October 23, 2010 (Original publish date) • By Dennis Beaver
One definition of The American Dream is the chance to go into business for yourself, opening your own shop. Often, this means stepping away from a job held for years.
“Indeed, with ability and drive to succeed, unlike so many other countries whose culture and political systems discourage an entrepreneur spirit, creativity, independent thought, action, and — God forbid — earning money — we in the United States are blessed with an economic system which encourages taking that step,” maintains Jay Rosenlieb, an attorney specializing in representation of management. Both Rosenlieb and his law partner Attorney Tim Scanlon — who practice in the San Joaquin Valley — were generous with their time and input for today’s story.
The lawyers were also quick to add a note of caution for anyone planning on going into business for themselves:
“While every new venture faces a risk of failure for a variety of business reasons — inadequate capital, lack of sales, getting paid and so on — most do not face immediate failure because they were basically shut down by a court order. If you plan to go into the same business as a former employer, then it is absolutely critical to understand what you may legally do,” Rosenlieb observes, adding, “or face expensive litigation.”
“Of course, it is always important to obtain legal advice before going into any business and to have both a lawyer and CPA on your team. But I cannot overly stress just how incredibly important this becomes if you are planning to directly compete with someone you worked for. You need to have a good understanding of what is fair and what is unfair competition,” Scanlon points out.
So, What is Unfair Competition?
What Can You do Before Quitting?
“In the abstract, business owners will all agree that competition is a good thing. It results in better products and services with lower prices for the consumer, which lead to more sales and profits. This applies to all aspects of our economy, from the doctor who decides to go out on his own after working for an HMO, to an auto mechanic who wants to open his own shop. California law states that post employment competition is legal if it’s fair.”
“But often, attitudes change when an employees quits and starts competing with them, suddenly, the fear factor understandably takes over. All bets are off. Depending upon what that former employee is doing, an abstract belief that competition is a really good thing, well, it now isn’t such a good thing after all. This is human nature and it is easy for someone on the outside to see how the fear of lost sales and revenue affects this earlier-stated belief in the value of competition,” Rosenlieb observes.
“Part of our job as lawyers who advise business is to help management understand the difference between fair and unfair competition, and then, if a former employee engages in unfair competition, to go to court if necessary, and to stop it. Courts will not tolerate what amounts to theft from a former employer. It is important for everyone to realize that an employee who goes into the same line of business is not prohibited from competing. Just don’t compete the wrong way,” he continued.
Common examples of unfair competition provided by the lawyers include:
(1) Taking customer lists;
(2) Taking lists of customer preferences;
(3) Taking lists of ordering patterns;
(4) Taking lists of vendors if that information has been considered as confidential.
(5) Competing with the employer while still employed!
“Although an employee who plans on going out on their own can prepare to compete, engaging in actual competition while still employed is improper,” Rosenlieb stressed.
“Interestingly, California courts have stated that even while still employed, an employee can:
(1) rent office space;
(2) Obtain insurance and a business licence;
(3)But they cannot tell prospective customers that they re about to change employers or go out on their own.
Rosenlieb cited one example of a former employee who got just what he deserved:
“The manager of a tire store which sold primarily to large trucking companies, phoned his accounts. He knew their ordering patterns, and how much they paid for tires.”
“Acting as if nothing had changed, he took orders and at the very end of the call explained that his new company would handle their business from now on, and offered significantly better prices and terms. He did not even consider for a moment that many customers would be offended by this dishonesty and would call the former employer. They did, and he found himself slapped with a lawsuit. It was expensive and within days, he closed his doors!”
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.