Michael was employed by a a compaand supplies used in hot stamp decorating. When he started working, he signed a statement agreeing not to disclose any information acquired during his-employment relating to the company's inventions, trade secrets, or systems, or any other confidential information regarding the property and business affairs of the company. In addition, he agreed not to use such information in competition with the company.
Through his job, Michael met and became friendly with Robert, who oned a company that sold marking tools to Michael's employer. Michael began favoring Robert's company with orders; the volume of those orders jumped from $12,500 for the previous year to $81,000 in the next 14 months. In addition, Michael began ordering patterns and models from a second company, which was also owned by Robert.
Then Michael and Robert formed a corporation of their own. Several months later, Michael quit his job and, through the new corporation, began producing and selling material used for hot stamp decorating -- in competition with his former employer.
The former employer sued Michael and Robert for misappropriating the manufacturing procedures manual, bonding technique, die-manufacturing technology, customer lists, project data, and other alleged trade secrets. The former employer also claimed that Michael had diverted orders to Robert's companies to help finance this new, competing venture. The judge awarded nearly $200,000 in damages to the former employer.
If you are thinking of leaving your employer to start a competing business of your own, don't be unduly discouraged by Michael's case -- but do proceed cautiously. By and large, the law favors mobility in the business world. You have a basic right to pursue your trade or calling without restraint. However, if you compete unfairly, a court may require you to pay damages to your former employer and may issue an injunction that severely limits your method of doing business.
By knowing the legal rules, you can reduce your chances of being hit with a costly lawsuit. Five legal claims are most commonly made against an ex-employee
1. You competed while working for us.
As an employee, you owe your employer loyalty. You are obligated, by law, to further your employer's business interests. But while you can't compete with your employer before quitting your job, you can plan and prepare for your new business venture.
It is legally acceptable, for example, to meet with colleagues to plan for a competing business. Similarly, you can safely meet with advisers -- your accountant, banker, and lawyer. And it is all right under the law to invite fellow employees to join you in your new business, as long as you observe certain precautions.
Other steps you can take safely, while already employed, include: forming a corporation or partnership; ordering materials, equipment, and stationery for your new company; and renting space.
You can tell current customers about your long-range plans, but be careful not to solicit their business or suggest that they refrain from placing orders with your present employer.
You are not required to inform your employer about your plans to leave.
What steps can get you in trouble?
* Disclosing trade secrets or other confidential information to your new associates. Trade secrets include such diverse examples as the formula for Coca-Cola, a soap company's process for manufacturing a detergent, or a glass company's technique for producing curved windshields.
* Taking copies of confidential documents or samples of products or parts.
* Entering into contracts with customers or suppliers for your own benefit rather than your employer's.
2. You broke a vow not to compete.
Suppose you have agreed in writing that you won't compete with your employer if rou leave your present job. Are your hands tied? Maybe not. Statutes in at least a dozen states make "covenants not to compete" unenforceable or severely limit when they can be used.
And where the legislature hasn't specifically acted, the courts may refuse to enforce restrictions that are unfair. The courts recognize that restrictive covenants generally are motivated by the employer's desire to protect sensitive business information. But because these covenants tend to restrain trade, courts scrutinize them closely.
Among the questions courts consider in deciding whether a covenant not to compete is valid are: How long does the restriction last? One year? Five years? Forever? Is the geographical scope reasonable? Do the employer and the employee have a confidential relationship? Is the restriction essential to protect the employer's legitimate business interests?
A case's outcome isn't always predictable. In states without specific statutes, the facts of the particular case are crucial when the court decides on enforceability. Bill, a contact-lens fitter, worked for an Illinois corporation that sold eyeglasses and contact lenses. He promised in writing not to compete with his employer within a 30-mile radius of any of his employer's establishments. There was no time limit. After quitting his job, Bill set up his own shop 150 feet from one of his employer's stores. The court ruled that the restrictive covenant here was harsh and oppressive and therefore unenforceable. This decision was based largely on the fact that there were no business secrets to protect because Bill's employer had disclosed none to him.
