When Growth Outpaces Governance: What the Rise and Fall of SmileDirectClub Teaches Business Owners About Litigation Risk
For many businesses, rapid growth is the ultimate measure of success. New customers, expanding markets, investor interest, and increasing revenue are all signs that a business is poised for long-term prosperity. Growth, however, also introduces inherent risks — particularly if governance, oversight, and risk-management practices fail to evolve in concert with expansion.
The rise and fall of SmileDirectClub offers a compelling example.
Founded in 2014, SmileDirectClub sought to disrupt the orthodontics industry by offering clear aligners directly to consumers through a network of affiliated dental professionals. The company’s innovative business model attracted significant investor interest and fueled rapid expansion. By 2019, SmileDirectClub had completed an initial public offering (IPO) that valued the company at nearly $9 billion. It became one of the most recognizable names in direct-to-consumer healthcare.
Yet, just four years later, the company filed for Chapter 11 bankruptcy protection and ultimately ceased operations. In December 2023, The Wall Street Journal, Reuters, and CNBC all reported on the company’s efforts to restructure its business amid mounting debt obligations, increasing competition, operational challenges, and liquidity concerns. Despite arduous efforts, the company ceased operations.
For business owners, however, the most important lesson is not the bankruptcy itself. It is what followed.
When Business Challenges Become Legal Challenges
As SmileDirectClub’s financial and operational difficulties intensified, the company found itself facing intense public scrutiny and legal challenges from multiple directions.
Investors pursued securities-related claims alleging that the company made misleading statements regarding its business prospects and financial performance. Consumers raised concerns regarding refunds, unfinished treatment plans, and ongoing payment obligations after operations ceased. Regulators became involved in addressing consumer complaints, while bankruptcy proceedings generated disputes involving creditors, restructuring efforts, and asset disposition.
At the same time, SmileDirectClub’s relationship with Align Technology became the subject of antitrust scrutiny and litigation alleging anticompetitive conduct within the clear aligner marketplace.
Viewed collectively, these disputes illustrate an important reality for business owners: legal risk rarely emerges from a single event. Instead, litigation often follows when operational, financial, governance, and stakeholder concerns begin to converge.
Growth Requires Stronger Governance
One of the most common mistakes growing companies make is assuming that the systems that led to success during the startup phase are equally sufficient as the business expands.
But as organizations grow, all facets of their operations become increasingly complex. Investor expectations, financing arrangements, regulatory obligations, customer relationships, vendor contracts, and compliance requirements all create new layers of risk and require new processes and protocols to mitigate exposure.
Throughout 2023, Reuters and CNBC reported on the financial and operational pressures within SmileDirectClub. While every business faces unique pressures, the broader lesson is clear: it is vital for governance structures, internal controls, and oversight mechanisms to evolve in lockstep with growth.
Stakeholders Often Become Adversaries During Times of Distress
Business owners typically focus on competitors as the primary source of risk. In reality, legal disputes arise just as often from existing stakeholders.
Investors may challenge disclosures and business decisions. Customers may pursue claims regarding products or services. Creditors may seek repayment or challenge restructuring efforts. Regulators may investigate compliance issues. Business partners may become adverse when financial pressures increase.
The SmileDirectClub insolvency demonstrates how quickly a company’s legal exposure can expand when business performance deteriorates and stakeholders seek to protect their interests.
Litigation Prevention Starts Long Before Litigation
Perhaps the most important lesson from SmileDirectClub is to insulate against litigation by instituting strong internal controls.
Routine reviews of governance structures, financial performance, compliance programs, risk-management procedures, disclosure practices, customer service protocols, and crisis response plans can identify vulnerabilities before they translate into significant legal problems.
While no governance system can eliminate risk entirely, businesses that regularly evaluate core areas of risk are often well-positioned to respond to challenges and can effectively reduce the likelihood of costly disputes.
The Legal Perspective
Business litigation rarely arises from a single mistake. More often, it results from a series of overlooked issues involving oversight, documentation, compliance, risk management, and stakeholder communications.
The SmileDirectClub story serves as a reminder that growth and success are not a shield from legal risk. In many cases, expansion exponentially increases the likelihood of litigation.
For closely held businesses, family-owned companies, and middle market enterprises, governance should not be viewed as merely an administrative exercise. Effective risk management is a core function that preserves enterprise value while substantially reducing the likelihood that business challenges will evolve into litigation.
Sources
- Reuters reporting (2023–2024) regarding SmileDirectClub’s restructuring efforts, bankruptcy proceedings, and business challenges.
- The Wall Street Journal reporting (2023) concerning the company’s financial condition, debt obligations, and Chapter 11 filing.
- CNBC reporting (2023–2024) regarding operational challenges and restructuring efforts.
- Public bankruptcy filings and company disclosures.
- Public reporting regarding securities litigation, consumer claims, regulatory actions, and antitrust litigation involving parties connected to SmileDirectClub.
