Florida Series III: Parent Company’s Merger Doesn’t Impact Subsidiary’s Noncompete with M.D.

Collier HMA v. Menichello a medical noncompete dispute, considers whether a third party can enforce a noncompete after a merger.  Jettisoning the “changed corporate culture and mode of operation” test, the Florida appeals court applied basic principles of corporate law to determine whether a parent company’s merger necessarily meant its subsidiary merged too and couldn’t enforce a noncompete involving one of its staff doctors.

Halfway through a three-year employment contract between the plaintiff and doctor defendant, the plaintiff’s corporate parent was acquired by another entity.  The plaintiff-doctor employment contract contained a 12-month noncompete and specifically said it was not enforceable by third parties, successors or assignees of the parties.

After the acquisition, the doctor defendant quit and went to work for one of plaintiff’s competitors.  The plaintiff sued the doctor for violating the 12-month noncompete. The doctor defended by stating that the parent company’s merger with another entity made the plaintiff a successor under the law that could not enforce the restrictive covenant.  The trial court agreed and entered summary judgment for the doctor.  The employer appealed.

Held: Reversed.  Plaintiff employer can enforce the doctor’s noncompete.

Reasons:

Under Florida law, S. 542.335(1)(f), Florida Statutes (2012),  an employment contractual provision that authorizes a third-party beneficiary, assignee or successor to enforce a restrictive covenant is valid.

The statute is silent on the meaning of “successor” but case law defines it to mean “a corporation that, through amalgamation, consolidation or other assumption of interests, is vested with the rights and duties of an earlier corporation.”

Here, the plaintiff employer’s status did not change after its parent company’s merger.  Under the law, a parent corporation is a separate and distinct legal entity from its wholly-owned subsidiary.  As a corollary, a parent company cannot exercise rights of its subsidiary.

The subsidiary plaintiff here continued its existence after the merger as the same single member LLC and didn’t sell or transfer its assets to another entity.  Any change in company ownership several tiers up the corporate chain simply didn’t impact the doctor’s employment contract since plaintiff continued to operate and to employ the doctor.  As the lone signer of the employment contract that contained the noncompete, plaintiff could enforce it.

Afterwords:

The Court refused to apply the nebulous “culture and mode of operation” test which looks to the parties’ post-merger conduct (i.e., did the parties act as though the acquiring company was dictating the acquired company subsidiary’s actions?) to decide whether a third-party can enforce a noncompete.  Instead, the Court considered whether the plaintiff continued its operations (it did) in the wake of the parent company’s merger.

Under black-letter corporate law principles, the Court found that the plaintiff’s parent company’s merger had no impact on the plaintiff as “no other entity emerged from the transaction as a successor to [plaintiff].”  Summary judgment for the plaintiff reversed.

 

False Info in Employee Time Records Can Support Common Law Fraud Claim – IL Fed Court

Some key questions the Court grapples with in Laba v. CTA, 2016 WL 147656 (N.D.Ill. 2016) are whether an employee who sleeps on the job or runs personal errands on company time opens himself up to a breach of fiduciary or fraud claim by his employer.  The Court answered “no” (fiduciary duty claim) and “maybe” (fraud claim) in an employment dispute involving the Chicago Transit Authority (CTA).

Some former CTA employees sued the embattled transit agency for invasion of privacy and illegal search and seizure after learning the CTA implanted Global Positioning System (“GPS”) technology on the plaintiffs’ work-issued cell phones. An audit of those phones revealed the plaintiffs’ regularly engaged in personal frolics during work hours.

The CTA removed the case to Federal court and filed various state law counterclaims to recoup money it paid to the ex-employees including claims for breach of fiduciary duty, fraud and conversion. The Northern District granted in part and denied in part the plaintiff’s motion to dismiss the CTA’s counterclaims.

Breach of Fiduciary Duty

Sustaining the CTA’s breach of fiduciary duty claim against the ex-employees’ motion to dismiss, the Court looked to black-letter Illinois law for guidance.  To state a breach of fiduciary duty claim in Illinois, a plaintiff must allege (1) the existence of a fiduciary duty, (2) breach of that duty, and (3) breach of the duty proximately caused damages.  The employer-employee relationship is one the law recognizes as a fiduciary one.

While the extent of an employee’s duty to his employer varies depending on whether the employee is a corporate officer, the law is clear that employees owe duties of loyalty to their employers.  Where an employee engages in self-dealing or misappropriates employer property or funds for the employee’s personal use, it can give rise to a fiduciary suit by the employer.

Here, the Court found that the employees’ conduct, while irresponsible and possibly negligent, didn’t rise to the level of disloyalty under the law.  The Court made it clear that under-par job performance doesn’t equate to conduct that can support a breach of fiduciary duty claim. (**6-7).

Fraudulent Misrepresentation

The Court upheld the CTA’s fraudulent misrepresentation claim – premised on the allegation that the plaintiffs lied to the CTA about the hours they were working in order to induce the CTA to pay them.  Under Illinois law, a fraud plaintiff must show (1) a false statement of material fact, (2) known or believed to be false by the party making the statement, (3) with the intent to induce the statement’s recipient to act, (4) action by the recipient in reliance on the truth of the statement, and (5) damage resulting from that reliance.

Under the Federal pleading rules, a fraud claimant must plead the “who, what, where when and how” of the fraud but the allegation of a defendant’s intent or knowledge can be alleged generally.

Here, the Court found that the CTA sufficiently alleged a fraudulent scheme by the employees to misrepresent the hours they worked in exchange for their paychecks.  This was enough, under Illinois fraud law, to survive the employees’ motion to dismiss.  See FRCP 9(b); (*7).

Take-aways:

1/ While an employee owes an employer fiduciary duties of loyalty, his sub-par job performance doesn’t equate to a breach of fiduciary duty.  There must be self-dealing or intentional conduct by the employee for him to be vulnerable to an employer’s fiduciary duty suit;

2/ An employee misrepresenting hours work can underlie a common law fraud claim if the employer can show it paid in reliance on the truth of the employee’s hour reporting;