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Employees must be careful when preparing to compete against their current employer. If done incorrectly, the employee could face lawsuits and significant monetary damage claims. Accordingly, it is vitally important that employees are careful to abide by all contractual and other legal obligations owed to their employer.
First, many employees will have contractual obligations to their employers. These can include agreements protecting proprietary and confidential information, prohibiting solicitation of employees or clients, and/or prohibiting competition. Agreements could also include conflict-of-interests policies prohibiting employees from taking actions, while employed, that create a conflict of interest with their employer. So, before preparing to compete, employees should have legal counsel review any/all contractual obligations they have to their employer.
Second, all employees, while employed, have a duty of loyalty to their employer. The duty of loyalty means what is says – while employed, the employer has the right to expect, and the employee has a duty to be, loyal to the business interests of the employer. This means that the employee will not do anything directly contrary to the business interests of the employer (for example, taking a business opportunity for himself/herself).
Third, all employees must be aware of state and federal laws protecting employer trade secrets. The District of Columbia, Maryland and Virginia all have Trade Secrets Acts. Further, the Defend Trade Secrets Act provides a federal cause of action for trade secret theft. There can also be state or federal criminal liability for trade secret theft. So, be careful and do not take employer information while preparing to compete – and remember, almost anything you do via computer leaves a digital trail. So, if you email yourself documents, download client contacts and contracts, and the like, you likely will get discovered.
Accordingly, what can an employee to prepare without getting into trouble? An employee’s preparatory actions can fall into two general categories: permissible or impermissible.
Please note, courts review these matters based on the circumstances on each case. Actions listed as permissible below will generally be permissible but should also be reviewed based on overall circumstances. Nothing in this article should be considered legal advice and any employee preparing to compete should consult legal counsel to review their unique circumstances.
The following actions are permissible, meaning that an employee can partake in them even if there is a non-compete provision in place and the employee is still working for the employer:
- Incorporating a business
- Negotiating for the purchase of a competing entity or business (unless it is opportunity that employer may have considered if known about – so, should employee have brought opportunity to employer)
- Negotiating a lease for the new business and/or leasing office space generally
- Obtaining a telephone listing for the new business
- Purchasing machinery, equipment or supplies for the new business
- Developing a business plan
- Creating / printing, but NOT DISTRIBUTING, announcements about the new business
- Registering a trademark for the new business and/or reserving a name for the business
- Conducting preliminary research and development to determine the feasibility of starting a business and/or gathering basic information
- Planning for financing of the business and/or securing financing for the business
- Opening a bank account for the business
- Developing a marketing plan, creating advertisements, etc.
In most cases, preparatory actions that create and lay the foundation of the new business are allowed so long as there is no interaction or announcement made to the public while the employee is still employed. So long as the employee keeps their plans to him/herself and their business partner(s) (and advisors), their actions should not violate their obligations to their employers.
As a general rule, the preparing employee should do nothing that harms his/her current employer. And they should not, in any manner, take any of the employer’s proprietary or trade secret information. If in doubt, consider what a jury would think of your actions – if they would think you were taking actions that harmed your employer, don’t do them.
The following actions are impermissible and violate contractual and/or legal obligations. If an employee performs any of these actions when working for a current employer, they will likely expose themselves to a potential lawsuit:
- Using employer equipment, property, or time to prepare to compete. If you are preparing to compete, do it with your own equipment on when you are not being paid to work for your current employer.
- Use of other employees’ time to further their competition plans.
- Use of, copying, downloading employer’s confidential information. Examples include: customer lists, employee information, terms of customer contracts, business and marketing plans, trade secrets, or any other non-public information tending to give employer a competitive advantage.
- Don’t take, borrow or steal any of your employer’s information. Period.
- Usurping / stealing business opportunities from the current employer – in other words, if you have client that comes to you with potential deal, don’t say, “Can you wait a month, I may have another company that could help you.”
In each of these examples, the preparing employee is violating the rights of his/her current employer by using time, equipment, information or business opportunities that belong to the employer. Doing any of these items is the surest way to face a lawsuit. Just don’t do it.
Conclusion: Starting your own business is exciting. Planning and preparing to start your business is exciting. But, if you are employed and are planning on competing against your current employer, be sure you are careful. Meet with an attorney. Understand any contractual prohibitions. Make sure you do not breach your duty of loyalty. Don’t steal any trade secrets.
And remember, if you are a key executive or client relationship manager (or similar position) and your departure and establishment of a competing business will harm your current employer, it is more likely that your employer will seek to protect their business by filing a lawsuit against you.
General Counsel, P.C. attorneys represent both businesses and employees in cases where employees have left to start competing businesses (or joined competing businesses). If you need assistance, contact our attorneys at email@example.com, call 703-556-0411, or visit: www.gcpc.com.
If you need more guidance or information, contact the employment law experts at General Counsel, PC today at 202-360-4230. Attorneys at General Counsel, PC are specialized in labor and employment law and have experience working with business owners and individuals across Virginia and the DC Metro area, including Fairfax County, Arlington, Loudoun County, and Prince William.