Affirmative defenses and compulsory counterclaims. In many instances, the consideration for an ex-employee’s non-compete and non-solicitation covenants was new or continued employment. If the former employer then breaches the employment contract — for example, by failing to pay all of the compensation and benefits to which the ex-employee was entitled — but nevertheless sues the ex-employee in an effort to enforce the covenants, the ex-employee probably will plead “unclean hands” (that is, one who seeks equity must do equity) as an affirmative defense. But here’s the rub: An ex-employee’s affirmative defense of unpaid compensation and benefits may derail the former employer’s covenant violation lawsuit, but the ex-employee may be held to have waived the right to collect the sums due her unless she also files a counterclaim.
Affirmative defense of former employer’s material breach of contract. Recently, Jumbo Sack Corporation sued an ex-employee in a Missouri state court for breach of a non-competition covenant. The ex-employee responded that Jumbo Sack’s failure to pay him all of the compensation to which he was entitled warranted the entry of summary judgment for him in the non-compete litigation. The trial court agreed. The appellate court reversed and remanded for a determination of whether Jumbo Sack materially breached its contract, holding that (a) only a material breach would preclude enforcement of the covenant, and (b) materiality is a question of fact which cannot be decided on a motion for summary judgment. Jumbo Sack Corp. v. Buyck, No. ED98134 (Mo. Ct. of Ap., 5/21/13).
Affirmative defense vs. compulsory counterclaim. In an unrelated recent Massachusetts court case, Sentient Jet, LLC sued two ex-employees for violating noncompetition and non-solicitation covenants. The ex-employees did not counterclaim but asserted as an affirmative defense that the covenants were unenforceable because Sentient failed to give them all the compensation and benefits to which they were entitled. After being instructed that “[Sentient] promised to provide a job for the [ex-employees] at a certain level of pay. If [Sentient] failed to pay the [ex-employees] according to the terms of the contract, then it cannot recover against [them] for breach of contract,” the jury returned a verdict for Sentient.
While the state court case was pending, the ex-employees sued Sentient in a Massachusetts federal court, alleging violation of federal and state statutes governing payment of wages, and breach of the employment contract. When the state court entered judgment for Sentient based on the jury verdict, the company moved for summary judgment in the federal case, arguing that (a) the state court judgment collaterally estopped the ex-employees’ statutory claims of unpaid wages, and (b) the Massachusetts compulsory counterclaim rule required dismissal of the counts alleging breach of contract. The federal court agreed and entered summary judgment for Sentient on all counts. Brennan v. Sentient Jet, LLC, Civil No. 12-cv-11519-LTS (D. Mass., 5/21/13).
Takeaway. Ex-employees, sued for violating covenants not to compete or solicit, may plead as an affirmative defense that the former employer materially breached their contract of employment. If the forum has a compulsory counterclaim rule (federal courts and some states do, Illinois and some other states do not), the ex-employees may not have the option of filing a separate breach of contract cause of action. Even if there is no applicable compulsory counterclaim rule, however, pleading “unclean hands” as an affirmative defense to the former employer’s complaint for violation of covenants may lead to a holding that the doctrine of collateral estoppel controls the breach of contract lawsuit.