Thinking About Competing With Your Former Employer — Read This First

Whether you are an employee thinking about leaving your position and competing against your former employer, an employer considering hiring an employee away from your competitor, or an employer thinking that a former employee is unfairly competing against you, this is a must read.

When employees leave to compete against their employer, the employee may reap the rewards of increased compensation, increased freedom and a higher sense of worth. When done incorrectly, it can be the basis for an emotional and expensive litigation. Businesses that are considering hiring employees from their competitors should also proceed with caution to avoid a potential legal battle that can quickly negate the benefits of such a hire. Some of the most important considerations in these moves are whether the employee has a non-compete or non-solicitation agreement with their former employer, whether the employee owes ongoing fiduciary duties to the former employer, or whether the former employer has any trade secrets that the employee intends to use in the competing business.

Non-Compete Agreements.

The essence of non-compete agreements is that the employee agrees not to compete with the employer’s business for a specific period of time and in a specific geographic location following his or her employment. Employers often require that high-level employees sign a non-compete agreement as a condition of their employment. Although not always easy, Florida courts will enforce non-compete agreements under certain circumstances.

The basic requirements of an enforceable non-compete agreement are: (1) that the agreement be reasonable in time; (2) that the agreement be reasonable in area and line of business; and (3) that the agreement protect a “legitimate business interest” of the employer. When deciding whether the agreement is reasonable in time, Courts generally presume that agreements for six months or less are reasonable and agreements for more than two years are unreasonable. These time periods may be greater where the employer seeks to enforce an agreement against a distributor, dealer, franchisee, licensee, or former owner of the employer, or if the agreement is based upon the protection of a trade secret.

Non-compete agreements are generally reasonable in area and line of business when an employee seeks to compete with their former employer within the same geographic market in which he previously worked. Protection of “legitimate business interests” of the employer can include, for example: (a) trade secrets; (b) valuable confidential business or professional information; (c) substantial customer or client relationships and goodwill; or (d) specialized training provided by the employer.

Practically, the presence of a non-compete agreement may deter competition with a former employer regardless of whether the agreement is enforceable. The threat that a former employee faces is that he/she will not only lose a substantial amount of time in defending against a claim of breach of the agreement, but he/she will also incur substantial attorneys’ fees that will offset any benefits of moving to a new employer or opening their own business. In addition, the employee may also face the threat of losing his/her new job as a result of the new employer’s fear that it too will become embroiled in litigation.

Employers that are considering hiring an employee from a competitor should determine upfront whether the potential employee has a non-compete agreement, as the investment in the employee may not be worth it if the competitor seeks to enforce the agreement. Essentially, once an employer has already hired an employee who is subject to a non-compete, its options become more limited and potentially more expensive. If the new employer discovers the non-compete before litigation, it can ignore the non-compete and hope nothing comes of it or attempt to limit exposure by reducing the employee’s contact with customers. Unfortunately, many employers do not find out about a non-compete until their competitor threatens a lawsuit. When this happens, the competitor will not only threaten to sue the employee, but also the new employer. In these cases the new employer will need to decide whether to fire the employee to avoid litigation or retain the employee and incur the litigation costs of defending against the enforceability of the non-compete agreement. Because these options may not be appealing for the new employer, it is better to determine upfront whether a non-compete agreement exists and decide whether the hire makes financial sense.

As a final note, a new employer generally needs to rely upon the word of a potential hire as to the presence of a non-compete agreement, but some potential hires may not disclose the existence of a non-compete.Potential employers can protect themselves by requiring the potential hire to certify in writing that they do not have a non-compete in place. The certification should include a provision that if it is untrue, the potential hire will reimburse the employer for any costs or attorneys’ fees incurred in defending against lawsuits by previous employers based upon the presence of a non-compete agreement. While the new employer may not actually recover any amounts from the employee, this type of certification may be helpful to the new employer should the former employer attempt to bring a suit against it.

Non-Solicitation Agreements.

