles of the Company’s principal place of business, own, operate, be employed by, or participate in the ownership, management or operation of any professional orthodontic practice other than that of the Company. In the event that this Covenant not to Compete is not enforceable under the terms set, stipulated damages are set at $500,000.00.

2. Solicitation or Inducement: Each incident of solicitation of a patient from the Company or of a referring dentist shall subject any member to a $5,000.00 payment payable to the Company immediately.

Each solicitation of a former employee (less than 6 months from the last date of employment) or current employee of the Company shall subject any member to payments payable to the Company immediately as follows:

Clerical Employee $50,000.00
Chairside or Lab Employee $50,000.00

3. Covenants Not to disclose or divulge Proprietary Information: Each incident or breach of disclosure or divulging of Proprietary Information will subject any member to a payment of $10,000.00 payable to the Company upon breach.

J. Acknowledgment. All parties acknowledge and agrees to the fairness and applicability of the above-mentioned scope and nature of said restrictive covenants and that said covenants specify the fair, appropriate, minimum and reasonable needs of Peterson and the Company. Caskey further acknowledges and warrants that he would be fully able to earn an adequate livelihood for himself and his dependents through his practice of orthodontics in areas other than the aforementioned areas if the foregoing restrictive covenants should be specifically enforced against him.

ARTICLE XIV: MISCELLANEOUS PROVISIONS

14.1 Notices. Any notice, demand, or communication required or permitted to be given by any provision of this Operating Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an executive officer of the party to whom the same is directed or, if sent by registered or certified mail, postage and charges prepaid, addressed to the Member’s and/or Company’s address, as appropriate, which is set forth in this Operating Agreement. Except as otherwise provided herein, any such notice shall be deemed to be given three (3) business days after the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, addressed, and sent as aforesaid.

14.2 Books of Account and Records. Proper and complete records and books of account shall be kept or shall be caused to be kept by the Manager in which shall be entered fully and accurately all transactions and other matters relating to the Company’s business in such detail and completeness as is customary and usual for businesses of the type engaged in by the Company. Such books and records shall be maintained as provided by this Agreement. The books and records shall at all times be maintained at the principal executive office of the Company and shall be open to the reasonable inspection and examination of the Members or their duly authorized representatives during reasonable business hours.

14.3 Application of (state) Law. This Operating Agreement and its application and interpretation shall be governed exclusively by its terms and by the laws of the State.

14.4 Waiver of Action for Partition. Each Member irrevocably waives during the term of the Company any right that he/she may have to maintain any action for partition with respect to the property of the Company.

14.5 Amendments. This Agreement may not be amended except by the unanimous vote of the Members.

14.6 Execution of Additional Instruments. Each Member hereby agrees to execute such other and further statements of interest and holdings, designations, powers of attorney, and other instruments necessary to comply with any laws, rules, or regulations.

14.7 Construction. Whenever the singular number is used in this Operating Agreement and when required by the context, the same shall include the plural and vice versa; the masculine gender shall include the feminine and neuter genders and vice versa; and the word “person” or “party” shall include an individual, corporation, firm, partnership, proprietorship, or other form of association.

14.8 Headings. The headings in this Operating Agreement are inserted for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Operating Agreement or any provision hereof.

14.9 Waivers. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Operating Agreement shall not prevent a subsequent act which would have originally constituted a violation from having the effect of an original violation.

14.10 Rights and Remedies Cumulative. The rights and remedies provided by this Operating Agreement are cumulative, and the use of anyone right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance, or otherwise.

14.11 Severability. If any provision of this Operating Agreement or the application thereof to any person or circumstance shall be invalid, illegal, or unenforceable to any extent, the remainder of the Operating Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law.

14.12 Heirs, Successors and Assigns. Each and all of the covenants, terms, provisions, and agreements herein contained shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, Personal Representative, successors, and assigns.

14.13 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company.

14.14 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.

14.15 Representation. Each Member has had the opportunity to review this Operating Agreement with their attorney and acknowledges that this Operating Agreement shall not be interpreted or construed for or against any party to this Operating Agreement.

