Counterclaims Against a Former Employee Who Sues the Company

The first question: is the claim compulsory?

Before deciding whether a counterclaim is wise, the company has to know whether it has a choice. Texas Rule of Civil Procedure 97(a) requires a pleading to state as a counterclaim any claim within the court's jurisdiction, not the subject of a pending action, that the pleader has against an opposing party at the time of filing, if it arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require third parties the court cannot reach. A compulsory counterclaim that is not pleaded is barred in any later suit. Federal Rule of Civil Procedure 13(a) is the same in substance, and most discrimination suits are in federal court.

Whether an employer's claim arises from the same transaction or occurrence as the employee's is a fact question, and courts in employment cases have gone both ways. A counterclaim that the employee breached the same employment agreement he sues on is almost always compulsory. A claim that the employee stole from the company two years before the termination he challenges is more often permissive, which means the company may bring it now or later. Rule 97(b) permits any counterclaim against an opposing party whether or not it arises from the same facts. The safe course when the question is close is to plead the claim, because the cost of pleading a permissive claim is low and the cost of losing a compulsory one is the claim itself. The general decision framework is in whether a business should file a counterclaim.

The claims that actually work

• Breach of contract. Confidentiality and non-solicitation agreements, repayment of a signing bonus or relocation advance with a documented clawback, unreturned draws against commission, and the return-of-property provision the employee ignored. The agreement, the breach and the number are all in documents.
• Breach of the duty of loyalty. Pre-departure solicitation of customers or diversion of opportunities while still employed, covered in whether employees owe a duty of loyalty in Texas.
• Trade secret misappropriation. Under the Texas Uniform Trade Secrets Act and, in federal court, the Defend Trade Secrets Act, where the employee took confidential information on the way out. This claim brings injunctive relief and, for willful and malicious misappropriation, exemplary damages and attorney's fees.
• Conversion and theft. Company property not returned, funds misapplied, expense fraud. The Texas Theft Liability Act adds attorney's fees to the prevailing party, which cuts both ways and is addressed in the Texas Theft Liability Act in business disputes.
• Breach of fiduciary duty, for officers and managers who owed one, with the forfeiture and disgorgement remedies that follow.

What does not work: a counterclaim for the cost of defending the suit, for the employee's poor performance, for “damage to morale,” or for the company's attorney's fees in the absence of a contract or statute that awards them. These are the counterclaims that get dismissed and that convert a defensible case into one with a retaliation count.

The retaliation risk

Title VII, 42 U.S.C. § 2000e-3(a), makes it unlawful for an employer to discriminate against an employee or former employee because he or she has opposed an unlawful practice or has made a charge, testified, assisted or participated in an investigation, proceeding or hearing. Texas Labor Code section 21.055 is the state equivalent. In Burlington Northern & Santa Fe Railway Co. v. White (2006), the United States Supreme Court held that the anti-retaliation provision reaches any employer action that would have been materially adverse to a reasonable employee, meaning one that well might have dissuaded a reasonable worker from making or supporting a charge of discrimination, and that it is not limited to actions affecting the terms of employment.

A counterclaim is an employer action against a person who has made a charge. Whether it is retaliatory depends on why it was filed. A counterclaim with a genuine basis, brought on a claim the company would have pursued anyway, is the exercise of a legal right. A counterclaim with no real basis, filed to make the lawsuit expensive and frightening, is the kind of action that might dissuade a reasonable worker, and the employee will plead it as a new act of retaliation, which is often easier to prove than the original discrimination claim. The dividing line is the merit and the motive, and both are proved from the company's own documents and testimony about when it learned of the conduct and why it decided to sue.

