Managed Health Care Assoc., Inc. v. Kethan
| Decision Date | 10 March 2000 |
| Docket Number | DEFENDANTS-APPELLEES,PLAINTIFFS-APPELLANTS,No. 99-5444,99-5444 |
| Citation | 209 F.3d 923 |
| Parties | (6th Cir. 2000) MANAGED HEALTH CARE ASSOCIATES, INC., MHCA ACQUISITION INC., D/B/A MHA/MEDECON,, v. RONALD KETHAN, EAST TEXAS REGIONAL COOPERATIVE, D/B/A FIRST CHOICE COOPERATIVE, Argued: |
| Court | U.S. Court of Appeals — Sixth Circuit |
Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 99-00066--Jennifer B. Coffman, District Judge. [Copyrighted Material Omitted] Dennis D. Murrell, William J. Hunter, Jr., Thomas P. O'Brien, III, Middleton & Reutlinger, Louisville, Kentucky, Daniel L. Abrams, Louis M. Solomon, Swidler, Berlin, Shereff & Friedman, New York, New York, for Appellants.
R. Gregg Hovious, Tachau, Maddox, Hovious & Dickens, Louisville, Kentucky, Charles M. Pritchett, James D. Cockrum, Brown, Todd & Heyburn, Louisville, Kentucky, for Appellees.
Before: Wellford, Siler, and Gilman, Circuit Judges.
GILMAN, J., delivered the opinion of the court, in which SILER, J., joined. WELLFORD, J. (pp.931), delivered a separate dissenting opinion.
Managed Health Care Associates, Inc. and MHCA Acquisition, Inc., d/b/a MHA/MedEcon (collectively MHA), commenced an action in state court against Ronald Kethan (Kethan) and East Texas Regional Cooperative, d/b/a First Choice Cooperative (First Choice). MHA sought a preliminary injunction to prevent Kethan from violating the non-competition clause that he had signed when employed by MedEcon Services, Inc. (MedEcon), MHA's predecessor. After Kethan and First Choice removed the case to federal court based on diversity of citizenship, the district court held that the non-competition agreement was enforceable only by MedEcon, and that it was not assignable by MedEcon to MHA without Kethan's consent. It therefore denied MHA's request for a preliminary injunction and dissolved the temporary restraining order that MHA had obtained in state court. For the reasons set forth below, we REVERSE the decision of the district court and REMAND the case for further proceedings consistent with this opinion.
On January 5, 1999, MHA commenced an action against Kethan and First Choice in the Circuit Court of Jefferson County, Kentucky. MHA sought and obtained a restraining order, enjoining Kethan from violating the non-competition clause that was part of his employment agreement with MedEcon.
On February 2, 1999, Kethan and First Choice removed the action to the United States District Court for the Western District of Kentucky. Kethan and First Choice then moved to dissolve the restraining order that MHA had obtained in state court and opposed MHA's motion for a preliminary injunction. On March 4, 1999, the district court dissolved the restraining order and denied MHA's request for a preliminary injunction. In late March of 1999, MHA filed this timely appeal.
On December 27, 1991, Kethan signed an employment agreement with MedEcon, a group purchasing organization (GPO) for hospitals with its principal place of business in Kentucky. GPOs contract for the purchase of a vast array of products for use by member healthcare facilities. They also enter into agreements directly with suppliers to allow member facilities to purchase the products at reduced prices, thereby providing a substantial savings of both time and money for their members. GPOs also engage in bulk purchasing in order to provide their members even greater discounts.
From 1992 through 1996, Kethan worked as a salesman and an agreement administrator for MedEcon. Kethan's job responsibilities included meeting with various representatives from hospitals and encouraging them to use the products covered by MedEcon's agreements. He contacted numerous representatives in Texas and Oklahoma on MedEcon's behalf. During this period, Kethan had the opportunity to develop strong business relationships with MedEcon's customers, including First Choice. Kethan eventually became the agreement administrator for the First Choice account.
In June of 1998, MHA, which is also a GPO, began negotiations with MedEcon for the acquisition of MedEcon's assets. On September 9, 1998, most of MedEcon's assets were purchased by MHA. Included in those assets was Kethan's employment agreement. Neither MedEcon nor MHA obtained Kethan's written consent to the assignment. Following the transaction, Kethan continued to be an at-will employee, performing the same job, receiving the same salary and benefits, and reporting to the same supervisor.
