Managed Health Care v. Kethan , 209 F.3d 923 ( 2000 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0143P (6th Cir.)
File Name: 00a0143p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
;

MANAGED HEALTH CARE

ASSOCIATES, INC., MHCA

ACQUISITION INC., d/b/a

No. 99-5444
MHA/MedEcon,

Plaintiffs-Appellants, >



v.


RONALD KETHAN, EAST

TEXAS REGIONAL
COOPERATIVE, d/b/a First 

Defendants-Appellees. 
Choice Cooperative,

1
Appeal from the United States District Court
for the Western District of Kentucky at Louisville.
No. 99-00066—Jennifer B. Coffman, District Judge.
Argued: March 10, 2000
Decided and Filed: April 21, 2000
Before: WELLFORD, SILER, and GILMAN, Circuit
Judges.
1
2 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 15
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
_________________ issue (and certainly not to the issue I would certify to that
Court). Pertinent to the issue was the unpublished decisions
COUNSEL of the Kentucky trial court and the Court of Appeals which
noted no controlling Kentucky authority on the question of
ARGUED: William J. Hunter, Jr., MIDDLETON & necessity of consent to a purported assignment by the
REUTLINGER, Louisville, Kentucky, for Appellants. James employee.
D. Cockrum, BROWN, TODD & HEYBURN, Louisville,
Kentucky, for Appellees. ON BRIEF: William J. Hunter, I dissent, accordingly, in favor of certification under the
Jr., Thomas P. O’Brien, III, Dennis D. Murrell, circumstances.
MIDDLETON & REUTLINGER, Louisville, Kentucky,
Daniel L. Abrams, Louis M. Solomon, SWIDLER, BERLIN,
SHEREFF & FRIEDMAN, New York, New York, for
Appellants. James D. Cockrum, Charles M. Pritchett, Jr.,
BROWN, TODD & HEYBURN, Louisville, Kentucky,
R. Gregg Hovious, TACHAU, MADDOX, HOVIOUS &
DICKENS, Louisville, Kentucky, for Appellees.
GILMAN, J., delivered the opinion of the court, in which
SILER, J., joined. WELLFORD, J. (pp.14-15), delivered a
separate dissenting opinion.
_________________
OPINION
_________________
RONALD LEE GILMAN, Circuit Judge. 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 noncompetition 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 noncompetition
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
14 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 3
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
_________________ injunction and dissolved the temporary restraining order that
MHA had obtained in state court. For the reasons set forth
DISSENT below, we REVERSE the decision of the district court and
_________________ REMAND the case for further proceedings consistent with
this opinion.
HARRY W. WELLFORD, Circuit Judge, dissenting. This
is a difficult case and my brothers would reverse and remand I. BACKGROUND
to the district court for further proceedings. I respectfully
differ. I am persuaded that the best course, in light of the A. Procedural history
uncertainties that exist in this area of the law in Kentucky, is
to certify this legal question to the Kentucky Supreme Court: On January 5, 1999, MHA commenced an action against
Kethan and First Choice in the Circuit Court of Jefferson
Is the non-competition agreement in this case between County, Kentucky. MHA sought and obtained a restraining
MedEcon and its employee, Kethan, assignable to the order, enjoining Kethan from violating the noncompetition
plaintiff company (a third party), in the absence of clause that was part of his employment agreement with
Kethan’s consent? MedEcon.
I do not agree with the majority opinion that the district On February 2, 1999, Kethan and First Choice removed the
court “held that non-competition clauses are not assignable in action to the United States District Court for the Western
Kentucky.” Rather, the essence of the district judge’s holding District of Kentucky. Kethan and First Choice then moved to
was this: dissolve the restraining order that MHA had obtained in state
court and opposed MHA’s motion for a preliminary
[T]he non-compete agreement and the confidentiality injunction. On March 4, 1999, the district court dissolved the
clause applied only to MedEcon and . . ., under W. R. restraining order and denied MHA’s request for a preliminary
Grace, they were not assignable to MedEcon to MHA injunction. In late March of 1999, MHA filed this timely
without the employee’s consent. Reinforcing this notion appeal.
is the Kethan/MedEcon agreement’s inclusion of a
requirement that all contract modifications must be B. Factual background
written. No such writing occurred here; thus, MedEcon
did not assign the covenant to compete or confidentiality On December 27, 1991, Kethan signed an employment
clause to MHA. agreement with MedEcon, a group purchasing organization
(GPO) for hospitals with its principal place of business in
(emphasis added.) Kentucky. GPOs contract for the purchase of a vast array of
products for use by member healthcare facilities. They also
