1

RECOMMENDED FOR FULL-

Pursuant to Sixth Circ

ELECTRONIC CITATION: 2000 F

File Name: 00a0

UNITED STATES COU

FOR THE SIXTH 

____________

MANAGED HEALTH CAREASSOCIATES, INC., MHCA

ACQUISITION INC., d/b/a

MHA/MedEcon,

Plaintiffs-Appellants,

v.

RONALD KETHAN, EAST

TEXAS REGIONALCOOPERATIVE, d/b/a FirstChoice Cooperative,

Defendants-Appellees.

Appeal from the United St

for the Western District of Ke

No. 99-00066—Jennifer B. Co

Argued: March 

Decided and Filed: A

Before: WELLFORD, SILER, 

Judges.
2 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

_________________

COUNSEL

ARGUED: William J. Hunter, Jr., MIDDLETON &REUTLINGER, Louisville, Kentucky, for Appellants. JamesD. Cockrum, BROWN, TODD & HEYBURN, Louisville,Kentucky, for Appellees. ON BRIEF: William J. Hunter,Jr., Thomas P. O’Brien, III, Dennis D. Murrell,MIDDLETON & REUTLINGER, Louisville, Kentucky,Daniel L. Abrams, Louis M. Solomon, SWIDLER, BERLIN,SHEREFF & FRIEDMAN, New York, New York, forAppellants. 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 aseparate dissenting opinion.

_________________

OPINION

_________________

RONALD LEE GILMAN, Circuit Judge. Managed Health

Care Associates, Inc. and MHCA Acquisition, Inc., d/b/aMHA/MedEcon (collectively MHA), commenced an actionin state court against Ronald Kethan (Kethan) and East TexasRegional Cooperative, d/b/a First Choice Cooperative (FirstChoice). MHA sought a preliminary injunction to preventKethan from violating the noncompetition clause that he hadsigned when employed by MedEcon Services, Inc.(MedEcon), MHA’s predecessor. After Kethan and FirstChoice removed the case to federal court based on diversityof citizenship, the district court held that the noncompetitionagreement was enforceable only by MedEcon, and that it wasnot assignable by MedEcon to MHA without Kethan’sconsent. It therefore denied MHA’s request for a preliminary

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issue (and certainly not to the issCourt). Pertinent to the issue was of the Kentucky trial court and thnoted no controlling Kentucky aunecessity of consent to a purpemployee.

I dissent, accordingly, in favor 

circumstances.
14 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

_________________

DISSENT

_________________

HARRY W. WELLFORD, Circuit Judge, dissenting. This

is a difficult case and my brothers would reverse and remandto the district court for further proceedings. I respectfullydiffer. I am persuaded that the best course, in light of theuncertainties that exist in this area of the law in Kentucky, isto certify this legal question to the Kentucky Supreme Court:

Is the non-competition agreement in this case between

MedEcon and its employee, Kethan, assignable to theplaintiff company (a third party), in the absence ofKethan’s consent?I do not agree with the majority opinion that the district

court “held that non-competition clauses are not assignable inKentucky.” Rather, the essence of the district judge’s holdingwas this:

[T]he non-compete agreement and the confidentialityclause applied only to MedEcon and . . ., under W. R.

Grace, they were not assignable to MedEcon to MHAwithout the employee’s consent. Reinforcing this notionis the Kethan/MedEcon agreement’s inclusion of arequirement that all contract modifications must bewritten. No such writing occurred here; thus, MedEcondid not assign the covenant to compete or confidentialityclause to MHA.

(emphasis added.)

The majority holds that “a non-competition clause is

assignable in Kentucky.” It adds that “[t]here is only one casein Kentucky that addresses this issue,” Choate v. Koorsen

Protective Servs., Inc., 929 S.W.2d 184 (Ky. 1996). We arein agreement that this particular Kentucky Supreme Courtdecision did not determine the answer to the assignability

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injunction and dissolved the tempoMHA had obtained in state court. below, we REVERSE the decisioREMAND the case for further prthis opinion.

I. BACKGRO

A. Procedural history

On January 5, 1999, MHA com

Kethan and First Choice in the CCounty, Kentucky. MHA sought order, enjoining Kethan from vioclause that was part of his empMedEcon. 

