Collier HMA Physician Management, LLC v. Brian Menichello, M.D.

NOT FINAL UNTIL TIME EXPIRES TO FILE REHEARING
MOTION AND, IF FILED, DETERMINED

IN THE DISTRICT COURT OF APPEAL
OF FLORIDA
SECOND DISTRICT

COLLIER HMA PHYSICIAN )
MANAGEMENT, LLC, d/b/a )
PHYSICIANS REGIONAL MEDICAL )
GROUP, a Florida limited liability )
company, )
)
Appellant, )
)
v. ) Case No. 2D16-1204
)
BRIAN MENICHELLO, M.D., an )
individual, )
)
Appellee. )
)

Opinion filed May 31, 2017.

Appeal from the Circuit Court for Collier
County; Hugh D. Hayes, Judge.

Alan D. Lash, Martin B. Goldberg,
Lorelei J. Van Wey, and Justin C.
Fineberg, of Lash & Goldberg LLP,
Miami, for Appellant.

Lawrence A. Farese and Michael R.
Whitt, of Robins Kaplan LLP, Naples, for
Appellee.

WALLACE, Judge.

In this case we are called upon to determine the enforceability of a

restrictive covenant in an employment agreement between Collier HMA Physician
Management, LLC, d/b/a Physicians Regional Medical Group, a Florida limited liability

company (Collier HMA), and Brian Menichello, M.D. (Dr. Menichello). Collier HMA

appeals the circuit court's final summary judgment in favor of Dr. Menichello entered on

the theory that the restrictive covenant was unenforceable because Collier HMA was a

"successor" employer and the employment agreement did not expressly authorize

enforcement of the covenant by an assignee or successor as required under section

542.335(1)(f), Florida Statutes (2012). Because the circuit court erred in basing its

ruling on what it deemed to be the "substance" of a merger transaction involving Collier

HMA's ultimate parent instead of on traditional principles of corporate law, we reverse.

I. THE FACTUAL AND PROCEDURAL BACKGROUND

Collier HMA is a Florida limited liability company with its principal place of

business in Collier County.1 The company owns and operates a health care business

that employs approximately forty physicians and operates two hospitals. Collier HMA

also has two full-service medical clinics, one in Naples and one in Bonita Springs.

Dr. Menichello is a medical doctor licensed to practice medicine in Florida.

In September 2012, Collier HMA entered into an Employment Agreement (the

Agreement) with Dr. Menichello. In accordance with the Agreement, Dr. Menichello was

1
The circuit court conducted an evidentiary hearing on Collier HMA's
motion for a temporary injunction. However, there has not been a final evidentiary
hearing on the merits in the circuit court. The facts stated in this opinion are drawn from
the pleadings, the transcript of the hearing on the motion for the temporary injunction,
the depositions on file, the affidavits, and other documents in the record. We review
these facts in the light most favorable to Collier HMA as the party against whom
summary judgment was entered. See Markowitz v. Helen Homes of Kendall Corp., 826
So. 2d 256, 259 (Fla. 2002).

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to practice medicine at Collier HMA and its two hospitals. The term of the Agreement

was for three years, but it was terminable by either party on ninety days' notice.

The Agreement, as amended, included a restrictive covenant that

provided in pertinent part, as follows:

6.7. Restrictive Covenant. During the term of this
Agreement, and for the 12-month period after this
Agreement expires or is terminated, you won't have any
financial relationship, including, without limitation, as an
employee or independent contractor, with Naples
Community Hospital, Inc., Lee Memorial Health System or
Millennium Physician Group, nor any organization that
directly or indirectly controls, is controlled by, or is under
common control with, Naples Community Hospital, Inc., Lee
Memorial Health System or Millennium Physician Group.

Notably, the Agreement does not provide that it is binding upon and enforceable by the

successors and assigns of the parties. Instead, the Agreement expressly provides to

the contrary:

6.11. No Third-Party Beneficiaries. The terms and
provisions of this Agreement are intended solely for the
benefit of you and us. It is not the intention of the parties to
confer third-party beneficiary rights upon any other person.

The absence of a provision for the enforcement of the Agreement by the successors

and assigns of the parties is pertinent to their arguments regarding the enforceability of

the restrictive covenant under section 542.335(1)(f).