The majority holds that “a non-competition clause is enter into agreements directly with suppliers to allow member
assignable in Kentucky.” It adds that “[t]here is only one case facilities to purchase the products at reduced prices, thereby
in Kentucky that addresses this issue,” Choate v. Koorsen providing a substantial savings of both time and money for
Protective Servs., Inc., 929 S.W.2d 184 (Ky. 1996). We are their members. GPOs also engage in bulk purchasing in order
in agreement that this particular Kentucky Supreme Court to provide their members even greater discounts.
decision did not determine the answer to the assignability
4 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 13
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
From 1992 through 1996, Kethan worked as a salesman and Kethan’s reliance on the statement was unreasonable in light
an agreement administrator for MedEcon. Kethan’s job of the contractual requirement that all modifications have to
responsibilities included meeting with various representatives be in writing. Aside from the fact that there appears to be no
from hospitals and encouraging them to use the products consideration for Irene’s alleged promise, this is exactly the
covered by MedEcon’s agreements. He contacted numerous type of claim that the non-modification clause was designed
representatives in Texas and Oklahoma on MedEcon’s behalf. to prevent. Accordingly, Kethan’s reliance argument is
During this period, Kethan had the opportunity to develop unavailing.
strong business relationships with MedEcon’s customers,
including First Choice. Kethan eventually became the E. The district court must balance the equities
agreement administrator for the First Choice account.
Although we have concluded that the district court erred in
In June of 1998, MHA, which is also a GPO, began dismissing MHA’s motion for a preliminary injunction based
negotiations with MedEcon for the acquisition of MedEcon’s on the legal issues regarding assignability, this leaves
assets. On September 9, 1998, most of MedEcon’s assets unresolved the factual issues that must be considered. These
were purchased by MHA. Included in those assets was issues include (1) the likelihood of success on the merits, (2)
Kethan’s employment agreement. Neither MedEcon nor the irreparable harm that could result if the injunction is not
MHA obtained Kethan’s written consent to the assignment. issued, (3) the impact on the public interest, and (4) the
Following the transaction, Kethan continued to be an at-will possibility of substantial harm to others. See In re Eagle-
employee, performing the same job, receiving the same salary Picher Industries, Inc., 963 F.2d 855, 859-60 (6th Cir. 1992).
and benefits, and reporting to the same supervisor. Kethan and First Choice strenuously argue that the district
court did not abuse its discretion in refusing to grant the
Twenty days after the sale of MedEcon’s assets to MHA, preliminary injunction because MHA cannot show any
Kethan gave thirty-days’ notice of his resignation. Two days damages and, in any event, could be adequately compensated
after Kethan tendered his resignation notice, First Choice by a monetary award. These issues will need to be resolved
ceased using MHA/MedEcon for group purchasing services. by the district court on remand.
When the thirty days had passed from Kethan’s resignation
notice, he commenced employment with First Choice. III. CONCLUSION
Shortly thereafter, MHA brought suit seeking to enforce
Kethan’s noncompetition agreement with MedEcon. For all of the reasons set forth above, we REVERSE the
decision of the district court and REMAND the case for
The noncompetition clause provides as follows: further proceedings consistent with this opinion.
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
12 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 5
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
Kethan’s and First Choice’s final argument is based on this Other Firm in which he or she has a proprietary or
circuit’s decision in W.R. Grace & Co. v. Hargadine, 392 financial interest, or of which he or she is a director,
F.2d 9 (6th Cir. 1968), which arguably held that officer, employee, shareholder, partner, or representative,
noncompetition clauses are not assignable under Ohio law. to do any of the following[:]
In the first place, Grace is distinguishable from the facts of
the present case because the court was interpreting Ohio law a. solicit or cause any past, present or future (up to the
as opposed to Kentucky law. Second, the holding in Grace time of the termination of employment) customers (or
with respect to assignability is ambiguous at best. The district members) of the Company or of any of the existing or
court’s decision in Grace actually supports MHA’s position, future subsidiaries or affiliates of the Company
because it held that the new employer had the right to enforce (“Subsidiaries or Affiliates”) to transfer all or part of
