The “Business Divorce”

There comes a time for most businesses when a current executive or employee decides to leave and establish a competing business. Like a divorce between husband and wife, there can be significant emotional and financial ramifications.

The departing individual has likely spent years with the company developing relationships with co-workers. Such relationships are based on trust, respect, and a degree of dependency. These relationships can extend beyond the workplace and take on a personal nature.

When an individual departs to compete against the former employer, those left behind may experience a sense of betrayal. There can also be a significant financial impact involved. As a result, litigation, or at least a threat of litigation, commonly arises.

The departing individual and employer should have a basic understanding of what can and cannot be done legally during such a transition. Whether you are an employee considering the idea of terminating your current employment in order to establish a competing business, or an employer suspecting one of your workers of this course of action, you should seek the advice of an attorney as soon as possible.

The concept that an employee owes a duty of loyalty to an employer has been around for decades. In addition to the general duty of loyalty, the law also recognizes an employee’s duty in the context of a related concept – an employee’s fiduciary duty.

A fiduciary duty arises in situations where an employee is employed in a position of trust or confidence over and above the duties owed by a typical employee. For example, an employee who serves as an officer or director of a company carries a fiduciary duty in addition to a general duty of loyalty. Although a distinction can be made between an employee’s general duty of loyalty and a fiduciary duty to the employer, courts frequently have intermingled the terms “fiduciary duty” and “duty of loyalty” in addressing the duties owed by an employee to an employer.

An employee has a duty to serve his employer faithfully and follow the employer’s reasonable instructions. However, without a restrictive covenant in place, an employee is generally free to compete with the former employer after the employment relationship ends. Typically, an employee does not awaken one morning, decide to leave the current employer, and start work at the new employment that same day. The difficulty lies in that period of time during which the employee continues to work for the current employer while having formed a definite intention to leave. This period can be critical to any analysis. Within that time frame, the employee cannot solicit future business that belongs to the current employer nor withhold information that promotes the current employer’s interests.

It must be noted that these (and all) cases are driven by their individual facts. Generally speaking, post-termination activities will not violate the employee’s duty of loyalty. However, when the former employee misappropriates and uses items such as price lists, client databases or other trade secrets, the balance can shift to provide a cause of action against the departing employee.

Prior to the date of departure, the departing employee may not recruit existing clients or current co-workers, and may not copy client files or materials which may constitute trade secrets for use in any future endeavors. The departing employee may form the new company, arrange for an office location, and obtain office equipment prior to departure, but such activities should be undertaken on weekends or after business hours, utilizing a personal telephone and a personal e-mail account for all communications.

Including nonsolicitation and noncompete clauses in employment agreements can aid both parties in understanding what behavior is expected, and what is unacceptable. Generally, the scope of such clauses should not be overly broad. This area of the law continues to expand as the courts evaluate the proper balance between protecting both the former employer and the employees’ right to work in a competing enterprise.

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These articles are provided for general informational purposes only and are marketing publications of Gentry Locke. They do not constitute legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult your own lawyer concerning your situation and specific legal questions you may have.