Chancery Addresses Statutes of Limitations Issues Arising Out Employment-Related Claims

Following an employment dispute between former employers and employees of a Delaware limited liability company, the employers (“Plaintiffs”) filed an action in the Delaware Court of Chancery seeking rescission of a contract recently executed by the parties. The contract at issue governed the percentage of fees to which the employees (“Defendants”) were entitled for any business the employees originated for the LLC. According to Plaintiffs, Defendants breached the contract by engaging in “self-marketing campaigns” through which Defendants failed to recognize any affiliation with the LLC and which caused a disparity in the amount of fees each party believed Defendants were entitled to. In a series of counterclaims, Defendants argued that Plaintiffs owed Defendants certain sums of money pursuant to the contractual relationship. Defendants asserted that Plaintiffs owed those sums based on the Defendants’ “expectancy in the contracts” which were lost after Plaintiffs purportedly breached the contract and forced Defendants to “resign and lose their expected profits from [the contract].”

In response to the counterclaims, Plaintiffs moved for judgment on the pleadings on several bases, including by asserting a statute of limitations defense, arguing that several of Defendants’ counterclaims were barred by 10 Del. C. § 8111. Under Section 8111, claims for damages arising out of an entitlement to wages, salary, overtime or other benefits are subject to a one-year statute of limitations. Defendants, in response, argued that the claims were subject to a three-year statute of limitations under 10 Del. C. § 8106 because the claims arose out of a contractual relationship that had not yet been completed.

The Court of Chancery largely rejected Defendants’ arguments that the claims were subject to Section 8106’s three-year statute of limitations. To determine which limitations period applied, the Court performed a “temporal test,” asking whether the claims arose “from services which have [already] been performed,” or whether the claims arose from the expectation of the contract’s performance. The Court explained that while it is true that the three-year limitation applies to “claims arising upon or after termination of the employer-employee relationship,” the claims in this action were largely based on “unpaid compensation for services [already] performed” during the employment period and were therefore subject to Section 8111. Because Defendants had not delineated which portions of their claims were attributable to services already performed, the Court asked the parties to submit supplemental briefings to account more precisely for the alleged damages.