Non-solicitation agreements are used to prevent former employees from soliciting their former employer’s customers or other employees. Because non-solicitation agreements do not prevent the employee from working in the same industry or same geographic area, they are less restrictive than non-compete agreements and courts may be more inclined to enforce them. For this reason, non-solicitation agreements are also more common than their non-compete counterparts. However, courts may decline to enforce non-solicitation agreements when the customer or colleague voluntarily initiates contact with the former employee at his new place of business.

Employees that have non-solicitation agreements should carefully consider how they intend to build a customer base before leaving their employment. If the only way for them to obtain customers for their new company is to contact their prior employer’s customers, they may be prevented from doing so or it may result in an expensive litigation.

Similarly, if you are considering hiring an employee from a competitor in hopes of taking that competitor’s customers, the hire may be risky if the proposed employee has a non-solicitation agreement. Similar to a non-compete agreement, if an employer is hiring an employee from a competitor and the employee says that he/she does not have a non-solicitation agreement, the new employer can further protect itself with a carefully drafted certification signed by the potential employee.

Ongoing Fiduciary Duties.

Pursuant to Florida law, employees owe a duty of loyalty to their employer during the term of their employment, which prevents the employee from competing with their employer while still employed. The duty of loyalty generally terminates when the employee leaves his or her job with the employer – leaving the employee free to compete against their former employer absent a non-compete agreement to the contrary. However, there are a few exceptions. Officers may not compete with a corporation until they either resign in writing or are terminated by a vote of the majority of the board of directors. Likewise, directors may not compete with a corporation until they resign in writing or are terminated by a vote of the majority of the corporation’s shareholders. Partners may not compete with their partnership until the partnership is dissolved. Finally, members may not compete with their limited liability companies until they dissociate from the company.

A new employer should also be aware of these requirements when hiring an employee of a competitor. First, be sure that the employee does not begin working for you until after they have left their position at the competitor. In addition, if the prospective employee is an officer, director, partner or member of the competitor, they should be able to provide you with the written resignation from their position, their formal notice of termination, documentation showing dissolution of the partnership or formal notice of their dissociation from a limited liability company. If the employee begins working for the new employer prior to these events taking place, the competitor may be able to pull the employee or new employer into litigation.

Trade Secrets.

One of the biggest concerns of employers today is the ability to protect and retain trade secrets. Generally, trade secrets include information that that is not known to competitors, such as product designs, source code for computer programs and software, proprietary formulas for calculating financial or sales information, and confidential methods of doing business within a given industry.

Both the former employee and the new employer can be subject to litigation under Florida’s Uniform Trade Secret Act and the Federal Defend Trade Secrets Act if the new employee leaves and begins using the competitor’s trade secrets. This type of litigation can be very expensive. Employees that compete with their former employer using that company’s trade secrets open themselves up to damages to compensate the former employer for its loss, punitive damages for wrongful use of the trade secret and attorneys’ fees. Moreover, those damages can also be attributed to the new employer for use of the trade secret when the new employer should have known of the employee’s wrongful use. As a result, employers should take care to ensure that new hires do not use trade secrets from their previous employer in the new employer’s business. That being said, many companies have their own way of conducting business, or the method of business operation is the same in the industry.This can often serve as a defense to an action brought by a former employer.

Conclusion.

Lawful competition can be extremely profitable and rewarding for an employee. In addition, employers can benefit from hiring employees who have the skills and experience necessary to excel at their company. However, both the former employee and the new employer should evaluate whether they are exposing themselves to litigation prior to engaging in competition, or hiring that prospect. As highlighted above, the cost of litigating these issues against a former employer can rapidly overcome the benefits of competing with your former employer or hiring an employee who worked for a competitor.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, complex commercial and real property law. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Cristina E. Groschel is certified as a Professional in Human Resources (PHR), and focuses her practice on labor and employment law, representing the interests of employers and business owners. She has represented businesses in a wide range of disputes, and counsels clients on a wide variety of Human Resources issues. Mr. Loren, Mr. Ohlenschlaeger and Ms. Groschel can be reached at [email protected], [email protected], [email protected] or 561-615-5701.