What you should know to greatly reduce your liability and ensure your new business avoids legal issues that can doom it before it even begins.
By Greg Rankin
If you’ve ever dreamed of leaving your current job to start a competing business, then you’re not alone. According to a recent report by the U.S. Department of Labor, Americans are quitting their jobs for better opportunities at the fastest rate in nearly two decades. Confidence in the economy and stagnant wage growth appear to be driving factors. All signs point to now as the ideal time to make your dream business a reality.
However, before you up and leave the office in a blaze of glory, there are a few critical factors that you should consider. Failure to do so can have serious legal ramifications that can derail your dreams of a successful launch before the engines even warm up.
Review your agreements
In all likelihood, when you began your current job you were asked to sign an employee contract that restricted you from doing certain things. This probably included agreeing not to retain proprietary information, trade secrets and other confidential company files, but it also may have included you agreeing to give up, or limit, your rights to start a competing venture.
Now is the time to go back and figure out what you agreed to and what legal options remain. There is a good chance the agreement included a non-compete or non-solicitation agreement, but depending on where you live and what exactly you signed, you may still have the legal right to set up a competing shop.
“First you need to know what state law will apply to your situation. If the employee and the employer are both in California, then the agreement may say California law will apply, but that is not necessarily a given,” says Devin Donohue, an experienced Los Angeles attorney who specializes in advising employees on these types of transitions. “The applicable law is critical. In many states non-competes are enforceable, but here in California post-employment non-compete agreements are only enforceable in very rare circumstances.”
Donohue, and his firm, Lombardi and Donohue, LLP. (www.ldattorneys.com), have more than 20-years of experience representing clients who successfully started their own businesses. In his experience, employers often require employees to sign non-compete or non-solicitation agreements that may or may not be enforceable. These agreements can directly – and adversely – impact your ability to start a new venture.
Donohue advises against blindly accepting those provisions and instead first consulting with a lawyer who can tell you what’s enforceable and if there are ways to pursue your new venture that do not violate those agreements or the law.
“There are a lot of things you can do on the front end to avoid or minimize potential problems down the road,” says Donohue. “If you retain a good lawyer who can help you strategize in the beginning stages of starting your venture, and you follow their advice, that should greatly reduce your risk.”
While getting advice and consulting with a lawyer is beneficial to any new business, there’s an even more critical reason why you should engage an attorney well before walking out the door. That is, the speed at which things can proceed once you leave.
“You may get a cease and desist letter from your former employer immediately after your departure, or maybe a notice that they are going directly into court as soon as the next day seeking a restraining order against you. At that point you won’t have time to begin looking for a lawyer to defend you.”
Donohue continues by pointing out any delay in finding representation puts you in jeopardy of losing in an emergency court proceeding, at which time your business may have to cease operations until a preliminary injunction hearing which is typically scheduled a few weeks away. This could be devastating to a start-up business.
Also, strategic mistakes made by an unrepresented (or poorly represented) new business owner during an emergency court hearing can damage a case so badly that the preliminary injunction is eventually granted against the owner, likely ending the new venture or drastically limiting what the new business can do to sustain itself.
Getting a head start
After safeguarding against handing your former employer a basis for shutting down your business, you can actually get a lot of your ducks in a row while still employed. Donohue cautions that this should all be done off company time.
“You have to be careful about violating the ‘duty of loyalty’ that an employee has to an employer,” says Donohue. “However, in California, you can plan and prepare to leave, there is nothing illegal about that. You can setup an LLC or corporation, look for space for your business, set up vendors, write a business plan, etc. and the courts allow for that.”
Your attorney should walk you through each step of the process and assist you in determining what you’re legally allowed to do as well as the inherent risks associated with each decision.
Preparing your exit
It’s never too early to plan your exit strategy. Obviously, taking anything with you as you go – files, emails, parts of any projects that you worked on while on company time – creates a potential risk that can turn into a claim for trade secret misappropriation by your former employer.
Furthermore, Donohue cautions that even if you did not sign a contract, your former employer may still come after you. Often a point of contention for a person trying to start a competitive business is the employer claiming trade secret misappropriation by accusing the former employee of taking a client list with them to a new endeavor.
“First, taking client lists in California is a really grey area with cases having been decided on both sides. I sometimes advise my clients to buy a targeted commercially-available list with the names of potential customers in their industry,” says Donohue. “In California you are legally allowed to send out a generic ‘tombstone’ announcement that you are starting a new business.”
A new business owner can then leave behind the customer list of the former employer and send the tombstone announcement to everyone on the commercially available list. “We have found this to be helpful in fighting claims that new business owners wrongfully took a protectable client list with them.”
You should also avoid engaging in wrongful conduct that sabotages your former employer. Donohue cites a scenario where a departing employee once tried to change the telephone numbers of the customers in the former employer’s database before leaving.
“Courts can look unfavorably at that and may issue a harsh restraining order as punishment for conduct like altering phone numbers or destroying/erasing client files”
“You should also presume that there is always a record of anything you do electronically – either on your work or personal computer, even if you attempt to erase it afterwards,” concludes Donohue.
When it comes time to launching a new business, planning is everything. By preparing early and understanding your options you give yourself the best chance of charting a course to success while avoiding being hamstrung by costly, distracting and sometimes devastating litigation with your former employer.
Greg Rankin is a Houston-based freelance writer with over 20 years of experience writing for entrepreneurs and small businesses.