Starting Competing Enterprise While Employed Can Mean Trouble

August 31, 2012Articles

As seen in Business First of Louisville.

Question
: I am considering leaving my current company to join or start a competing company. I would like to start the process while still employed by my current employer. Among other things, I would like to start contacting potential investors, clients, and employees. Do I have any legal duties to my current company that would prevent me from doing this?

Answer: The short answer to this question is “Yes” and “Be careful.”

From a practical perspective, if you intend to leave your existing company in order to start or join a competing enterprise, you probably would like to do as much as possible to prepare for your new venture prior to leaving your current company.

However, Kentucky law has spoken loudly and clearly in favor of the current company on this issue.

Depending on your position in the company, you probably have a fiduciary duty which would prevent you from taking virtually any steps to prepare competing with your current company before termination of your current relationship. The law says that this rule is founded on basic principles of honesty and fair dealing.

Contractual duties

This article focuses on legal duties that apply regardless of whether you have a written contract. Obviously though, the starting point in determining your obligations in preparing for a departure should be your written contract, if you have one. A written contract may contain duties to the employer in the form of a noncompetition clause, nonsolicitation clause, or other restrictions. Kentucky law frequently upholds these types of agreements if the terms are reasonable in scope and duration.

Other duties

Even in the absence of contractual duties, the law imposes fiduciary duties on many business people, including corporate directors and officers, partners, certain LLC members, and certain employees. These duties require generally that people holding such positions act in the best interests of the company. In the eyes of the law, it is not in the best interests of the company for its personnel to begin planning for a competing enterprise while simultaneously carrying out their existing duties to the company.

Who has a fiduciary duty?

Kentucky law has long held that directors, officers, and certain high-level employees have a duty to act in the best interests of the company. This includes the duty not to begin preparations to compete until after termination of the current relationship.

Over time, Kentucky courts have taken a broad view of what types of employees have a fiduciary duty to the company. Generally, employees in a position of trust and with access to confidential or other valuable information have a fiduciary duty. This means that management, salespeople, and employees with comparable responsibilities will often be found to have a fiduciary duty.

It would not be wise to assume that you do not have a fiduciary duty without first consulting your personal legal counsel.

What preparations may you take?

The general rule is that someone with a fiduciary duty may not compete or even begin preparations to compete with the company until after termination of the current relationship. Generally, this means that before leaving the company, you may not solicit clients or investors, solicit co-workers to join you, or take concrete steps to create the new business venture such as opening bank accounts and acquiring property.

Very early preparations such as conducting personal research for use in developing your new enterprise are permissible. Beyond that, you should tread very carefully.

It is not a good idea to try to skirt these obligations and hope the current company will never find out. Now more than ever, your preparations to compete will be preserved in an evidence trail of emails, texts, phone records, credit card statements, receipts, and so on.

The law even holds that those who assist the departing employee in breaching his or her fiduciary duty to the company can be held liable. Thus, your new employer or potential new business partners must essentially hold off working with you until after you have left, lest they risk legal liability as well.

Notably, the current company can waive your fiduciary duty. For instance, if you inform your employer of your intention to compete and, with that knowledge, the employer permits you to remain at the company for a certain amount of time, you will be free to begin preparations for your new venture. Of course, this type of friendly departure is rare.

After termination of the relationship

After leaving the company, and in the absence of a noncompetition agreement or other restrictive agreement, you will generally be free to compete vigorously with your former company for clients, employees, etc. However, there is a cautionary note here regarding the type of information you may use to your advantage in the new enterprise.

Of course, you carry with you and may avail yourself of the general experience and knowledge gained from your prior employment. However, you will have a continuing duty not to exploit confidential or trade secret information you gained while working for the former company.

In sum, the law clearly favors the company over the departing individual in this situation. While you might not like this if in the position of leaving to start or join a competing enterprise, you will like it if you eventually find yourself on the other side of the coin.