Dealt an Unclean Hand: Employer’s Breach Makes a Strong Defense To Noncompete

A basic tenet of contract law is that a person seeking to enforce the contract must have fully performed his obligations under the contract.  Stated simply, you can’t complain about someone else’s breaches if you have breached the contract.  As many courts have been fond of saying, “one who seeks equity must do equity.”  And, in many non-compete cases, the issue arises as to whether the employer has fulfilled all of its contractual obligations under an employment agreement, and if not, the employee can use this “unclean hands” defense in an action to enforce a non-compete agreement.

The South Carolina case most clearly to rely on this principal in denying enforcement of a non-compete is Associated Spring Corp. v. Roy F. Wilson & Avnet, Inc. 410 F. Supp. 967 (D.S.C. 1976). In that case, Wilson was hired by Associated Spring as a salesman. His “Salesman’s Agreement” included a non-solicitation clause which prohibited Wilson from soliciting Associated Spring’s customers for two years after he ceased employment.  Wilson worked for Associated Spring for almost two and a half years, at which time Wilson resigned his position.  Wilson said he resigned from Associated Spring because the company had breached his employment contract by assigning Wilson’s exclusive accounts to other salesmen.

Not long after Wilson left Associated Spring, he went to work for Avnet, a business competitive with his former employer. Of course, it was not long before Wilson began calling on some of his former customers.  Associated Spring sued.  Wilson and his new employer, Avnet, admitted that he had been violating the non-solicitation by making sales calls to Associated Spring customers, but argued that the restrictive covenant was unenforceable because of Associate Spring’s breach of Wilson’s employment agreement.

The U.S. District Court, applying South Carolina law, agreed and held that Associated Spring’s breach of the employment contract prevented the company from enforcing Wilson’s non-solicitation obligations.  The District Court relied on the “clean hands” doctrine in ruling for Wilson and Avnet.

Twenty-four years after the Associated Spring case, the South Carolina Court of Appeals endorsed the District Court’s holding in Williams v. Riedman,339 S.C. 251, 529 S.E.2d 28 (S.C. App. 2000).  Interestingly, the Court of Appeals extended the holding by ruling that the breach of a related albeit separate agreement could also be a defense to a breach of contract action.  The court stated:

“Although the Non-Piracy Agreement was given to Williams in the form of a letter which was separate and arguably independent from the employment manual, this fact does not appear dispositive in light of the analysis in Associated Spring. In Associated Spring, the parties specifically agreed in a written contract that the restrictive covenant was independent and enforceable despite a claim or cause of action against the corporation. Nevertheless, the court held the corporation’s breach precluded it from enjoining Wilson from further violating the restrictive covenant and from recovering damages for past violations. Here, there were no specific contractual provisions, but rather, Williams’ status as an at-will employee was altered by the employee manual, related documents, and oral representations. Because the contract is implied in this case, the reasoning in Associated Spring is even more persuasive.”

So, it would appear that the breach of any obligation in an employment contract (oral or written, express or implied) will be a defense to the enforcement of an ancillary non-compete or non-solicitation agreement.  In deciding the timing of an exit, an employee might want to consider breaches of an employment obligations by her employer, including the breach of the implied covenant of good faith and fair dealing. Even a unilateral change of employment terms might provide a kernel an argument that grows into a defense that beats a non-compete.

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