Employees owe their employers certain fiduciary duties. In particular, the duty of loyalty requires that the employee not do anything to harm the employer (like compete or usurp business opportunities) during employment. If an entrepreneur is not subject to a non-compete, after they are no longer employed, they are permitted to compete. But what are entrepreneurs allowed to do to prepare to start their business while they are still employed? What is the difference between competing or preparation? The answer to that will likely hinge upon the applicable jurisdiction and its body of law.
For instance, Arizona permits preparation while still employed so long as it doesn’t take the form of “acts in direct competition with the employer’s business.” The question is, where do you draw the line? As you may guess, the answer will be determined on a case-by-case basis. Making arrangements like renting office space, creating business materials (business cards, stationary, logo), parking a website domain name, are usually permissible. When the preparation goes further and starts to resemble competing with the employer, that is when the problems start. For instance, trying to take the employer’s customers or employees is a fiduciary duty violation. The entrepreneur (if still employed) needs to be advised as to how far they can go with preparations.
Additionally, while the entrepreneur prepares, they are not allowed to use company property or disclose the employer’s confidential information. For these reasons, and the reasons set forth above regarding trade secrets, it is important to advise the entrepreneur to return or leave behind all property that belonged to the employer.
What if the entrepreneur has already done some of the above? Keeping in mind that we are committed to helping the client, not simply delivering news of impending doom, how do you advise them as to the next steps?
As you undoubtedly noticed, the above subdivisions overlap and blend into one another quite often.
📖 Read the case of Iconix, Inc. v. Tokuda, 457 F.Supp.2d 969 (2006). This case covers a lot of the issues we discuss in this Unit.