the covenant against the employee for the specified term of their business from the Company or the Subsidiaries or
two years. Id. at 19. But because the two-year covenant had Affiliates or render competitive services to any such
ended in April of 1962 due to a prior corporate change, customers (or members).
however, and because Grace did not acquire ownership until
May of 1964, the district court held that the two-year ban had b. induce or attempt to influence any existing or future
already lapsed. Id. This court affirmed the district court’s employee of the Company or any of the Subsidiaries or
decision but, in dicta, stated that noncompetition clauses were Affiliates to leave such employment; and
not assignable under Ohio law. Id at 20. Because Grace was
interpreting Ohio law and because the basis for the court’s c. engage in any of the kinds of business activities in
decision is unclear, we find that the case is not determinative which the Company or any of the Subsidiaries or
in resolving the present action. Affiliates have been or is now engaged within the States
of Texas, Kansas, Nebraska, Oklahoma, Colorado, Idaho,
Based on the opinions of the lower Kentucky courts in Arizona, Wyoming, and Missouri.
Choate, the majority rule from the other states that have
addressed the issue, and the additional reasons set forth In addition to the noncompetition clause, the agreement
above, we believe that the Kentucky Supreme Court would contained a provision requiring that any modifications be in
conclude that noncompetition clauses are assignable. writing and signed by both parties. The agreement also
Consequently, we reverse the district court on this point. provided that any disputes were to be governed by Kentucky
law. No clause in the contract, however, directly addressed
D. Kethan could not reasonably rely on Larry Irene’s the issue of whether Kethan’s contract could be assigned.
statements
The district court concluded that the assignment of
Kethan and First Choice next argue that even if the Kethan’s contract was a modification. Because any
noncompetition clause was properly assigned to MHA, MHA modification had to be in writing, and there was no such
waived its contractual rights or is now estopped from writing, the district court held that Kethan was no longer
asserting its contractual rights because its president Larry bound by the noncompetition clause. The district court also
Irene allegedly told Kethan that MHA would not enforce the held that noncompetition clauses are not assignable under
clause against him. MHA argues that Irene never made such Kentucky law.
a statement to Kethan. Even if Irene did so state, however,
6 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 11
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
II. ANALYSIS type of employee for whom noncompetition clauses were
designed. See Central, 622 S.W.2d at 685-86.
A. Standard of review
Kethan and First Choice respond by arguing that a personal
Although this court reviews a challenge to a district court’s services contract cannot be assigned. A personal services
decision regarding preliminary injunctions for abuse of contract, however, requires that one of the parties be bound to
discretion, see Sandison v. Michigan High School Athletic render personal services. See generally Kenneth D. Corwin,
Ass’n, 64 F.3d 1026, 1030 (6th Cir. 1995), the two key issues Ltd. v. Missouri Medical Service, 684 S.W.2d 598, 600 (Mo.
in this case are questions of law dealing with assignments Ct. App. 1985) (“[T]he duty to perform is not assignable
under Kentucky law. Neither issue has been directly without the consent of both parties.”). In contrast, a
addressed by the Supreme Court of Kentucky. “When the noncompetition clause only requires that one of the parties
district court construes a contract, such interpretation is a abstain from certain activities. See generally Equifax Servs.,
question of law and reviewable de novo by the appellate Inc. v. Hitz, 905 F.2d 1355, 1361 (10th Cir. 1990)
court.” F.D.I.C. v. Aetna Cas. and Sur. Co., 903 F.2d 1073, (“Although an employee’s duty to perform under an
1077 (6th Cir. 1990). Our role in this diversity of citizenship employment contract generally is not delegable, . . . the right
case “is to make [the] best prediction, even in the absence of to enforce a covenant not to compete generally is assignable
direct state court precedent, of what the Kentucky Supreme in connection with the sale of a business.”) (citation omitted);
Court would do if it were confronted with this question.” In re Andrews, 80 F.3d 906, 912 (4th Cir. 1996) (“Although
Welsh v. United States, 844 F.2d 1239, 1245 (6th Cir. 1988). the Thirteenth Amendment prohibits a court from specifically
enforcing a personal service contract, an agreement not to
B. An assignment does not modify the underlying terms compete is specifically enforceable if it is reasonable.”).
