Can an employee avoid the enforcement of a non-compete agreement when an employer is engaged in unethical or unlawful activity?

Consider the following situation: A company is engaged in unethical activity.  An employee resigns from the company due to the company’s misconduct. He just does not want to work for the unethical, even potentially law-breaking, employer anymore. The employee then attempts to work at his former company’s competitor, but finds that he is prohibited from doing so because of a non-compete agreement that he signed with his former employer.  Can the employee void or escape the obligations of the non-compete agreement based on his former employer’s wrongful conduct?  One might think that a non-compete agreement would be hard for the unethical or even law-breaking employer to enforce, but the answer to that question in Texas is that the non-compete is likely to be enforced by the courts unless the employee is able to show that he was directly harmed by the employer’s misconduct, or that the misconduct related to the non-compete agreement.

The doctrine that forms the basis of an argument to void a non-compete agreement on the grounds of an employer’s unethical or unlawful conduct is referred to as the “unclean hands doctrine” (also sometimes called the “clean hands doctrine”). The unclean hands doctrine is a defense to “equitable relief” such as an injunction or restraining order. One party asserts that an opposing party is not entitled to this kind of relief because the opposing party has committed some sort of wrongdoing, has also engaged in bad behavior, or are themselves liable for an offense.  The unclean hands defense has been raised by defendants in an attempt to prevent the enforcement of non-compete agreements, but Texas courts only allow the use this defense under narrow circumstances.

In Central Texas Orthopedic Products, Inc. v. Espinoza, an employee attempted to avoid the enforcement of a non-compete agreement when he went to work for a competitor in direct violation of the agreement because his employer had violated a separate compensation agreement, by failing to pay all wages and commissions owed to him.  The San Antonio Court of Appeals held that since the employer’s failure to pay Espinoza was a breach of an agreement that was separate from the non-compete agreement, the employer’s breach of the separate compensation agreement could not constitute an unclean hands defense to the non-compete agreement.   Finding that the obligations were separate, the court held that the doctrine of unclean hands does not apply when a party is guilty of inequitable conduct that relates to a transaction that is separate from the one in dispute.  Another example can be found in SA Bay LLC v. Hall, a federal district court case from the Southern District of Texas in which a restaurant owner brought an action seeking to enforce a non-compete clause against a competitor.  The defendant sought to assert the affirmative defense of unclean hands based on the plaintiff’s alleged violation of the Texas Business and Commercial Code through the operation of its business without having registered its assumed name.  The court denied the use of the unclean hands defense after finding no evidence that the unlawful action personally injured the defendant, noting that in the Fifth Circuit, the defense of unclean hands requires a defendant to show that he has been personally injured by the plaintiff’s conduct or improper acts.  Other Texas courts have similarly held that the unclean hands defense requires a showing that the employee was directly harmed by the employer’s misconduct, or that the misconduct related to the non-compete agreement.

Employees seeking to make a move often come to us asking if their non-competes are still valid even though his or her employer has been a rascal or worse. Unfortunately, we usually have to advise that he or she will still have to deal with the non-compete on its terms and find a solution that works for both parties.