On February 2, 1999, Kethan and 

action to the United States DistrDistrict of Kentucky. Kethan and Fdissolve the restraining order that Mcourt and opposed MHA’s minjunction. On March 4, 1999, the restraining order and denied MHAinjunction. In late March of 199appeal.B. Factual background

On December 27, 1991, Ketha

agreement with MedEcon, a grou(GPO) for hospitals with its prinKentucky. GPOs contract for the products for use by member healthenter into agreements directly with facilities to purchase the products providing a substantial savings of their members. GPOs also engage to provide their members even gre
4 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

From 1992 through 1996, Kethan worked as a salesman and

an agreement administrator for MedEcon. Kethan’s jobresponsibilities included meeting with various representativesfrom hospitals and encouraging them to use the productscovered by MedEcon’s agreements. He contacted numerousrepresentatives in Texas and Oklahoma on MedEcon’s behalf.During this period, Kethan had the opportunity to developstrong business relationships with MedEcon’s customers,including First Choice. Kethan eventually became theagreement 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’sassets. On September 9, 1998, most of MedEcon’s assetswere purchased by MHA. Included in those assets wasKethan’s employment agreement. Neither MedEcon norMHA obtained Kethan’s written consent to the assignment.Following the transaction, Kethan continued to be an at-willemployee, performing the same job, receiving the same salaryand 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 daysafter Kethan tendered his resignation notice, First Choiceceased using MHA/MedEcon for group purchasing services.When the thirty days had passed from Kethan’s resignationnotice, he commenced employment with First Choice.Shortly thereafter, MHA brought suit seeking to enforceKethan’s noncompetition agreement with MedEcon. 

The noncompetition clause provides as follows:Employee, during the term of this agreement and for aperiod of two (2) years after the termination thereof, willnot do, directly or indirectly, for himself or herself or asan agent of, or on behalf of, or in conjunction with, anyperson, trust, firm, partnership, corporation, or businessorganization other than the Company (“Other Firm”), norwill he or she, directly or indirectly, cause or permit any

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Kethan’s reliance on the statement of the contractual requirement thabe in writing. Aside from the fact consideration for Irene’s alleged ptype of claim that the non-modificto prevent. Accordingly, Kethaunavailing.E. The district court must bala

Although we have concluded tha

dismissing MHA’s motion for a pron the legal issues regarding unresolved the factual issues that missues include (1) the likelihood of the irreparable harm that could resissued, (3) the impact on the pupossibility of substantial harm to Picher Industries, Inc., 963 F.2d 85Kethan and First Choice strenuoucourt did not abuse its discretion preliminary injunction because damages and, in any event, could bby a monetary award. These issueby the district court on remand. 

III. CONCLU

For all of the reasons set forth a

decision of the district court and 

further proceedings consistent wit
12 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

Kethan’s and First Choice’s final argument is based on this

circuit’s decision in W.R. Grace & Co. v. Hargadine, 392

F.2d 9 (6th Cir. 1968), which arguably held thatnoncompetition clauses are not assignable under Ohio law.In the first place, Grace is distinguishable from the facts ofthe present case because the court was interpreting Ohio lawas opposed to Kentucky law. Second, the holding in Gracewith respect to assignability is ambiguous at best. The districtcourt’s decision in Grace actually supports MHA’s position,because it held that the new employer had the right to enforcethe covenant against the employee for the specified term oftwo years. Id. at 19. But because the two-year covenant hadended in April of 1962 due to a prior corporate change,however, and because Grace did not acquire ownership untilMay of 1964, the district court held that the two-year ban hadalready lapsed. Id. This court affirmed the district court’sdecision but, in dicta, stated that noncompetition clauses werenot assignable under Ohio law. Id at 20. Because Grace wasinterpreting Ohio law and because the basis for the court’sdecision is unclear, we find that the case is not determinativein resolving the present action. 

Based on the opinions of the lower Kentucky courts in

Choate, the majority rule from the other states that haveaddressed the issue, and the additional reasons set forthabove, we believe that the Kentucky Supreme Court wouldconclude that noncompetition clauses are assignable.Consequently, we reverse the district court on this point.D. Kethan could not reasonably rely on Larry Irene’s

statements

Kethan and First Choice next argue that even if the

noncompetition clause was properly assigned to MHA, MHAwaived its contractual rights or is now estopped fromasserting its contractual rights because its president LarryIrene allegedly told Kethan that MHA would not enforce theclause against him. MHA argues that Irene never made sucha statement to Kethan. Even if Irene did so state, however,

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Other Firm in which he or shfinancial interest, or of which officer, employee, shareholder, pto do any of the following[:]a. solicit or cause any past, pretime of the termination of empmembers) of the Company or ofuture subsidiaries or affilia(“Subsidiaries or Affiliates”) to their business from the CompanAffiliates or render competitivcustomers (or members).b. induce or attempt to influencemployee of the Company or anAffiliates to leave such employmc. engage in any of the kinds which the Company or any Affiliates have been or is now enof Texas, Kansas, Nebraska, OklArizona, Wyoming, and MissouIn addition to the noncompetiti

contained a provision requiring thawriting and signed by both partprovided that any disputes were to law. No clause in the contract, hothe issue of whether Kethan’s con

