Provided by Matt Dickstein, Business Attorney
If you have customers, you might wonder, “can my employees set up a competing business and steal my customers?” From the employee’s perspective, the question is “Can I take customers with me to my new business?”
No-Compete Contract Isn’t Worth the Paper It’s Written on. After termination of employment, a contractual non-competition clause usually is not enforceable. Under California law, an employee ordinarily may compete with his or her prior employer, even if the employee signed an agreement that prohibits competition. Of course there are exceptions to this rule. In brief, a non-competition clause can be enforceable if it was (i) entered into as part of the sale of a business; or (ii) entered into pursuant to a partnership agreement or shareholders agreement that prohibits a withdrawing employee’s competition in a limited geographic area.
Who Gets the Customers? Although a prohibition on competition may be unenforceable, the departing employee still may not unfairly steal customers. What is unfair? In general, the law will prohibit an employee from using the customer list of the former employer if: (i) the customer list was a trade secret; and (ii) the former employee misappropriated the list.
As to the first element, a customer list can be a trade secret when the employer has invested much time and effort in creating it and has kept it secret. A protected customer list can contain, for example, information about the particular needs and interests of the customers.
As to the second element, once the employer has proven that the customer list is a trade secret, it then must prove that the employee misappropriated the list. Here the issue is whether the departing employee solicited the customers, as opposed to merely announcing a change in professional affiliation. In other words, the employee may announce his or her new status to the employer’s customers, but may not go any further. To go further would be to solicit the customers, which is prohibited. The distinction between solicitation and mere announcement is a shifting line, and the departing employee must take great care not to cross it.
Who Gets the Rank and File Employees? The rule on the solicitation of office managers and other employees is similar to the rule for the solicitation of customers. In general, California law protects the right of employees to change employment. A departing employee, however, may not solicit or ask other employees to leave the former employer. Rather, the departing employee may only announce his or her plans. The employee must then back off, and permit other employees to initiate the next contact by requesting to join the departing employee in the competing business.
Finally, please keep in mind that the law of competition is by its nature fluid and gray. There are few hard and fast rules, and no guarantees can be given on the outcome of any dispute. Moreover, employers and employees become quite emotional about these cases. Even “innocent” parties get dragged in, for example, a company that hires the departing employee likely will be named as a defendant in the case. The costs of litigation (let alone losing in litigation) can get high. So keep this common-sense advice in mind: at all times be sure that you are acting in a decent and fair manner, and well within the boundaries of the law. Remember that, in the final analysis, courts try to protect persons who have acted with decency.
ABOUT THE AUTHOR: Matt Dickstein, Business Attorney
Since 1994, I have been practicing business law, corporations & LLC law, securities law (including private offerings / placements), franchise law, real estate ventures, mergers and acquisitions, and exit and succession planning. I work with small to mid-size companies in all industries and at all stages of a company’s development, from start-up to IPO or sale.
I am fluent in Chinese and have worked extensively on legal transactions in the People’s Republic of China, including joint ventures and the formation of offshore holding companies and PRC operating companies (for example, Cayman Island parent with a WFOE and domestic subsidiary in China). I also represent Chinese companies that expand to the United States.
Copyright Matt Dickstein, Business Attorney