14.16 Default/Remedies. Should any Member fail to perform any obligation required under this Agreement, the non-defaulting Member may forward a notice to the defaulting Member, after which the defaulting Member will have thirty (30) days within which to cure the default. In the event the defaulting Member fails to cure the default within the thirty (30) day time-frame, the Manager or non-defaulting Member may pursue all rights and remedies at law or in equity, and during the time period within which the defaulting Member is in default the defaulting Member’s rights under this Operating Agreement shall be suspended. A default under this Agreement shall constitute a default of any and all other agreements and promissory notes between the Members, and a default under any of those other agreements or promissory notes shall constitute a default by the defaulting party of this Agreement.

14.17 Citations. Any citation to any statute, code, or regulation shall be interpreted to include such statute, code, or regulation as may be amended from time to time as is consistent and necessary to carry out the intent and purpose for such citation.

14.18 Attorneys’ Fees. If any Member, Manager or Interest Holder brings an action or proceeding (including arbitration) to enforce the terms hereof or declare rights hereunder, the Prevailing Party in any such proceeding, arbitration, action, or appeal thereon shall be entitled to its reasonable attorneys’ fees.

14.19 Authority. If either Party hereto is a corporation, limited liability company, trust, or general or limited partnership, each individual executing this Agreement on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Agreement on the entity’s behalf.

14.20 Acknowledgment of Spouse. Each married Member or Member (or principal of a Member) who becomes married after executing this Agreement agrees that such Member (or principal of a Member) shall obtain his or her spouse’s signature on the Acknowledgment and Agreement of Member’s Spouse in the form (Schedule B, C) attached hereto, and shall deliver such executed document to the Company simultaneously with the Member’s execution of this Agreement. Any Member (or principal of a Member) contemplating marriage during the term of this Agreement shall obtain the signature of his or her future spouse on a form similar to Exhibits B-1 and B-2 and deliver such executed form to the Company not later than ten (10) days prior to the marriage.

CERTIFICATION

THE UNDERSIGNED, being all of the Members of Northern Arizona Orthodontics, LLC, an Arizona limited liability company, hereby evidence their adoption and ratification of the foregoing Operating Agreement of the Company.

EXECUTED by each Member as of the day and year first above written.

(Fancy signature lines and titles and such)

SCHEDULE A: CAPITAL CONTRIBUTIONS OF MEMBERS

MEMBER

(Selling partner’s name)

CAPITAL CONTRIBUTION

(Selling business partner’s) Capital Contribution is (X) percent (X%) of all of the following, related to the (business/practice) located at (address):

ALL PROFESSIONAL EQUIPMENT
ALL OFFICE FURNITURE, FIXTURES AND EQUIPMENT
ALL SUPPLIES AND INSTRUMENTS
ALL PATIENT FILES, CONTRACTS AND RECORDS
ALL TRANSFERABLE SERVICE AND MAINTENANCE CONTRACTS
TELEPHONE NUMBER AND LISTING, SIGNAGE, GOODWILL AND
OTHER INTANGIBLE ASSETS, INCLUDING THE APPLICABLE RESTRICTIVE COVENANTS
ALL ACCOUNTS RECEIVABLE

SCHEDULE B and C: ACKNOWLEDGMENT AND AGREEMENT OF MEMBER’S SPOUSE

(Each of our spouses signed an agreement stating that they were aware of this operating agreement, that they had had the chance to review it with their own legal counsel, and that they understand the agreement is only between us business partners. They also agreed they have no rights to ownership of any portion the business in the case of divorce or death of their spouse.)

SCHEDULE D: REACQUISITION OF PURCHASED MEMBERSHIP

(A few more details on the junior partner’s restrictions on selling the practice between years 0 and 10 of partnership)

Should (junior partner) no longer be able to maintain membership in (business), they will sell their share back to (senior partner) for the following:
a. 0.7 x fair market value at time of sale for the first 5 years after purchase
b. 0.85 x fair market value after 7 and before 10 years after purchase.

All parties agree that these terms are satisfactory and in the best interest of all parties.

Booyah. That, friends, is our operating agreement. Hope it was helpful.

Feel free to leave questions in the comments section!