In September 2012, when the parties entered into the Agreement and Dr.

Menichello began the three-year term of his employment, Collier HMA was part of a

large group of medical businesses that were ultimately controlled by Health

Management Associates, Inc. (HMAI), a Delaware corporation with its headquarters and

principal place of business in Naples. During the term of the Agreement, Community

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Health Systems, Inc. (CHS), effected a merger transaction whereby it acquired control

of all of the businesses in the chain that were previously subject to the ultimate control

of HMAI. An explanation of the ownership of Collier HMA and its place in the family of

several other companies related to it both before and after the merger is necessary to

an understanding of the parties' arguments and the issue to be decided.

As is often the case with medical businesses, the structure of these

companies was and remains characterized by multiple levels or tiers of ownership. At

the first tier, Collier HMA owned and operated the business where Dr. Menichello was

employed. At the second tier up the chain, Collier HMA was owned by a single

member, Southwest Florida HMA Holdings, LLC. At the third tier, that entity was owned

by Health Management Associates, LP. At the fourth tier, Health Management

Associates, LP, was owned by Health Management General Partner, LLC. At the fifth

tier, that entity was owned by Collier HMA's ultimate parent company, HMAI. The stock

of HMAI was publicly traded. Thus, the equity interest in HMAI changed hands

regularly. By contrast, the ownership of Collier HMA and the other companies in the

multi-tiered ownership structure remained constant.

The merger by which CHS acquired HMAI, the ultimate parent of Collier

HMA at the top tier of the ownership structure, occurred in January 2014. This

transaction was structured as follows: CHS caused to be created a wholly-owned

subsidiary named FWCT-2 Acquisition Corporation (FWCT-2). Upon approval of the

merger by the necessary parties, FWCT-2 merged with and into HMAI, with the result

that HMAI survived as a wholly-owned subsidiary of CHS.

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 After the merger, the stock of HMAI was no longer publicly traded. But

HMAI survived the merger and continued to operate, as did all of the subsidiaries in the

chain of ownership below HMAI. Obviously, there was a change in the ownership of

HMAI, but there was no change in the ownership of its subsidiary companies, including

Collier HMA. Indeed, Collier HMA continued to exist and to operate the medical

practice, with Southeast Florida HMA Holdings, LLC, as its sole member, just as before

the merger. Also, just as before, Dr. Menichello continued to be employed by and to

receive his compensation from Collier HMA.

After the CHS merger, Dr. Menichello became dissatisfied with certain

aspects of the continued operations of Collier HMA. Although we need not detail Dr.

Menichello's complaints here, they related primarily to a claimed insufficiency in staffing

and other services that he believed were necessary to the optimum operation of his

practice. On September 24, 2014, Dr. Menichello gave Collier HMA ninety days' written

notice of his intention to terminate the Agreement without cause effective December 24,

2014. Afterwards, Collier HMA learned that Dr. Menichello intended to begin working

for Naples Community Hospital, Inc. (NCH), or one of its affiliates. On October 30,

2014, Collier HMA sent Dr. Menichello a letter reminding him of the provisions of the

restrictive covenant in the Agreement. Collier HMA also informed Dr. Menichello of its

intent to seek enforcement of the restrictive covenant in the event of a breach. At the

end of the ninety-day notice period, Dr. Menichello became employed by NCHMD, Inc.,

an affiliate of NCH.

On December 29, 2014, Collier HMA filed a Verified Complaint for

injunctive relief against Dr. Menichello and a Motion for Temporary Injunction. In

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particular, Collier HMA sought injunctive relief against Dr. Menichello prohibiting his

employment in breach of the provisions of the restrictive covenant. Dr. Menichello filed

an answer, affirmative defenses, and a counterclaim for declaratory relief in response to

the complaint. Pertinent to the issues in this case, Dr. Menichello raised what the

parties characterized as the "successor defense" in his fifth affirmative defense as

follows:

Community Health Systems, Inc. ("CHS") is the
successor to Health Management Associates, Inc. ("HMA")
in the ownership, operation, and control of Physicians
Regional Healthcare System and affiliated companies,
including in particular the Defendant's former employer,
Collier HMA Physician Management, LLC. The Restrictive
Covenant does not expressly authorize enforcement by a
party's successors or assigns. Therefore, the Plaintiff, as a
subsidiary and affiliate of the successor CHS, lacks standing
to enforce the Restrictive Covenant, and this Court must
refuse enforcement of the Restrictive Covenant, pursuant to
Fla. Stat. § 542.335(1)(f).