After-acquired evidence: a defense that is not a counterclaim

Sometimes the company learns, in discovery or in its own investigation after termination, that the employee did something that would have justified firing on the spot: falsified an application, stole, or took confidential files. That evidence has a specific use that does not require a counterclaim. In McKennon v. Nashville Banner Publishing Co. (1995), the United States Supreme Court held that after-acquired evidence of wrongdoing that would have led to termination does not bar the employee's discrimination claim, because the employer's unlawful motive still occurred, but it limits the remedy. Reinstatement and front pay are generally not appropriate, and back pay is calculated from the date of the unlawful discharge to the date the new information was discovered. To get that limitation the employer must establish that the wrongdoing was of such severity that the employee in fact would have been terminated on those grounds alone.

The doctrine is pleaded as a defense and proved with the company's actual practice: evidence that it has terminated other employees for the same conduct. It does not recover money for the company, but it can reduce a large back-pay claim to a small one, and it often has more practical value than a counterclaim for the same conduct.

The anti-SLAPP wrinkle

A former employee sued on a counterclaim may try to dismiss it under the Texas Citizens Participation Act, Civil Practice and Remedies Code chapter 27, arguing that the counterclaim is a response to the employee's exercise of the right to petition, that is, the lawsuit itself. The statute's exemptions limit that move. Section 27.010(a)(5) provides that the Act does not apply to a legal action arising from an employer-employee or independent contractor relationship that seeks recovery for misappropriation of trade secrets or corporate opportunities, or that seeks to enforce a non-disparagement agreement or a covenant not to compete. Those counterclaims proceed without the early-dismissal motion. Other counterclaims, such as a defamation claim over what the employee said about the company, remain exposed to it, and section 27.009(c) lets a court award fees against the company if a compulsory counterclaim dismissed under the Act was frivolous or filed only for delay.

What the employee's lawyer will do with a counterclaim

• Plead retaliation, adding a count that the counterclaim itself is an adverse action taken because of the charge or suit.
• Demand the company's investigation file, including when each fact was learned, to show the claim was known and ignored until the lawsuit.
• Move to dismiss or for summary judgment on a counterclaim that lacks a contract, a statute or evidence of damages.
• Use it at mediation as proof of bad faith, and before a jury as evidence of the company's attitude toward employees who complain.
• Welcome the fee exposure where the counterclaim rests on a statute that awards fees to the prevailing party, because a dismissed counterclaim can mean fees for the employee.

Example

Suppose a Dallas staffing firm terminates a recruiter for poor production and she sues in federal court for sex discrimination and retaliation. In preparing its defense the firm reviews her email and finds that, in her last two weeks, she forwarded the firm's candidate database and client rate sheets to her personal account and that she has since placed two candidates with a former client through a new agency. Her agreement contains confidentiality and twelve-month non-solicitation covenants.

The firm has a compulsory counterclaim for breach of the agreement and a trade secret claim, both arising from the employment relationship at issue and both exempt from the anti-SLAPP statute. It files them with its answer, seeks an injunction on the database and documents its damages from the two placements. It also pleads after-acquired evidence: the firm's policy and prior terminations show it would have fired her for the data transfer alone, which caps back pay at the date the forwarding was discovered. The counterclaim is defensible against a retaliation charge because it was filed as soon as the conduct was found, rests on a signed agreement, and seeks relief the firm would have sought from any departing recruiter. A counterclaim for her “failure to meet quota,” by contrast, would have had no legal basis and would have handed her the retaliation count.

The decision in four questions

1. Is it compulsory? If it arises from the same facts as her suit, plead it or lose it.
2. Is it real? A signed agreement or a statute, a provable breach, and damages or an injunction the company actually wants. If any of the three is missing, do not file.
3. When did the company learn of it, and what did it do? A claim pursued promptly looks like enforcement; one unearthed to answer a lawsuit looks like retaliation.
4. Does after-acquired evidence do the job instead? Where the goal is to shrink the employee's recovery rather than to collect, the defense may be enough.

These are judgments a litigator makes with the employee's complaint, the agreements and the investigation file in hand, usually within the deadline for the company's answer. How the company handles the charge stage that precedes most of these suits is covered in what to do when the company receives an EEOC charge. Tina Wysk defends employers in Dallas state and federal courts and brings the company's own claims when they are worth bringing.