The district court concluded 

Kethan’s contract was a modmodification had to be in writingwriting, the district court held thbound by the noncompetition clauheld that noncompetition clauses Kentucky law.
6 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

II. ANALYSIS

A. Standard of review

Although this court reviews a challenge to a district court’s

decision regarding preliminary injunctions for abuse ofdiscretion, see Sandison v. Michigan High School AthleticAss’n, 64 F.3d 1026, 1030 (6th Cir. 1995), the two key issuesin this case are questions of law dealing with assignmentsunder Kentucky law. Neither issue has been directlyaddressed by the Supreme Court of Kentucky. “When thedistrict court construes a contract, such interpretation is aquestion of law and reviewable de novo by the appellatecourt.” F.D.I.C. v. Aetna Cas. and Sur. Co., 903 F.2d 1073,

1077 (6th Cir. 1990). Our role in this diversity of citizenshipcase “is to make [the] best prediction, even in the absence ofdirect state court precedent, of what the Kentucky SupremeCourt would do if it were confronted with this question.”Welsh v. United States, 844 F.2d 1239, 1245 (6th Cir. 1988).B. An assignment does not modify the underlying terms

of an employment contract

Provision fourteen of Kethan’s employment agreement with

MedEcon provides that “[n]o waiver, alteration, ormodification of any of the provisions of this Agreement shallbe valid unless in writing and signed by both of the partieshereto.” The first key issue thus becomes whetherMedEcon’s assignment of Kethan’s employment agreementwas a modification of the terms of his contract.

Kentucky courts have not yet addressed the issue of

whether the assignment of an employment contract modifiesthe underlying terms of the contract. The Second Circuit,however, has rejected the notion that an assignment modifiesthe underlying terms of a contract: 

The fact that the Agreement also provided that its termscould not be waived or altered without the writtenconsent of the bank did not justify a departure from the

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type of employee for whom nondesigned. See Central, 622 S.W.2

Kethan and First Choice respond 

services contract cannot be assigcontract, however, requires that onrender personal services. See geneLtd. v. Missouri Medical Service, 6Ct. App. 1985) (“[T]he duty to pwithout the consent of both panoncompetition clause only requiabstain from certain activities. See Inc. v. Hitz, 905 F.2d 1355, (“Although an employee’s duty employment contract generally is nto enforce a covenant not to compin connection with the sale of a busIn re Andrews, 80 F.3d 906, 912 (the Thirteenth Amendment prohibienforcing a personal service contcompete is specifically enforceabHere, Kethan was an at-will emploat any time. Consequently, the nonot require any affirmative action is thus assignable. 

Kethan and First Choice further a

style and “character” changed wassets of MedEcon. This, howeveof whether the noncompetition clathe clause was not tied to the managof MedEcon. In fact, MedEcon management at any time, and Ketbound by the noncompetition clauswould have changed exactly as it dthe stock of MedEcon rather than inoted, Kethan would have had no 
10 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

In addition to opinions from the lower courts of Kentucky,

this court may use the rule adopted by most of thejurisdictions that have addressed the assignability issue aspersuasive authority in determining how the KentuckySupreme Court would likely decide the question. See Kurczi,

113 F.3d at 1429. With respect to the assignability ofnoncompetition clauses, “[a] majority of courts permit thesuccessor to enforce the employee’s restrictive covenant as anassignee of the original covenantee (the original employer) .”6 RICHARD

A. LORD, WILLISTON ON 

CONTRACTS § 13:13

(4th ed. 1995).

MHA also correctly points out that if it had purchased the

stock of MedEcon rather than its assets, MedEcon would haveremained in existence and continued to be Kethan’s employer.Because no assignment would have been necessary undersuch circumstances, Kethan would have had no basis to evenquestion the enforceability of the noncompetition clause.Allowing Kethan to avoid his obligations under thecircumstances of this case simply because MHA decided tostructure the transaction as a purchase of assets rather thanstock would exalt form over substance.

