The scenario occurs daily in many different businesses. A disgruntled employee decides to use her talents, skills, and knowledge of the industry to start a rival enterprise. She plans to do things differently-offer lower prices, a different sales approach, a more service-oriented style. To minimize the risk involved, the employee decides to investigate potential markets, possible locations for the business, and financing. She would also like to discuss first-hand with current clients or fellow employees the possibility that they would follow her into the new business. Concerned with breaching fiduciary obligations, the employee contacts her attorney and asks for advice-specifically, what steps may she take while still employed?
The above hypothetical currently perplexes corporate attorneys because of uncertainty in the law on this matter. The law is clear that absent a covenant-not-to-compete, a high-level employee may resign and set up a new company directly competing with the former employer.' In so doing, the employee may use the skills and knowledge acquired from the employer, and the employee may solicit the employer's customers and employees. Promotion of free competition and entrepreneurial behavior justifies the rule; the right to start a new business based on an innovative idea, product, or approach is integral to our capitalist system. As studies have shown, small- and medium-size firms have employed the most people over the last two decades, serving as the largest source of economic growth.
Most business people, however, plan carefully before starting a new enterprise. Before beginning operations, the entrepreneur considers financing, location, the product, customers, and other items. Only through careful consideration of these factors can the entrepreneur make an informed decision about the new venture's likelihood for success. For the employee desiring to form her new business within the same industry that she currently works, such planning creates tensions with opposing policy interests-the duty of loyalty protecting the company from employee self-interest and free competition requiring that the employee have some freedom to make necessary preparations to compete.
Scott W. Fielding,
Free Competition or Corporate Theft?: The Need for Courts to Consider the Employment Relationship in Preliminary Steps Disputes,
52 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol52/iss1/12