Setting Up A New Business While Still Employed. How Far Can You Go?

You’ve decided to branch out on your own and start your own business. Congratulations! The only problem is that you plan on using all the skills, knowledge, and a few of your current employer’s trade secrets or proprietary information to see the new business.

Setting Up Your New Business While Still Employed. How Far Can You Go?

You’ve decided to branch out on your own and start your own business. Congratulations! The only problem is that you plan on using all the skills, knowledge, and a few of your current employer’s trade secrets or proprietary information to see the new business. Worse yet, you will be in direct competition with your current (and soon to be former) employer. Exactly how far can you go without getting tripped up? It depends on what level employee you are (i.e. a non-officer or director, or higher), exactly what activities you are planning, and if there are specific prohibitions in a Non-Compete or Confidentiality Agreement you might have signed.

Generally, employees owe a duty of loyalty to their employer. Loosely translated, an employee is required to act in the best interests of his or her employer. An employee is to devote all of his or her working time or energies to promote the mission of the employer. Further, an employee is expected to refrain from any actions that would place the employer in a negative light or be otherwise harmful to the interests of that employer. That would seem to include taking steps to directly compete against that employer while still employed. The duty to act in such a manner is even higher for directors or officers of a company that also owe a fiduciary responsibility to that employer.

An employee may, however, be able to take some preliminary steps in getting ready to open his or her own business while still employed. The key turns on the degree those actions are unfairly harming the employer. Since this is a very sensitive area, employers are likely to be critical and start up the litigation mechanics early if they become aware. Congratulations, you’ve just earned your day in court!

Generally, courts have found it IS ACCEPTABLE to take the following preparatory steps:

  • Forming/Incorporating a business that will compete;
  • Leasing office space;
  • Obtaining a telephone listing;
  • Developing a business plan;
  • Purchasing equipment;
  • Opening a bank account;
  • Registering a trademark;
  • Negotiating for the purchase of a business;
  • Preliminary research and development to determine the venture’s feasibility;
  • Making bank or other financing arrangements;
  • Creating a website;
  • Printing new business cards;
  • Telling clients of your future plans provided that the communication is not a solicitation.

On the other hand, Courts have found that the following types of activities CROSS THE LINE. If you find yourself doing any of these, you’ve gone too far and are likely to end up in hot water:

  • Using an employer’s trade secrets or other confidential information;
  • Soliciting customers or employees;
  • Usurping a corporate opportunity;
  • Undertaking substantive design and development activities;
  • Taking preparatory actions while “on the clock” or utilizing an employer’s office or property;
  • Leaving the employer in a lurch as it regards important projects or clients you are working with;
  • Directly and actively competing with the employer while still employed;
  • Acting in violation of any of the provisions of a Non-Compete or Confidentiality Agreement.

Most courts would not construe typical Non-Compete Agreements as preventing an employee from taking preparatory actions consistent with the duty of loyalty discussed above. A carefully drafted Non-Compete Agreement however can prevent many of the preliminary activities we have discussed. Boznos Law has experience in drafting these types of agreements for employers.

Copying files, e-mailing them to your home, or downloading information to a memory stick or other similar device while are still employed is a sure fire way to buy a lawsuit. Most employers, after learning of an employee’s planned departure, will conduct a forensic examination of all computers, cell phones or other devices that could contain employer information.  The results are almost never good for purloining employees.

Illinois has very strict legislation known as the Illinois Trade Secrets Act which prohibits an employee from wrongfully obtaining certain confidential or proprietary information and using that information for his or her own benefit or for the benefit of another. There is also a newly enacted Federal law known as the Defending Trade Secrets Act which can come into play to stop wrongful misappropriation of these types of materials. At the end of the day the ultimate question for the Courts to decide is whether the preliminary actions taken by an employee while still working are placing the employer at an unfair competitive advantage.

With over 30 years’ experience in advising both employees and employers on cutting edge employment law issues, let Boznos Law work with you to ensure you are ready to meet the challenges posed by the ever-changing employment law landscape. Call Bill Boznos today at (630) 375-1958 or contact us at www.boznoslawoffice.com/contact-us through our website at www.boznoslawoffice.com.

 

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