The Unclean Hands Defense in Texas Non-Compete Cases

We are blogging on “Non-competes, Trade Secrets, Fiduciary Duties, and the Inevitable Disclosure Doctrine.” Mark Oberti has prepared a detailed paper on all of these issues, which can be found here.

In Central Texas Orthopedic Products, Inc. v. Espinoza, NO. 04-09-00148-CV, 2009 WL 4670446 (Tex. App.–San Antonio Dec. 9, 2009, pet. denied) (unpublished), the employee tried to avoid the enforcement of his non-competition agreement by raising the defense of “unclean hands.” The equitable doctrine of “unclean hands” requires that a party seeking equity must come to court with clean hands. In re EGL Eagle Global Logistics, L.P., 89 S.W.3d 761, 766 (Tex. App.–Houston [1st Dist.] 2002, orig. proceeding [mand. denied]). The doctrine of unclean hands will be applied only to “one whose conduct in connection with the same matter or transaction has been unconscientious, unjust, or marked by a want of good faith, or one who has violated the principles of equity and righteous dealing.” In re Jim Walter Homes, Inc., 207 S.W.3d 888, 899 (Tex. App.–Houston [14th Dist.] 2006, orig. proceeding) (quoting Thomas v. McNair, 882 S.W.2d 870, 880-81 (Tex. App.–Corpus Christi 1994, no writ.)).

In Central Texas Orthopedic Products, Inc. v. Espinoza, CTOP sued Espinoza after he resigned his employment and went to work for a direct competitor in violation of a noncompetition agreement he signed with CTOP. Espinoza contended that the noncompetition agreement could not be enforced against him because CTOP had violated a separate Compensation Agreement by failing to pay all wages and commissions owed to him. The trial court agreed and granted summary judgment for Espinoza. The San Antonio Court of Appeals reversed the judgment for Espinoza and held that since CTOP’s alleged failure to pay Espinoza did not grow out of the obligations outlined in the noncompetition agreement, the alleged breaches of the separate Compensation Agreement could not, as a matter of law, constitute an unclean hands defense to the noncompetition agreement. See also French v. Community Broadcasting of Coastal Bend, Inc., 766 S.W.2d 330, 334 (Tex. App.–Corpus Christi 1989, writ dism’d w.o.j.) (evidence did not require finding that the employer’s allegedly unclean hands barred enforcement of covenant not to compete against former general manager for television station; the covenant itself stated it was to be construed as agreement independent of any other contractual provision and that other causes of action should not constitute defense to covenant, and the contract contained a clause allowing for recovery of damages for breach of contract).