Employment & Labor Publications

EMPLOYER'S BREACH OF CONTRACT MAY INVALIDATE NON-COMPETE

By Courtney A. George

In Connecticut, an employer’s breach of an employment agreement is a recognized defense to the enforcement of a covenant not to compete.  The breach must be material, such that it deprives the employee of a substantial benefit for which he clearly bargained and reasonably expected.  However, the employee’s failure to timely or properly object to the breach may constitute waiver of the defense.

Recent Superior Court decisions provide guidance.  In Heritage Benefit Consultants, Inc. v. Cole, an employer could not enforce a non-compete agreement against a former employee because it failed to deliver promised consideration in exchange for the employee’s non-compete.  There, the employer and employee had entered into a written employment agreement containing a non-compete provision.  Consideration for the agreement included a 3% stock interest.  Despite the employee’s repeated requests for the stock, the employer never delivered the stock or equivalent value.  The court concluded that the employer’s failure to deliver the promised consideration constituted a material breach of the employment agreement and that such breach discharged the employee from his obligations under the non-compete.  In reaching its conclusions, the court reasoned that the breach was material because the employee would not have entered into the agreement without the stock provision and failure to deliver the stock or equivalent value deprived the employee of the benefit of his bargain.  As a result, the employee was free to solicit the employer’s clients and employees for his competing business.

By contrast, in Merryfield Animal Hospital v. Mackay, the court found that a former employee had waived the employer’s material breach of an employment agreement as a defense.  There, the employer sought to enforce a non-compete provision contained in the parties’ employment agreement.  The employee claimed that the non-compete was unenforceable because the employer had materially breached the agreement by engaging in inappropriate and unethical practices in the operation of its business.  Despite evidence that the employer had engaged in the alleged practices, the court concluded that the employee had waived the defense because he continued in his employment after becoming aware of the alleged breaches and accepted all the benefits of his employment without ever notifying the employer, orally or in writing, that he would not be bound by the non-compete agreement due to those breaches.

Under the Heritage and Merryfield decisions, employers may not expect to enforce non-compete provisions against employees unless they have met any and all contractual obligations owed to the employees.  At the same time, employees may not sit on their rights.  In order to preserve a defense based on an employer’s material breach of an employment agreement, employees must timely register their objections to any breach and indicate that, due to the breach, they will not be bound by the non-compete.  Otherwise, an employee may waive the defense altogether.