of an employment contract Here, Kethan was an at-will employee who was free to resign
at any time. Consequently, the noncompetition clause does
Provision fourteen of Kethan’s employment agreement with not require any affirmative action on the part of Kethan, and
MedEcon provides that “[n]o waiver, alteration, or is thus assignable.
modification of any of the provisions of this Agreement shall
be valid unless in writing and signed by both of the parties Kethan and First Choice further argue that the management
hereto.” The first key issue thus becomes whether style and “character” changed when MHA purchased the
MedEcon’s assignment of Kethan’s employment agreement assets of MedEcon. This, however, is irrelevant to the issue
was a modification of the terms of his contract. of whether the noncompetition clause is assignable because
the clause was not tied to the management style or “character”
Kentucky courts have not yet addressed the issue of of MedEcon. In fact, MedEcon could have changed its
whether the assignment of an employment contract modifies management at any time, and Kethan would have still been
the underlying terms of the contract. The Second Circuit, bound by the noncompetition clause. Similarly, management
however, has rejected the notion that an assignment modifies would have changed exactly as it did if MHA had purchased
the underlying terms of a contract: the stock of MedEcon rather than its assets and, as previously
noted, Kethan would have had no basis to complain.
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
10 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 7
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
In addition to opinions from the lower courts of Kentucky, general New York rule . . . that a parol assignment of a
this court may use the rule adopted by most of the debt, claim, or chose in action is valid. An assignment
jurisdictions that have addressed the assignability issue as does not modify the terms of the underlying contract. It
persuasive authority in determining how the Kentucky is a separate agreement between the assignor and
Supreme Court would likely decide the question. See Kurczi, assignee which merely transfers the assignor’s contract
113 F.3d at 1429. With respect to the assignability of rights, leaving them in full force and effect as to the party
noncompetition clauses, “[a] majority of courts permit the charged. Insofar as an assignment touches on the
successor to enforce the employee’s restrictive covenant as an obligations of the other party to the underlying contract,
assignee of the original covenantee (the original employer) .” the assignee simply moves into the shoes of the assignor.
6 RICHARD A. LORD, WILLISTON ON CONTRACTS § 13:13
(4th ed. 1995). Citibank, N.A. v. Tele/Resources, Inc., 724 F.2d 266, 268-69
(2d Cir. 1983) (citations omitted); accord, Ametex Fabrics,
MHA also correctly points out that if it had purchased the Inc. v. Just In Materials, Inc., 140 F.3d 101, 107 (2d Cir.
stock of MedEcon rather than its assets, MedEcon would have 1998) (noting that it is “elementary” that assignments do not
remained in existence and continued to be Kethan’s employer. modify the underlying terms of a contract). Those cases
Because no assignment would have been necessary under correctly recognize that assignments and modifications are
such circumstances, Kethan would have had no basis to even completely different concepts, and that assignability is not
question the enforceability of the noncompetition clause. impacted by “boilerplate” modification provisions.
Allowing Kethan to avoid his obligations under the
circumstances of this case simply because MHA decided to Based on the reasoning of Citibank and Ametex, we
structure the transaction as a purchase of assets rather than conclude that the terms of Kethan’s employment were not
stock would exalt form over substance. modified by the assignment of his contract and the
substitution of MHA for MedEcon. Following the
The policy behind enforcing noncompetition clauses is to assignment, Kethan’s contractual rights and duties as an
protect businesses against employees resigning and taking employee did not change. The only thing that changed was
valued clients with them. See Central Adjustment Bureau, the entity now entitled to enforce the terms and conditions
Inc. v. Ingram Associates, 622 S.W.2d 681, 685-86 (Ky. Ct. that Kethan had previously agreed to when he entered into his
App. 1981). In this case, while working for MedEcon, employment agreement. Accordingly, we hold that the
Kethan had access to MedEcon’s customer lists. He district court erred when it concluded that the assignment of
eventually became First Choice’s primary advisor. Because Kethan’s employment contract modified the terms of his
of that, Kethan developed a special business relationship with agreement.
First Choice. Shortly after First Choice decided to end its
business relationship with MHA/MedEcon, Kethan ceased C. A noncompetition clause is assignable in Kentucky
