Taking Customers With You When You Start a Business

If you've decided to break off on your own and launch a business that's competition to your former employer, heed these words of wisdom from a business law expert.

By Cliff Ennico

Opinions expressed by Entrepreneur contributors are their own.

A reader sent in the following question recently in regards to the ramifications of notifying your employer's customers that you're leaving to start a similar business:

"For the past several years, I've been employed by a local accounting firm and have have developed close relationships with several of the firm's clients. A number of these clients have been dealing exclusively with me as opposed to the firm's partners, and I view them (rightly or wrongly) as 'my' clients. I'm leaving the firm shortly to set up my own practice in the same town and would like to notify these clients of my change in status, but I'm afraid the firm will sue me for 'stealing business'. I've never signed any sort of noncompete agreement with the firm. What are my legal risks here?"

First of all, no business "owns" its clients or customers. People are free to use whichever service providers they like, and agreements that prevent them from doing so are often viewed as illegal "restraints of trade" and are generally struck down by the courts.

Second of all, as I'm sure you already know, this situation is every employer's worst nightmare: You spend years training someone in the hopes they'll help you grow your business, and the next thing you know, they've quit and taken half your customers with them.

Shame on this accounting firm for not requiring all its employees to sign a "nonsolicitation" agreement, in which the employees promise not to contact any of the firm's customers or clients for a period of XX months after leaving the firm's employ for any reason. Unlike noncompete agreements--which prohibit ex-employees from working in the same field or profession within a certain geographic area--nonsolicitation agreements are viewed as a legitimate effort by a business to protect its goodwill, and are often upheld by the same courts that routinely strike down noncompetes.

Even though your firm didn't make you sign a nonsolicitation agreement, you still may have some legal liability to your former employer if you blatantly try to steal its customers. That's because, to date, 42 states have adopted some form of a statute called the "Uniform Trade Secrets Act." If your state has adopted a version of this act, then you're prohibited from stealing your employer's "trade secrets" and using them for your own benefit, even without a written agreement with the employer.

In most states, a firm's client list would be considered a "trade secret" unless its content can be "readily obtained through some independent source." So if you download the firm's entire client list onto a computer diskette or CD and then send a letter to everyone on that list announcing the opening of your new firm, your old firm will almost certainly view that as a theft of its "trade secrets" and will sue you for that.

However, taking out an ad in a local newspaper or a local chamber of commerce publication saying that "Joe Blow, formerly with XYZ Accounting Firm, has now opened his new office at ____________" probably will not be viewed as "trade secret" theft, as you're making a general solicitation to the entire community and not just targeting your former firm's clients (even though virtually all of them read the same local newspapers and trade publications).

What about directly contacting clients with whom you had a personal relationship during your tenure at the accounting firm? While there's no guarantee your firm will tolerate any solicitation of business, consider following these guidelines:

  • Limit your solicitations to those clients for whom you're the "sole and exclusive" firm contact--if you do most of the client's work but the client plays golf with your boss every week, you're not the "sole and exclusive" firm contact and should avoid soliciting that client.
  • Wait until after you leave the firm before sending any e-mail or written correspondence to those client with your new contact information.
  • Do not offer these clients any discounts or "deals" you wouldn't also give to someone who walks in off the street.

Under no circumstances should you remove any client files, documents or other client-specific information from the firm when you leave, even if a client says they'll follow you. Your solicitation to the client should include a "form letter" for the client to send to your old firm terminating the client relationship and requesting that all files be transferred to you. (If the client owes any money to your old firm, be prepared to wait until that gets settled before you get the files.)

Cliff Ennico is a syndicated columnist, author and host of the PBS television series MoneyHunt. His latest book is Small Business Survival Guide(Adams Media). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2006 Clifford R. Ennico. Distributed by Creators Syndicate Inc.

Cliff Ennico

Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.

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