By Ciara Linnane, MarketWatch
SmileDirectClub Inc. shares tumbled anew on Thursday, after the company filed a lawsuit against the California Dental Board and individual members, claiming that they attempted to intimidate its staff and customers in a series of raids on SmileShops across the state.
The suit, filed on behalf of Dr. Jeffrey Sulitzer, D.M.D., the company’s lead dentist, and his practice, along with the teeth-straightening startup, is seeking damages for what it calls a “campaign of harassment, intimidation, and anti-competitive conduct.”
The suit also says that Joseph Tippins, investigator in the enforcement unit of the Dental Board, told the company in 2017 that the Dental Board had an active investigation of SmileDirect’s /zigman2/quotes/214109287/composite SDC +0.66% operations. The company, however, which went public in September, did not make any disclosures regarding raids or investigations in its IPO documents.
“The Board, its Members, and Tippins have undertaken this campaign in an effort to squelch the competitive threat posed by the business model supported by SmileDirect, and not to protect any legitimate concern about the public health, welfare, and safety of consumers,” the suit alleges.
SmileDirect did not immediately respond to a request for comment. The California Dental Board said it does not comment on pending litigation.
The suit comes days after California Gov. Gavin Newsom signed a new law that changes the rules on ‘teledentistry,” the model used by SmileDirect. The bill includes protections for patients who undergo direct-to-consumer orthodontic treatment, such as that offered by SmileDirect, including a provision that allows them to submit complaints to the Dental Board, even if they have signed nondisclosure agreements.
Those protections were included after opposition to SmileDirect from dentists and orthodontists, who have been critical of the company’s business model. SmileDirect offers clear aligners by mail to customers using either a 3-D image of their teeth taken at a so-called SmileShop or from an impression made using an online kit. The company then develops and ships the clear aligners — a form of dental braces — and the customer undergoes a five- to 10-month treatment plan. Dentists say any orthodontic procedure requires a thorough exam because any mistake can cause permanent damage and even break teeth.
SmileDirect has faced strong opposition from medical organizations, including the American Dental Association and the American Association of Orthodontists, which have accused it of endangering patients and practicing medicine illegally.
Earlier this month, short seller Hindenburg Research published a report saying that the company has attracted more than 1,200 Better Business Bureau complaints in its five years of existence and that some of its practices have been deemed illegal by dental boards in Alabama and Georgia.
Hindenburg founder Nathan Anderson said customers have been forced to perform emergency dentistry on themselves and described an aggressive sales culture that pressures employees to “sell a new smile” to at least 70% of clients each month.
SmileDirect responded with a statement criticizing “organized dentistry” and its “anti-competitive legal actions.”
The suit was filed with the U.S. District Court for the Central District of California Western Division.
SmileDirect shares have struggled since the IPO and are down 50% in the past month, while the S&P 500 has fallen 0.3%. The stock dropped more than 10% in its trading debut and is 61% below its IPO price.
Nonetheless, a day after the Hindenburg report, all 10 banks on the IPO issued buy ratings on the stock.