Business law fundamentals and applications

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CASE BRIEF

CASE: Managed health care associates Inc., v. Ronald Kethan

PARTIES: MHA as plaintiff appellants / Kethan as defendant appellee.

Are noncompetition agreements assignable in Kentucky, and if so is the assignment of Kethan's employment agreement a modification of the existing agreement that is required to be in writing and signed by all parties?

FACTS: Kethan worked as a salesman for MedEcon and part of his employment agreement that he signed included a noncompete clause. While Kethan was employed by MedEcon it assigned most of its assets to MHA including Kethan's employment agreement. Kethan did not consent to the assignment, however Kethan did continue his employment under MHA exactly as it occurred under MedEcon. Kethan resigned from MHA and went to work for FirstChoice who was a customer of MHA who worked directly with Kethan as an employee of MHA.

The noncompetition clause in Kethan's employment agreement states that for two years after the end of his employment with MedEcon, Kethan cannot solicit MedEcon's customers to remove business from MedEcon, and Kethan cannot personally or as part of a corporation engage in any of the business practices in which MedEcon is engaged in certain states. Additionally, the agreement's choice of law clause uses Kentucky law and it contains a clause that any modification to the employment agreement must be in writing and signed by both parties.

When Kethan went to work for FirstChoice the company stopped using MHA for purchasing services. MHA brought suit in state court to enforce Kethan's noncompetition agreement with MedEcon by enjoining his further employment with FirstChoice.

PROCEDURAL FACTS: Kethan removed from state court to federal district court. The federal district court determined that the assignment of a noncompetition agreement is invalid under Kentucky law and further that the assignment was a modification and thus since the assignment was not in a writing signed by both parties, it was an invalid assignment. Therefore, MHA was not privy to the agreement between Kethan and MedEcon and thus could not enforce the noncompetition clauses in the agreement. MHA appealed to the district court's decision. The court of appeals determined that the district court erred in ruling that the assignment was a modification of Kethan's employment agreement and in ruling that noncompetition agreements are not assignable in Kentucky.

CONCLUSION: The court of appeals reversed and remanded the federal district court's denial of MHA's request to enjoin Keethan from violating the noncompetition clause that he signed with MedEcon.

BLACK LETTER LAW: Non-competition agreements are assignable as part of the sale of business assets without consent of both parties to the original non-competition agreements as long as the assignment does not change the underlying terms of the agreement.

REASONING: If an assignment of an agreement does not change the underlying terms of an agreement, it is not a modification of the original agreement. It is merely a separate agreement between the assignor and assignee in which the assignor gives its rights under the contract to the assignee for good and valuable consideration. Since an assignment is not a modification to the original agreement, it does not need to be in writing and signed by the parties to the original agreement. However, if the terms of the original agreement are altered by the assignment, such as if Kethan's terms of employment changed (different salary, different working hours, different responsibilities) then the assignment could arguably be a modification of the original agreement. However, in this case nothing about Kethan's work environment changes.

Further, the court determined that due to Kentucky public policy and case precedent, noncompetition agreements are assignable because Kentucky public policy favors enforcement of noncompetition agreeements as long as they are reasonable. This policy is designed to protect businesses from unscrupulous employees who attempt to abuse their connections they gain as employees and take valuable business with them when they leave, which is exactly what Kethan did in this case when he went to work for FirstChoice. The court of appeals also used general contract law treatise's that note most contracts are generally assignable and enforceable by the assignee unless the contract explicitly states otherwise or the assignment goes against public policy concerns. According to Choate v. Koorsen Protective Servs., Inc. A noncompetition clause that is enforceable in Kentucky is assignable as part of a business's sale of its assets. The court did not find that the Choate case was distinguishable from the present case in any significant way. Therefore the ruling in the Choate case is applicable here. Thus, the employment agreement at hand and its applicable noncompetition clauses are assignable to MHA and enforceable by MHA.