Dr. Menichello also asserted the theory of the "successor defense" in his counterclaim

seeking declaratory relief against Collier HMA.

The circuit court conducted a hearing over several days on Collier HMA's

motion for a temporary injunction. At the conclusion of the hearing, the circuit court

denied the motion. Collier HMA appealed the denial of its motion for temporary

injunction, and this court affirmed the circuit court's order on January 15, 2016. Collier

HMA Physician Mgmt., LLC v. Menichello, 185 So. 3d 1241 (Fla. 2d DCA 2016) (table

decision).

II. THE CIRCUIT COURT'S RULING

Dr. Menichello moved for a partial summary judgment on his successor

defense and on his related counterclaim seeking a declaratory judgment that the

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restrictive covenant was not enforceable. The circuit court granted the motion, ruling as

follows:

1. The record evidence establishes beyond dispute
that the Defendant's employer, Collier HMA Physician
Management, LLC ("Collier HMA"), was acquired by a third
party, Community Health Systems, Inc. ("CHS"), through its
wholly owned subsidiaries, during the course of the
Defendant's employment.

2. As a result of its acquisition by CHS during the
course of Defendant's employment, the Plaintiff, Collier
HMA, is a "successor" employer within the meaning of Fla.
Stat. § 542.335(1)(f).

3. Pursuant to Fla. Stat. § 542.335(1)(f), a restrictive
covenant is not enforceable by successors or assigns unless
the restrictive covenant expressly authorizes such
enforcement.

4. Neither the Employment Agreement at issue in this
case, nor the restrictive covenant in particular, authorizes
enforcement of the restrictive covenant by successors or
assigns.

5. Therefore, the restrictive covenant is not
enforceable by the Plaintiff as a matter of law.

6. There is no genuine issue as to any material fact
relative to the successor defense and the Defendant is
entitled to a judgment as a matter of law on the successor
defense and related Counterclaim for Declaratory Judgment.

The circuit court's written findings do not explain the rationale underlying its conclusion

that Collier HMA had become a successor employer. However, the circuit court noted

that it based its ruling in part on the testimony and documentary evidence presented at

the hearing on the motion for the temporary injunction. At the conclusion of that

hearing, portions of the circuit court's oral ruling provide important clues to its thinking:

And so I think you—you look at form over substance
and—or the—you don't get—reverse that and say you don't

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 get carried away by looking at the form—formal structure;
you look at the substance of it, who really owns it. And—
and, obviously, in this case the HMA—original HMA
company is—I mean, is definitely owned by another
corporate structure.

(Emphasis added.) The circuit court also noted that after the merger, there were certain

indicia of a new employer-employee relationship in the mode of operation of Collier

HMA. The circuit court noted as an example that Dr. Menichello had been required to

submit to a drug screening after the merger as if he had been a new employee of the

company. Thus, in applying section 542.335(1)(f) to the question of whether Collier

HMA had become a successor entity after the merger, the circuit court viewed its task

as to ferret out the substance of what had occurred rather than to examine the formal

structure of the transaction and to determine whether there had been any change in the

identity of Dr. Menichello's employer.

After the entry of the order granting Dr. Menichello's motion for summary

judgment, the circuit court entered a final summary judgment in his favor. This appeal

followed.

III. THE STANDARD OF REVIEW

The standard of review for an order granting a motion for summary

judgment is de novo and requires a two-pronged analysis. Volusia County v. Aberdeen

at Ormond Beach, L.P., 760 So. 2d 126, 130 (Fla. 2000). Summary judgment is proper

only if (1) no genuine issue of material fact exists, viewing every possible inference in

favor of the party against whom summary judgment has been entered, and (2) the

moving party is entitled to a judgment as a matter of law. See id.; Huntington Nat'l Bank

v. Merrill Lynch Credit Corp., 779 So. 2d 396, 398 (Fla. 2d DCA 2000). "If the record

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reflects the existence of any genuine issue of material fact or the possibility of any

issue, or if the record raises even the slightest doubt that an issue might exist, summary

judgment is improper." Holland v. Verheul, 583 So. 2d 788, 789 (Fla. 2d DCA 1991).