The opposite result was reached in a Colorado case involving Gene, the regional manager of an account-collection service. Gene had promised in writing not to compete anywhere in the United States for two years after termination of his job. After his employer fired him, Gene formed another corporation that offered similar collection services, and he became its general manager. Here the court held that the restriction was enforceable. The court said that, rather than being limited to collection services, Gene "is a career salesman with skills and experience that can be effectively applied in the sale of another service or product."
3. Yov're ussing our trade secrets.
A trade secret can be anything that gives your employer a competitive advantage over those who don't know or use the information. Often the trade secret is a formula, a pattern, a device, or a process.
The key to a trade secret is secrecy. The courts often look at what an employer has done to guard the secrecy of the information and preserve its confidentiality.
One type of evidence your former employer might introduce in court is a written agreement in which you promised not to disclose certain information to others or use it in competition with the employer. You can, however, be held liable for misusing a trade secret even if you haven't signed a written agreement. Conversely, a written agreement won't protect the employer if the information available to you is readily ascertainable -- that is, if competitors or the general public can acquire it easily elsewhere.
Generally, a trade secret relates to the production of goods, but it may also relate to the sale of goods or services, or to other business operations. Bert, who had not signed a nondisclosure agreement, tried to use a business plan developed by his former employer for selling prepaid funeral services. The court ruled that this would be an improper use of a trade secret. In Bert's case, his former employer had developed forms and techniques for promoting, financing, and selling funeral services that gave the employer a marked advantage over competitors.
Courts often look at the effort and expense invested by an employer in developing the information that is claimed to be a trade secret. On the other hand, generally available information will not be treated as a trade secret. For example, by showing that the ingredients of a radiator sealant were published knowledge and available to all in the business, Wally was able to defeat a claim by his former employer that he was misusing a trade secret. Similarly, Paul was able to demonstrate that the chrome-plating process that he learned from his former employer used techniques well known in the plating industry.
4. You've stolen our customers.
Clarence was the shop manager of a company that made devices for securing loads on truck trailers. His wife, Hilda, was an office manager at the same company. Clarence and Hilda went into business for themselves and solicited orders from many of their former employer's customers. In a suit started by the former employer, the court issued an injunction prohibiting the two entrepreneurs from using the confidential customer list to solicit customers. The former employer convinced the court that he had spent substantial time, energy, and money traveling around the country to develop a list of creditworthy customers. The list described special financial considerations that apply to the customers.
In their own business, Clarence and Hilda solicited orders from only 176 of several thousand potential customers nationwide. Of those 176, half were on the former employer's list. Because it was clear that Clarence and Hilda depended heavily on the specialized list to build up their new business, the court said that this was a "wrongful use of 'confidential' information."
In general, once you have left your job, you are free to solicit orders from customers of your former employer. But, as evidenced above, courts sometimes apply trade-secret principles to protect a customer list.
If your employer has developed a highly specialized customer list and kept it confidential, a court may prevent you from using that list later. The court will look at the time, effort, and expense that were invested by your employer in developing the list and at how difficult it would be to construct such a list from scratch. As with trade secrets, your employer's case is stronger if you signed an agreement that you wouldn't use the customer list for your own benefit.
Assuming that your former employer hasn't developed a specialized customer list, there is one more precaution you should be aware of in soliciting customers: Make it clear to them that you are now working for yourself or for a new company. Don't create the impression that your new entity is a division of or a successor to your former employer's business.
5. You've taken our best employees.
Usually you are free to invite fellow employees to join you in your new enterprise. However, you will find yourself in legal trouble if your former employer can prove that you carried out a plan to strip the company of its key personnel so that it could no longer function effectively. Also, don't encourage fellow employees to break existing contracts for employment -- an unlikely problem, since such contracts are relatively rare.
Keep in mind that these are general principles. Your legal rights will depend in large part on the specific facts of your case. Also keep in mind that law varies somewhat from state to state. While some information -- such as whether your state allows restrictive covenants -- can be obtained from local government agencies, other, less general questions can best be answered by an experienced business lawyer.