When do permissible preparations to compete become unlawful competition?

December 5, 2019

Topics: Employees as Competitors

During employment, employees have a duty of loyalty requiring that they only take actions for the benefit of their employer.  However, it is not uncommon in this day and age for employees to plan to leave their current employment to compete with their employer, either by going to work for a competitor or by setting up their own competing company.  Absent a restrictive covenant agreement prohibiting post-employment competition, and presuming the employee does not improperly utilize any of his or her former employer’s confidential information or trade secrets to compete, post-employment competition is generally permissible and is considered part of our free enterprise system.

Certain actions employees may take in planning to leave their current employer are lawful and permissible.  But there is a line which, once crossed, turns those preparatory actions into unlawful competition in violation of the employee’s duty of loyalty to his or her current employer.

In planning to compete following departure from current employment, employees probably may take actions such as:

  • Purchasing a business or leasing space from which to run a business;
  • Incorporating a new business;
  • Opening a bank account or filing a trademark application;
  • Purchasing or leasing furniture or supplies;
  • Hiring a consultant to draft a business plan;
  • Purchasing or leasing computers, copy machines and other business equipment; and
  • Planning or ordering marketing materials.

Each of these are considered preparatory and are generally found to be permissible activities that may be taken while employed as long as such actions are done off the employer’s clock and without utilizing the employer’s resources.  An employee therefore may spend her weekend time looking at potential retail space to lease for the purpose of setting up a competing business—as long as she takes no actions to actually compete.

Those marketing materials being designed may not be sent out or distributed until after the employee leaves his or her current employment as the distribution would be considered taking an action to compete.  Regardless of the timing of the material’s distribution, sending it to the current employer’s client list which was improperly taken upon departure from employment would be unlawful and unfair competition for which the then-former employer likely could seek damages.

Other likely prohibited actions that would turn preparatory actions into unlawful competition in violation of a duty of loyalty include:

  • Contacting current clients to advise of the intention to create a competing business in the future;
  • Advising a prospective client to hold an order for a month because a better deal might be available (intending to take that prospective client to the competing business); and
  • Conducting design and development efforts to enhance a current employer’s product with the intention of selling the enhanced product by a competing venture.

Any actions that would directly take business or potential business away from a current employer would be considered improper.
Our free enterprise system is used to encourage fair competition.  Employees are permitted to utilize their general experience, knowledge and skill to conceive of, set up, and (after leaving current employment) run and manage competing companies.  What is prohibited is unfair competition that harms a current employer or utilizes that employer’s confidential information and trade secrets in efforts to compete.
Should you be looking to set up your own business, or have concerns regarding a former employee’s actions, employment counsel can help evaluate the actions taken and provide guidance  your legal compliance rights and obligations.