IV. COLLIER HMA'S APPELLATE ARGUMENTS

On appeal, Collier HMA makes three arguments. First, the circuit court

misinterpreted and misapplied section 542.335(1)(f) in concluding that Collier HMA

became a successor employer after the merger so as to preclude it from enforcing the

restrictive covenant. Second, after the merger, Dr. Menichello executed an amendment

to the Agreement in which he ratified and reaffirmed all terms and conditions of the

Agreement and all prior amendments, including the restrictive covenant. Thus, Collier

HMA may enforce the restrictive covenant against Dr. Menichello. Third, and in the

alternative, there were genuine issues of material fact regarding the applicability of the

successor defense that precluded the entry of a summary judgment in favor of Dr.

Menichello on that issue. Based on our disposition of Collier HMA's first argument, we

need not address its second and third arguments.

V. DISCUSSION

Section 542.335(1)(f), provides as follows:

(1) Notwithstanding s. 542.18 and subsection (2),
enforcement of contracts that restrict or prohibit competition
during or after the term of restrictive covenants, so long as
such contracts are reasonable in time, area, and line of
business, is not prohibited. In any action concerning
enforcement of a restrictive covenant:

....

(f) The court shall not refuse enforcement of a
restrictive covenant on the ground that the person seeking
enforcement is a third-party beneficiary of such contract or is

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 an assignee or successor to a party to such contract,
provided:

1. In the case of a third-party beneficiary, the
restrictive covenant expressly identified the person as a
third-party beneficiary of the contract and expressly stated
that the restrictive covenant was intended for the benefit of
such person.

2. In the case of an assignee or successor, the
restrictive covenant expressly authorized enforcement by a
party's assignee or successor.

Under the statute, a court may not refuse to enforce a restrictive covenant because the

party seeking enforcement is a third-party beneficiary of the contract, an assignee, or a

successor of a party to the contract. See § 542.335(1)(f). In other words, in

accordance with section 542.335(1)(f), as long as the contract expressly provides for

enforcement of the restrictive covenant by a third-party beneficiary, assignee, or

successor, a court may not refuse enforcement of the restrictive covenant on the ground

that the entity seeking enforcement is not a party to the contract. See Cellco P'ship v.

Kimbler, 68 So. 3d 914, 917 (Fla. 2d DCA 2011); Marx v. Clear Channel Broad., Inc.,

887 So. 2d 405, 408 (Fla. 4th DCA 2004); Tusa v. Roffe, 791 So. 2d 512, 514 (Fla. 4th

DCA 2001).

In his Fifth Affirmative Defense and in his counterclaim for declaratory

relief, Dr. Menichello maintained that Collier HMA had become a "successor" within the

meaning of section 542.335(1)(f) after the CHS merger. The circuit court agreed.

Because the Agreement did not authorize enforcement of the restrictive covenant by

successors, the circuit court ruled that Collier HMA—as a successor—did not have the

right to enforce the restrictive covenant against Dr. Menichello. Thus, the question of

Collier HMA's right to enforce the restrictive covenant against Dr. Menichello requires us

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to determine whether Collier HMA qualified as a successor after the merger within the

meaning of the statute.

Section 542.335 does not provide a definition of the term "successor."

The context in which the term is used requires us to seek the meaning of the term as it

relates to corporations and other business entities. In this context, the term "successor"

denotes "[a] corporation that, through amalgamation, consolidation, or other assumption

of interests, is vested with the rights and duties of an earlier corporation." Black's Law

Dictionary 1660 (10th ed. 2014); see also Corneal v. CF Hosting, Inc., 187 F. Supp. 2d

1372, 1375 (S.D. Fla. 2001) ("The term successor 'is generally applicable to

corporations wherein one corporation by a process of amalgamation, consolidation or

duly authorized legal succession becomes vested in the rights and assumes the

burdens of its predecessor corporation.' " (quoting Int'l Ass'n of Machinists & Local

Lodge #954 v. Shawnee Indus., Inc., 224 F. Supp. 347, 352 (W.D. Okla. 1963))).