The policy behind enforcing noncompetition clauses is to

protect businesses against employees resigning and takingvalued clients with them. See Central Adjustment Bureau,Inc. v. Ingram Associates, 622 S.W.2d 681, 685-86 (Ky. Ct.App. 1981). In this case, while working for MedEcon,Kethan had access to MedEcon’s customer lists. Heeventually became First Choice’s primary advisor. Becauseof that, Kethan developed a special business relationship withFirst Choice. Shortly after First Choice decided to end itsbusiness relationship with MHA/MedEcon, Kethan ceasedworking for MHA and commenced working for First Choice.The reason that Kethan was able to develop his uniquebusiness relationship with First Choice, and later go to workfor it, was because MedEcon employed him and placed himin charge of the First Choice account. He is thus precisely the

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general New York rule . . . that debt, claim, or chose in action idoes not modify the terms of the is a separate agreement betwassignee which merely transfers rights, leaving them in full force charged. Insofar as an assigobligations of the other party to the assignee simply moves into t

Citibank, N.A. v. Tele/Resources, I(2d Cir. 1983) (citations omitted)Inc. v. Just In Materials, Inc., 141998) (noting that it is “elementarymodify the underlying terms of correctly recognize that assignmecompletely different concepts, animpacted by “boilerplate” modific

Based on the reasoning of C

conclude that the terms of Kethamodified by the assignment osubstitution of MHA for Meassignment, Kethan’s contractual employee did not change. The onthe entity now entitled to enforce 

that Kethan had previously agreed employment agreement. Accorddistrict court erred when it concluKethan’s employment contract magreement.C. A noncompetition clause is a

 Under Kentucky law, it has lon

contract is generally assignable, upolicy or the contract itself, or its show that one of the parties reposethe other, which he would have be
8 Managed Health Care

Associates, et al. v. Kethan, et al.

No. 99-5444

any other person.” Pulaski Stave Co. v. Miller’s CreekLumber Co., 128 S.W. 96, 101 (Ky. 1910) (citation omitted).Kentucky courts have also acknowledged that noncompetitionclauses play a critical role in business and are favored as longas they are reasonable in geographic scope and duration. SeeCentral Adjustment Bureau, Inc. v. Ingram Associates, 622S.W.2d 681, 685-86 (Ky. Ct. App. 1981) (noting that the onlyprotection for highly specialized businesses againstemployees resigning and taking their clients away arenoncompetition clauses); Lareau v. O’Nan, 355 S.W.2d 679,681 (Ky. 1962) (“[T]he policy of this state is to enforce[noncompetition clauses] unless very serious inequities wouldresult.”); Borg-Warner Protective Services, Corp. v.Guardsmark, Inc., 946 F.Supp. 495, 501 (E.D. Ky. 1996)(distinguishing Calhoun v. Everman, 242 S.W.2d 100 (Ky.1951), by noting that “the more modern cases, including thosein Kentucky, place more emphasis on the employer’sinvestment in the employee and have evolved an approachbalancing the importance of that factor against the hardship tothe employee and the public interest”). 

The second key issue in the present case, however, is not

the general enforceability of a noncompetition clause, butwhether such a clause is assignable under Kentucky law.There is only one case in Kentucky that addresses this issue.In Choate v. Koorsen Protective Servs., Inc., 929 S.W.2d 184(Ky. 1996), an employee was subject to a noncompetitionclause that was silent as to whether it could be assigned. Theassets of the company were later sold, and the seller assignedthe noncompetition clause to the purchaser. Choate, theemployee, argued that the clause was unenforceable becausehe did not expressly consent to the assignment. The JeffersonCounty Circuit Court rejected this argument and issued aninjunction enforcing the noncompetition clause. Thisdecision was affirmed by the Kentucky Court of Appeals.

By the time the case reached the Kentucky Supreme Court,

the one-year noncompetition clause had expired by its ownterms. Because the issue was then moot, the Kentucky

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Supreme Court declined to address Kentucky authority on point, as enand the appellate courts in noncompetition clauses may be assa business’s assets. “Where a resolved an issue to which the high will normally treat [those] decisiabsent a strong showing that the sdecide the issue differently.” KurF.3d 1426, 1429 (6th Cir. 199quotation marks omitted). We finor indeed any showing at all, in th

But Kethan and First Choic

distinguishable because the trial noncompetition clause until the orjoined as a plaintiff. We find thihowever, because the circuit cour

contractual rights to Choate’s no

transferred from Sexton, ChoateKoorsen, and held that “Koorsen [hcovenant not to compete againreference to Sexton. Consequentljoined as a party plaintiff had no eanalysis or holding. 

Kethan and First Choice also a

decisions of the Jefferson CounKentucky Court of Appeals cannRule 76.28(4)(c) of the Kentucky provides that unpublished decisauthority. This Kentucky procedcontrolling in the case before us. F.2d 308, 313 (6th Cir. 1974) (notuse their own procedural rules in Sixth Circuit Rule 28(g) is the relenot preclude this court from coreasoning of unpublished cases.