In a recent decision, the Colorado Court of Appeals affirmed a lower court’s ruling that a former executive for a credit-card processing company did not breach his employment agreement when he poached company clients, because the company materially breached the employment agreement first. Accordingly, even though the restrictive covenant was otherwise enforceable, the employer could not recover damages caused by the former employee’s solicitation.

Background

The Colorado Court of Appeals decision in Zuni Payments, LLC v. Kosarek upheld a trial-court decision that awarded the defendant over $30,000 in damages for counterclaims on unpaid severance and unused PTO owed to him by the plaintiff, Zuni Payments d/b/a Banctek Solutions, his former employer.

The defendant signed an employment agreement containing exclusivity and non-solicitation provisions when he began employment in 2019. In March 2020, Banctek orally advised the defendant that his initial agreed-upon $200,000 salary would be reduced to $100,000, and later informed him that he would be moving to a commission-only compensation structure. Thereafter, the defendant and Banctek entered negotiations for an independent-contractor agreement and the defendant formed his own company, Paybase, LLC, to receive payments from Banctek, but no agreement was ever finalized. The company soon after terminated the defendant’s employment and did not pay him severance or compensate him for his unused PTO.

In 2021, Banctek sued the defendant and Paybase, alleging that the defendant violated the exclusivity and non-solicitation provisions in his employment agreement by working with Banctek’s prospective clients after his termination and by using his employment with Banctek to operate for his own benefit. The defendant counterclaimed for breach of contract (among other things), arguing that he was not bound by the exclusivity and non-solicitation clauses because Banctek materially breached the employment agreement first when it failed to pay his earned salary, PTO, and severance.

After a bench trial, the trial court determined that the non-solicitation provision met the exceptions of Colorado Revised Statutes §8-2-113 and that the provision was reasonable and enforceable. Nevertheless, the trial court judge ruled that the defendant was excused from compliance with the non-solicitation clause because Banctek breached the contract first by failing to follow its termination requirements and failing to pay severance and accrued PTO. The trial court awarded Banctek $7,684.62 for unused PTO, $23,076.92 for six weeks of severance pay, and over $100,000 in attorneys’ fees and costs.

On appeal, the Court of Appeals focused primarily on Banctek’s first breach and affirmed the trial court’s judgment.

Implications for Colorado Employers

The Zuni case is a reminder that an employer’s prior breach of an employment agreement can, at least in some instances, excuse the employee’s performance under the agreement—including post-employment restrictive covenants. Colorado employers should therefore act carefully in two regards when they consider entering into and then enforcing restrictive covenants (in addition to compliance with § 8-2-113). First, employers should use caution when drafting agreements that combine terms of employment with non-solicitation or other restrictive covenants, and consider separating core employment terms from post-employment obligations or otherwise severing one obligation from another. Second, to avoid a situation like the Zuni case, employers seeking to enforce restrictive covenants should scrupulously comply with their own contractual obligations in the first place.