The status of Collier HMA after the CHS merger does not comport with the

standard definition of a successor as it relates to corporations or other business entities.

Placing our focus narrowly on Collier HMA, we see that it had not been consolidated

with or amalgamated into another company after the merger. And Collier HMA had not

acquired the rights of or assumed the burdens of any other entity. Indeed, the

undisputed evidence showed that nothing about the corporate structure or ownership of

Collier HMA was different after the merger. Collier HMA continued in existence as a

single member limited liability company. It did not sell or otherwise transfer any of its

assets. One could not identify a successor entity to Collier HMA as defined above

because its ownership had not altered and it continued to operate with the same assets

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and personnel after the merger. Furthermore, Collier HMA had not assigned the

Agreement to another entity because no such assignment was required. And if we step

back to look at the larger picture, we see that Collier HMA continued to function after the

merger as a part of the chain of health care businesses that had been part of the HMAI

network.

If we take an even broader view, we must acknowledge that the ownership

of HMAI—the ultimate parent of Collier HMA at the top of the multi-tiered chain of

companies—did change after the merger. Obviously, CHS had acquired HMAI, the

ultimate parent of Collier HMA. But the change in the ownership of HMAI did not cause

any change in the ownership of Collier HMA. More to the point, the acquisition of HMAI

by CHS did not make CHS the successor to Collier HMA. The argument to the contrary

is inconsistent with the proposition that "[a] parent corporation and its wholly-owned

subsidiary are separate and distinct legal entities." Am. Int'l Grp., Inc. v. Cornerstone

Buss., Inc., 872 So. 2d 333, 336 (Fla. 2d DCA 2004) (citing Gladding Corp. v. Register,

293 So. 2d 729, 732 (Fla. 3d DCA 1974)). The idea that CHS became a successor to

Collier HMA after the merger is also inconsistent with the principle that a parent

corporation cannot exercise the rights of its subsidiary. See id. at 336. Notably, Dr.

Menichello did not plead or prove that Collier HMA was operated as the mere

instrumentality of CHS so as to warrant a disregard of the distinction between Collier

HMA and its ultimate parent five or six tiers above it in the chain of ownership. See

generally Unijax, Inc. v. Factory Ins. Ass'n, 328 So. 2d 448, 454 (Fla. 1st DCA 1976)

(discussing the elements that must be proved to establish that a subsidiary entity is the

mere instrumentality of the parent).

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 In response to these points, Dr. Menichello argues here—as he did

successfully in the circuit court—that a proper application of section 542.335(1)(f) to the

merger transaction under review in this case requires us to look at the substance of the

transaction, not to the form by which it was structured. Dr. Menichello explains his

position as follows:

Here, CHS acquired HMA and all of its subsidiaries by
merging HMA into a wholly owned CHS subsidiary. All
ownership, control, and management of HMA and its
subsidiaries, including Collier HMA, succeeded to CHS as of
the date of the transaction. As a result of the merger, CHS,
through its wholly owned subsidiary, became vested with the
rights and duties of HMA. Thus, as the lower court correctly
found, CHS is the "successor-by-merger" of HMA and all of
its subsidiaries.

(Record references omitted.) Dr. Menichello concedes that Collier HMA survived the

merger transaction. Nevertheless, he contends that Collier HMA survived only "as a

wholly owned subsidiary and an employment arm of the successor, CHS, a total

stranger to the Employment Agreement with Dr. Menichello." Dr. Menichello concludes

that since Collier HMA is now nothing more than a subsidiary of CHS, it does not have

the right to enforce the restrictive covenant because of the absence of the necessary

authorization for enforcement by successors in the Agreement.

Based on the teaching of the Florida Supreme Court in Corporate Express

Office Products, Inc. v. Phillips, 847 So. 2d 406 (Fla. 2003), we must reject Dr.

