North Pacific Lumber Co. v. Oliver
596 P.2d 931, 1979 Ore. LEXIS 991, 286 Or. 639 (1979)
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Rule of Law:
The doctrine of unclean hands bars an employer from receiving equitable relief, such as the enforcement of a non-compete covenant, when the employer has engaged in serious misconduct that is integrally related to the employment relationship, particularly when the employee's duties required participation in the wrongdoing. However, an employee who knowingly participated in the employer's misconduct may also be barred by unclean hands from recovering affirmative relief, such as attorney fees.
Facts:
- In February 1967, North Pacific Lumber Co. hired defendant Oliver as a lumber trader.
- Oliver's employment contract contained a two-year non-compete agreement.
- In 1969, North Pacific promoted Oliver to assistant manager of its hardwood division.
- During Oliver's employment, traders in the hardwood division were encouraged by management to make improper profits on customer claims by misrepresenting settlement amounts to suppliers and keeping the difference.
- As assistant manager, Oliver was responsible for supervising these activities, and his compensation was based in part on these improper profits.
- In April 1976, Oliver voluntarily terminated his employment with North Pacific.
- Soon after his resignation, Oliver began working for Tree Products Company, a direct competitor of North Pacific.
Procedural Posture:
- In May 1976, North Pacific Lumber Co. (plaintiff) filed suit in circuit court (a trial court) against Oliver (defendant), seeking an injunction and damages for breach of the non-compete agreement.
- Oliver asserted the defense of 'unclean hands' based on North Pacific's business practices and counterclaimed for attorney fees.
- The trial court found the contract valid but refused to enforce it because of plaintiff's unclean hands and dismissed the complaint.
- The trial court awarded defendant Oliver $105,000 in attorney fees.
- Plaintiff North Pacific Lumber Co. (appellant) appealed the dismissal and the attorney fees award to the Supreme Court of Oregon.
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Issue:
Does an employer's systematic and improper business practice, in which an employee was required to participate as a condition of employment, bar the employer from enforcing a non-compete agreement against that employee under the doctrine of unclean hands?
Opinions:
Majority - Holman, J.
Yes, an employer's improper business practices in which an employee must participate can bar the enforcement of a non-compete agreement under the doctrine of unclean hands. A court of equity will not enforce a contract of employment where performance involves the employee's participation in the employer's illegal or unethical wrongdoing. The court found that North Pacific's practice of fraudulently profiting from customer claims was a common, encouraged practice in the department where Oliver was assistant manager. His position required him to oversee and participate in this misconduct. This misconduct was not collateral but was directly related to the totality of the employment relationship, which is the subject matter of the suit. Therefore, North Pacific came to the court with 'unclean hands' and is barred from receiving equitable relief. However, the court also found that Oliver possessed unclean hands, as he knowingly participated in and personally profited from the fraudulent scheme for over seven years. Because both parties were culpable, the court will not grant affirmative relief (attorney fees) to Oliver, choosing instead to leave the parties as it found them.
Analysis:
This decision significantly clarifies the scope of the unclean hands doctrine in employment contract disputes. It establishes that the court will examine misconduct occurring throughout the entire employment relationship, not merely at the time of the contract's execution. The case sets a precedent that an employer forfeits its right to equitable enforcement of a non-compete covenant if the job itself requires the employee to engage in unethical or illegal practices. Furthermore, it demonstrates the doctrine's symmetrical application by denying affirmative relief to a 'prevailing' employee who was complicit in the wrongdoing, reinforcing the maxim that equity will not aid a party to a corrupt transaction.
