A recent federal Fifth Circuit Court of Appeals case affirmed a jury verdict that an employer’s prior material breach of an employment contract excused an employee’s subsequent breach of a noncompete in the contract, Ramsey v. Sheet Pile, L.L.C., 130 F. 4th 193 (5th Cir. 2025).
Ramsey was hired as Sheet Pile’s CFO and signed an employment contract that contained a covenant not to compete in consideration of confidential information. After Ramsey went to work, Sheet Pile claimed it discovered various improprieties committed by Ramsey and terminated him and then refused to pay him his earned salary of $5,000.00. After his termination, Ramsey formed his own consulting company, began to work with one of his employer’s competitors and sued Sheet Pile for his unpaid salary, a bonus and on a note Sheet Pile executed in his favor. Sheet Pile counterclaimed for breach of the employment agreement and sought damages not specified or discussed by the Fifth Circuit and injunctive relief to prohibit Ramsey from working for a competitor and from soliciting its customers and vendors. Sheet Pile later dropped those requests for injunctive relief but sought an injunction to compel Ramsey to return its confidential information.
The case was tried to a jury which found in favor Ramsey on his claim for unpaid salary and on the note. The jury also found that Ramsey breached his employment agreement but refused to find him liable because his duty to perform had been excused by Sheet Pile’s prior material breach of the employment contract. Under Texas law, when one party to a contract commits a material breach of that contract, the other party is excused from any obligation to perform. Hernandez v. Gulf Group Lloyds, 875 S.W. 2d 691, 692 (Tex. 1994). On appeal, Sheet Pile challenged the jury finding on prior material breach, arguing that the facts of the case were legally insufficient to support it. In analyzing the record, the Fifth Circuit found there was legally sufficient evidence to support the verdict of a prior material breach because after Sheet Pile failed to pay Ramsey his salary, he formed his consulting company and started working with Sheet Pile’s competitor, either of which action may have violated the Ramsey’s covenant not to compete in the employment contract. The Fifth Circuit affirmed the trial court’s judgment based on the jury’s verdict that a prior material breach by Sheet Pile excused Ramsey’s later breach of the contract and rejected Sheet Pile’s argument that the evidence showed that Ramsey elected to treat the employment contract as continuing after his employer’s breach which can be fatal to the defense of prior material breach.
The trial court refused to grant Sheet Pile’s requested injunction for return of its confidential information because it had failed to show that the Ramsey was likely to disclose the information in the future. The Fifth Circuit found that the trial court did not abuse its discretion in denying the injunction, especially since Sheet Pile did not raise in the trial court its argument on appeal that Ramsey admitted to retaining documents that contained confidential information. Since it remanded the case to the trial court on the issue of prejudgment interest on the note, the Fifth Circuit, without discussing the effect of Sheet Pile’s prior material breach, left it open to the trial court to consider on remand whether injunctive relief to return documents containing the information would be appropriate.
While we expect to see the issue of prior material breach raised in noncompete cases based on this opinion, this case should be instructive to employers. First, if the employer had included the noncompete in a confidentiality and nondisclosure agreement separate from the employment contract, then the employee should not have had a defense of prior material breach with respect to claims based on the noncompete since the non-payment of salary would have been related only to the employment contract. Second, even with the noncompete being in the employment agreement, the employer could have avoided the issue of prior material breach by paying the CFO his earned salary when it terminated him.