Does An Entrepreneur Have a Right to Compete With a Former Employer?

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Entrepreneurs who contemplate starting a business in their current field of expertise often ask about the extent to which they can use knowledge, skills, client lists, and actual written materials from their current and previous positions. The basic answer is that employees owe their employers a duty of loyalty while still employed. Once that employment relationship ends, absent an enforceable non-competition (noncompete) agreement, the employee is free to enter into competition with the employer and make use of the general knowledge, skills, and experience she gained on the job.

While still employed, an entrepreneur is permitted, in the absence of a noncompete agreement, to prepare to compete with an employer. She must nevertheless remain a loyal employee and continue to work in her employer’s best interests. She should make certain that the preparation activities do not cause her to neglect her duties as an employee. She must devote her full attention to her job during working hours and should not use the employers’ facilities or property (such as phone or internet service or accounts) in order to prepare to launch her business.

If the entrepreneur did indeed enter into a noncompete agreement with her employer, she must consider the enforceability and terms of that agreement. Generally, noncompete agreements are enforceable by courts when they are in writing and exchanged for something of value (generally, that something of value is the promise of employment itself offered by the employer). Courts also require noncompete agreements to be reasonable in terms of the limitations on the entrepreneur’s future activities; the geographical area restricted; and the duration of the time period when competition is prohibited. Generally, a time period of 1-2 years is considered reasonable. If any particular clause in the noncompete is deemed overreaching, a court will adjust it in order to make it more reasonable.

Another contract the entrepreneur must consider is any confidentiality agreement and or nondisclosure agreement (NDA) she may have signed. A confidentiality agreement will require the entrepreneur to maintain the secrecy of any proprietary information or trade secrets she learned in the course of her employment, and this obligation on the former employee is typically interpreted as a continuing one, as long as the information remains confidential. A broad array of information can be considered confidential, including product plans, marketing plans, customer lists, software, blueprints, and/or any other information that is maintained in confidence. However, it should be emphasized that an employer is not entitled to require the information to be kept it in confidence if it is already publicly available (such as the contact information for clients that is already available on the internet), or if the employer did not properly guard the secrecy of such information.

Finally, copyright law may affect the entrepreneur’s future activities. In the absence of a confidentiality agreement limiting her use of certain confidential information and ideas, she is free to employ information, skills, experience, and ideas learned on the job. However, copyright law may protect the particular expression of those ideas authored by the employer. For example, if an entrepreneur has access to sales training manuals as an employee, she will need to create her own such manuals when she strikes out on her own. Absent any confidential information, she can incorporate the ideas contained in those manuals into her own written work, which she has independently created. Courts will find that the an employee committed copyright infringement if she reproduced, distributed, or relied too heavily on her employer’s particular expression of ideas that were written or otherwise recorded. It is wise to seek legal advice in order to determine the extent to which an entrepreneur is entitled to use such materials as a basis for creating her own written work.

Entrepreneurs can take heart in knowing that they can deploy experience and skills they gained on the job. However, they must take care to fulfill their duties of loyalty while still employed and to honor any noncompete and/or confidentiality agreements they made with their former employers.

 

Author:

Donna Gitter, Professor of Law at Baruch College

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