working for MHA and commenced working for First Choice.
The reason that Kethan was able to develop his unique Under Kentucky law, it has long been recognized “that a
business relationship with First Choice, and later go to work contract is generally assignable, unless forbidden by public
for it, was because MedEcon employed him and placed him policy or the contract itself, or its provisions are such as to
in charge of the First Choice account. He is thus precisely the show that one of the parties reposes a personal confidence in
the other, which he would have been unwilling to repose in
8 Managed Health Care No. 99-5444 No. 99-5444 Managed Health Care 9
Associates, et al. v. Kethan, et al. Associates, et al. v. Kethan, et al.
any other person.” Pulaski Stave Co. v. Miller’s Creek Supreme Court declined to address it. Consequently, the only
Lumber Co., 128 S.W. 96, 101 (Ky. 1910) (citation omitted). Kentucky authority on point, as enunciated by both the trial
Kentucky courts have also acknowledged that noncompetition and the appellate courts in Choate, recognizes that
clauses play a critical role in business and are favored as long noncompetition clauses may be assigned as part of the sale of
as they are reasonable in geographic scope and duration. See a business’s assets. “Where a state appellate court has
Central Adjustment Bureau, Inc. v. Ingram Associates, 622 resolved an issue to which the high court has not spoken, we
S.W.2d 681, 685-86 (Ky. Ct. App. 1981) (noting that the only will normally treat [those] decisions . . . as authoritative
protection for highly specialized businesses against absent a strong showing that the state’s highest court would
employees resigning and taking their clients away are decide the issue differently.” Kurczi v. Eli Lilly & Co., 113
noncompetition clauses); Lareau v. O’Nan, 355 S.W.2d 679, F.3d 1426, 1429 (6th Cir. 1997) (citation and internal
681 (Ky. 1962) (“[T]he policy of this state is to enforce quotation marks omitted). We find no such strong showing,
[noncompetition clauses] unless very serious inequities would or indeed any showing at all, in the case before us.
result.”); Borg-Warner Protective Services, Corp. v.
Guardsmark, Inc., 946 F. Supp. 495, 501 (E.D. Ky. 1996) But Kethan and First Choice argue that Choate is
(distinguishing Calhoun v. Everman, 242 S.W.2d 100 (Ky. distinguishable because the trial court did not enforce the
1951), by noting that “the more modern cases, including those noncompetition clause until the original employer had been
in Kentucky, place more emphasis on the employer’s joined as a plaintiff. We find this argument unpersuasive,
investment in the employee and have evolved an approach however, because the circuit court in Choate found that all
balancing the importance of that factor against the hardship to contractual rights to Choate’s noncompetition clause were
the employee and the public interest”). transferred from Sexton, Choate’s original employer, to
Koorsen, and held that “Koorsen [has] the right to enforce the
The second key issue in the present case, however, is not covenant not to compete against Choate” without any
the general enforceability of a noncompetition clause, but reference to Sexton. Consequently, the fact that Sexton was
whether such a clause is assignable under Kentucky law. joined as a party plaintiff had no effect on the circuit court’s
There is only one case in Kentucky that addresses this issue. analysis or holding.
In Choate v. Koorsen Protective Servs., Inc., 929 S.W.2d 184
(Ky. 1996), an employee was subject to a noncompetition Kethan and First Choice also argue that the unpublished
clause that was silent as to whether it could be assigned. The decisions of the Jefferson County Circuit Court and the
assets of the company were later sold, and the seller assigned Kentucky Court of Appeals cannot be considered because
the noncompetition clause to the purchaser. Choate, the Rule 76.28(4)(c) of the Kentucky Rules of Civil Procedure
employee, argued that the clause was unenforceable because provides that unpublished decisions cannot be cited as
he did not expressly consent to the assignment. The Jefferson authority. This Kentucky procedural rule, however, is not
County Circuit Court rejected this argument and issued an controlling in the case before us. See Miller v. Davis, 507
injunction enforcing the noncompetition clause. This F.2d 308, 313 (6th Cir. 1974) (noting that federal courts may
decision was affirmed by the Kentucky Court of Appeals. use their own procedural rules in diversity cases). Instead,
Sixth Circuit Rule 28(g) is the relevant authority, and it does
By the time the case reached the Kentucky Supreme Court, not preclude this court from considering the persuasive
the one-year noncompetition clause had expired by its own reasoning of unpublished cases.
terms. Because the issue was then moot, the Kentucky