Twenty days after the sale of MedEcon's assets to MHA, Kethan gave thirty-days' notice of his resignation. Two days after Kethan tendered his resignation notice, First Choice ceased using MHA/MedEcon for group purchasing services. When the thirty days had passed from Kethan's resignation notice, he commenced employment with First Choice. Shortly thereafter, MHA brought suit seeking to enforce Kethan's non-competition agreement with MedEcon.
The non-competition clause provides as follows:
Employee, during the term of this agreement and for a period of two (2) years after the termination thereof, will not do, directly or indirectly, for himself or herself or as an agent of, or on behalf of, or in conjunction with, any person, trust, firm, partnership, corporation, or business organization other than the Company ("Other Firm"), nor will he or she, directly or indirectly, cause or permit any Other Firm in which he or she has a proprietary or financial interest, or of which he or she is a director, officer, employee, shareholder, partner, or representative, to do any of the following[:]
a. solicit or cause any past, present or future (up to the time of the termination of employment) customers (or members) of the Company or of any of the existing or future subsidiaries or affiliates of the Company ("Subsidiaries or Affiliates") to transfer all or part of their business from the Company or the Subsidiaries or Affiliates or render competitive services to any such customers (or members).
b. induce or attempt to influence any existing or future employee of the Company or any of the Subsidiaries or Affiliates to leave such employment; and
c. engage in any of the kinds of business activities in which the Company or any of the Subsidiaries or Affiliates have been or is now engaged within the States of Texas, Kansas, Nebraska, Oklahoma, Colorado, Idaho, Arizona, Wyoming, and Missouri.
In addition to the non-competition clause, the agreement contained a provision requiring that any modifications be in writing and signed by both parties. The agreement also provided that any disputes were to be governed by Kentucky law. No clause in the contract, however, directly addressed the issue of whether Kethan's contract could be assigned.
The district court concluded that the assignment of Kethan's contract was a modification. Because any modification had to be in writing, and there was no such writing, the district court held that Kethan was no longer bound by the non-competition clause. The district court also held that non-competition clauses are not assignable under Kentucky law.
Although this court reviews a challenge to a district court's decision regarding preliminary injunctions for abuse of discretion, see Sandison v. Michigan High School Athletic Ass'n, 64 F.3d 1026, 1030 (6th Cir. 1995), the two key issues in this case are questions of law dealing with assignments under Kentucky law. Neither issue has been directly addressed by the Supreme Court of Kentucky. "When the district court construes a contract, such interpretation is a question of law and reviewable de novo by the appellate court." F.D.I.C. v. Aetna Cas. and Sur. Co., 903 F.2d 1073, 1077 (6th Cir. 1990). Our role in this diversity of citizenship case "is to make [the] best prediction, even in the absence of direct state court precedent, of what the Kentucky Supreme Court would do if it were confronted with this question." Welsh v. United States, 844 F.2d 1239, 1245 (6th Cir. 1988).
Provision fourteen of Kethan's employment agreement with MedEcon provides that "[n]o waiver, alteration, or modification of any of the provisions of this Agreement shall be valid unless in writing and signed by both of the parties hereto." The first key issue thus becomes whether MedEcon's assignment of Kethan's employment agreement was a modification of the terms of his contract.
Kentucky courts have not yet addressed the issue of whether the assignment of an employment contract modifies the underlying terms of the contract. The Second Circuit, however, has rejected the notion that an assignment modifies the underlying terms of a contract:
The fact that the Agreement also provided that its terms could not be waived or altered without the written consent of the bank did not justify a departure from the general New York rule . . . that a parol assignment of a debt, claim, or chose in action is valid. An assignment does not modify the terms of the underlying contract. It is a separate agreement between the assignor and assignee which merely transfers the assignor's contract rights, leaving them in full force and effect as to the party charged. Insofar as an assignment touches on the obligations of the other party to the underlying contract, the assignee simply moves into the shoes of the assignor.
Citibank, N.A. v. Tele/Resources, Inc., 724 F.2d 266, 268-69 (2d Cir. 1983) (citations omitted); accord, Ametex Fabrics, Inc. v. Just In Materials, Inc., 140 F.3d 101, 107 (2d Cir. 1998) (). Those cases correctly recognize that assignments and modifications are completely different concepts, and...
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