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When Does Preparing to Compete Cross the Line?

An employee or former employee who starts preparing to compete with his employer or former may get tripped up in one of two scenarios:  (1) breaching a fiduciary duty of loyalty; or (2) running afoul of a noncompete agreement.  Let’s look at each of these.

Duty of Loyalty

It is widely recognized that all employees—and especially officers—owe a duty of loyalty to their employer.  This ends when the employment ends.  Does the employee breach this duty by preparing to compete with her employer before termination of employment?  The answer is “probably not,” provided that the employee’s actions aren’t unfairly harming the employer.

Courts have found that it’s ok for an existing employee to take the following preparatory steps:

  • Forming/incorporating a business that will compete;
  • Developing a business plan;
  • Negotiating for the purchase of a business;
  • Preliminary research and development to determine feasibility;
  • Registering a trademark;
  • Making arrangements for financing;
  • Gathering basic information;
  • Purchasing equipment;
  • Opening a bank account;
  • Leasing office space;
  • Obtaining a telephone listing; and
  • Telling clients of the employee’s future plans provided that the communications are not solicitations;

On the other hand, courts have found that it is not ok for a person to do the following while still employed:

  • Using the employer’s trade secrets or other confidential information;
  • Soliciting customer or co-workers;
  • Leaving the employer in a lurch;
  • Taking preparatory actions while “on the clock” or utilizing the employer’s office or property;
  • Usurping a corporate opportunity; or
  • Undertaking substantive design and development activities.

Noncompete Agreements

Most courts would not construe a typical noncompete agreement as preventing an employee or former employee from taking preparatory actions consistent with the duty of loyalty discussion above.  If the language is broad enough to also prohibit the employee from preparing to compete, many courts would be very reluctant to enforce the provision unless the employer can justify it.  At the end of the day, the ultimate question for the court often is whether the employee’s preparatory actions are placing the employer at an unfair competitive disadvantage.

 

by David L. Johnson

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