How to Lower the Risks of Competing With Your Former Boss
Before you take on your ex-employer head-to-head, make sure you understand the legal implications of this oft-risky venture.
Q: I want to start a business that is the same as myemployer's, but I signed a nondisclosure agreement. Is thatgoing to be a problem? Also, is it OK to contact clients that Iused to service for my former employer?
A: I receive questions like this often, and you'reright to be concerned about stepping on your former employer'stoes, especially if you'll be competing with him.
When you work as either an employee or a contractor, an employerwill often have you sign a confidentiality agreement, also known asa nondisclosure agreement. A confidentiality agreement is acontract where one party, in exchange for receiving employment,agrees to use information in a particular way and not tell othersabout it.
Confidentiality agreements typically have a clause that defineswhat information is confidential, how the information may be usedand how long you must keep the information secret. A typicalemployer's confidentiality agreement states that almost all theinformation at their business is confidential and must be used onlyfor the purposes of employment.
If someone who signed a confidentiality agreement with hisformer employer starts another business, and his employer allegesbreach of the confidentiality agreement, the burden will be on theformer employee to show that he didn't misuse his formeremployer's information. Signing the agreement meant that theemployee agreed that everything the agreement covered was owned andto be used for the benefit of the employer. Proving that youdidn't use the information you had access to is verydifficult.
Trade Secret Law
Even if you did not sign a confidentiality agreement with yourformer employer, you may still be subject, through trade secretlaw, to legal restrictions on use of information you were exposedto.
As defined by the Uniform Trade Secret Act, which is the generaldefinition adopted under most state and federal laws, a tradesecret is: "Information, including a formula, pattern,compilation, program, device, method, technique or process that:(a) derives independent economic value, actual or potentia from notbeing generally known to, and not being readily ascertainable byproper means by, other persons who can obtain economic value fromits disclosure or use; and (b) is the subject of efforts that arereasonable under the circumstances to maintain itssecrecy."
Often, customer lists, client leads, product specifications,business plans, market research and a lot of other businessinformation fall under this definition and are subject to tradesecret protection. If you use such information, a former employercan allege that you have stolen her trade secrets and sue you fordamages or try to get an injunction to stop your business orproduct.
Starting Your Business
If you want to risk starting a business that competes with a formeremployer, and there most certainly is risk involved, then there aresome things you can do that may reduce the risk:
- Read what you signed. Read, and/or have an attorney helpyou understand, what you signed for your former employer. It may bedrafted so that you can lessen your risk. If it contains anoncompete clause, then that will increase your risk.
- Start from scratch and document it. If you get sued by aformer employer, you will have to prove that you did not use hisinformation to start or run your business. Therefore, forget whatyou've learned and get the knowledge again. Document all thesteps you take to acquire, compile or research the information youuse for your business, products or services. Keep track of who youtalked to, as well as when, how and what information youfound.
- Get you own customers. Do not, under any circumstances,directly contact customers (past, present or future) that youremployer had any type of contact or list for. If you are announcingyour new business, make a general business announcement: Run anadvertisement in the local paper or mail a letter to everyone inyour industry or market. Let former customers contact you and, ifthey do, document the date and the person making contact. Usinganother party's customer list is the prime example of a stolentrade secret.
Note: The information in this column is provided by theauthor, not Entrepreneur.com. All answers are general in nature,not legal advice and not warranted or guaranteed. Readers arecautioned not to rely on this information. Because laws change overtime and in different jurisdictions, it is imperative that youconsult an attorney in your area regarding legal matters and anaccountant regarding tax matters.
Judith A. Silver, Esq., is the CEO and founder of Silver LawInc., a technology and business law practice, and Coollawyer Inc., alegal publishing company on the web. Prior to starting hercompanies, she served as in-house counsel at Adobe Systems andSabre/Travelocity.com. She holds a bachelor's degree cumlaude from Cornell University and her juris doctorate from theUniversity of California, Hastings College of the Law, in SanFrancisco.