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Starting a Business Without Starting a Lawsuit (or, The Gentleman's Guide to Saying Goodbye)

Let's suppose you have spent the last few years working for your employer. While on the job, you have learned the industry, made a host of relevant industry contacts, and have established strong relationships with your employer's clients and vendors. You are confident that you now have the skills, knowledge and contacts to start your own business in this industry. While you realize your employer may not be happy, you do not think he has any legitimate grounds to object. After all, you are not an indentured servant, and when you signed on to your job, you sought a steady paycheck, not a lifetime commitment.

Your employer may view things differently. From his standpoint, he has invested considerable time, money and effort training you to be a productive employee. He entrusted you with access to his proprietary processes, business information, and customers. To have you leave when his investment is beginning to pay off to start a competing business, strikes him as not only ungrateful, but unethical and possibly illegal.

So, how do you start a business without triggering a lawsuit from your employer that will embroil you in litigation in your first year (or more) of business?

Here are some issues to consider, along with a couple of dos and don'ts.

  1. Review Your Employment Agreement or Employee Manual. In my last blog, I discussed the enforceability of various non-compete and non-solicitation clauses in employment agreements, which restrict an employee's activities following the termination of employment. If you have an employment agreement, or even if your employer has an employee manual, it's important to review these documents for any limitations they may seek to impose on your post-employment activities, and to discuss them with your attorney to determine if they are enforceable. You will want to honor such restrictions to the extent they are enforceable.

Generally, in the absence of such restrictive covenants, an employee is free to leave and compete actively with his employer.

  1. What You Cannot Do. What you cannot do will largely depend on the contents of any restrictive covenants you may have agreed to in connection with your employment. Moreover, even in the absence of a restrictive covenant, an employee owes a duty of loyalty to his employer, which prohibits an employee from taking actions that are detrimental to the employer during his employment. This precludes taking any assets of the employer while you are still an employee for use in your planned venture, including, customer lists or other information you know your employer considers confidential, proprietary or trade secret.

Furthermore, you may not solicit or tell your employer's customers about your plans before you leave, or solicit the employer's personnel to join you, as this will be deemed a dereliction of duty.

  1. What You Can Do. What you may do is take preliminary steps to starting your new business prior to its launch, provided you do this on your own time. This may include forming the business entity, purchasing a domain, and locating and equipping a space to carry out the business. You must be careful not to begin promoting the business until after you have left your job.

Of course, none of these steps will insulate you from a lawsuit if your employer is unhappy with you becoming a competitor. However, because New York strongly favors competition and entrepreneurship, making your departure in an ethical way that is fair to your employer will greatly minimize your risk.

Frank J. Monteleone

Frank J. Monteleone

Monteleone Law

11 Broadway, Suite 615

New York, NY 10004

fjm@monteleonelaw.com