Menichello's argument. In Corporate Express, the court affirmed that an analysis of the

enforceability of restrictive covenants after a stock purchase, asset purchase, or

corporate merger must be based on "the traditional principles of corporate law." Id. at

414. In other words, courts must rely on the "form of the commercial transaction" under

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review in determining the enforceability of a restrictive covenant after the completion of

a stock purchase, asset purchase, or corporate merger. Id. The court rejected the Fifth

District's reliance on a "culture and mode of operation" analysis in the case under

review. Id. The court also expressly disapproved what it characterized as the Fifth

District's substitution of "a novel test of changing corporate identity based on changes in

corporate culture and mode of operation for well-established principles of commercial

transactions." Id. (citing Phillips v. Corp. Express Office Prods., Inc., 800 So. 2d 618,

620 (Fla. 5th DCA 2001)). After expressing its disapproval of the Fifth District's

substance-over-form analysis, the court explained the rationale for the correct approach

to determining the enforceability of a restrictive covenant after the completion of a stock

sale, asset sale, or corporate merger as follows:

Reliance on changes in corporate culture and mode
of operation as a measure of whether an employer has
changed identity and therefore must obtain a consensual
assignment of a noncompete agreement would inject
unnecessary uncertainty into corporate transactions.
Changes in corporate culture occur frequently, often in
response to market forces and without a corresponding
change in corporate structure. As long as the other
prerequisites to the validity of a noncompete agreement are
met, neither a 100 percent stock purchase nor a merger
affects the enforceability of the agreement.

Id. Thus, the court rejected the approach adopted by the circuit court that would

attempt to ascertain the "substance" of the transaction instead of a more practical focus

on the transaction's structure following traditional principles of corporate and business

law.2

2
We understand that in Corporate Express the court considered section
542.33, Florida Statutes (1985), the version of the statute applicable to restrictive
covenants entered into before July 1, 1996. Section 542.335, Florida Statutes (Supp.

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 Accordingly, we must disapprove the effort to determine the question of

whether CHS was a successor to Collier HMA by trying to discover what had "really

happened" when the dust settled after CHS's acquisition of HMAI. Instead, we must

focus on what occurred following traditional principles of corporate and business law.

As we have seen, the merger transaction concluded with CHS in control of HMAI,

Collier HMA's ultimate parent. Nevertheless, there was no change in the ownership

structure or assets of Collier HMA. Granted, CHS became the ultimate parent of Collier

HMA as a result of the merger, but CHS's status as the ultimate parent of Collier HMA

did not give it the authority to enforce the restrictive covenant in the agreement. See

Cellco P'ship, 68 So. 3d at 917-18. Viewing what occurred based on traditional

principles of corporate law, no other entity emerged from the transaction as a successor

to Collier HMA. Tellingly, Dr. Menichello continued to be employed by and to receive

his compensation from Collier HMA. And, of course, Collier HMA could not be a

successor to itself. As the only other signatory to the Agreement, Collier HMA had the

right to seek enforcement of the restrictive covenant in its own contract. See Chen v.

Cayman Arts, Inc., No. 10-80236-CIV, 2011 WL 782279, *8 (S.D. Fla. Feb. 24, 2001). It

follows that Dr. Menichello's successor defense fails as a matter of law.

1996), replaced section 542.33 effective July 1, 1996. See ch. 96-257, §§ 1-2, Laws of
Fla. Nevertheless, the court's analysis of the factors to be considered in determining
the effect of a stock purchase, asset purchase, or a corporate merger in construing the
statute remains generally applicable. See Johnson Controls, Inc. v. Rumore, No. 8:07-
CV-1808-T-17TBM, 2008 WL 203575, *7 (M.D. Fla. Jan. 23, 2008) ("In Corporate
Express, the Florida Supreme Court determined that a successor corporation's ability to
enforce noncompete agreements entered into between employees and the predecessor
corporation depends on the type of business transaction or transfer.").

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 VI. CONCLUSION

For the foregoing reasons, the circuit court erred in entering the order

granting summary judgment and the final summary judgment in favor of Dr. Menichello.

Accordingly, we reverse the order granting summary judgment and the final summary

judgment and remand this case to the circuit court for further proceedings consistent

with this opinion.

Reversed and remanded.

MORRIS and LUCAS, JJ., Concur.

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