Legal question - Restraint of trade?

[Chocaholic]

Hypothetical situation:

General Manager leaves a company (industry leader). Two years later the National Sales Manager of the same company leaves. They partner to start their own company in the same industry. The new partners pursue business with their contacts in this somewhat niche market. As they work to grow their business, they take business away from the former employer, as well as other competitors in the industry.

There were no non-compete contracts in place with the GM or NSM as employees. Assuming the partners are successful in their new business venture, do they harbor any liability by winning business away from their previous employer?

[lendaddy]

If they can prove theft of documents or systems or something like that maybe, but without a no-compete I can't see it.

[Hugh R]

Not a lawyer, but generally "no compete" clauses don't apply unless the company is going to pay them for the time they don't compete. Company can't not let you make a living.

[lendaddy]

Originally Posted by Hugh R

Not a lawyer, but generally "no compete" clauses don't apply unless the company is going to pay them for the time they don't compete. Company can't not let you make a living.

Never heard of that Hugh, could it be a Cali thing?

It doesn't matter in this instance as there were no such agreements, but now you have me curious.

[Chocaholic]

What if the partners hired other people away from the original company? It seems that would be ok too, as the employees are free to work where they want. No? Could the original company say they were being pillaged and, as a result, restrained from a fair business environment?

[Flatbutt1]

Pillaged? I don't see how the original company could fairly do anything to the strtup company. Unless the former employees stole customer lists or contracts etc. then its open competition. If the original company can't hang on to their employees, who is to say the startup is responsible?

[Hugh R]

Len,

How could it be legal in any state? You can't hire an employee and say "Oh, if you leave me, you can't work anywhere else doing the same thing" That's rediculous. You can probably be sued for taking proprietory info, but your contact list? What if you don't take the contact list, but you remember their names, phone numbers and who those old clients were? I'm not a lawyer, or anything like that. But people leave companies every day and woo away old clients all the time. If you want to have an ex-employee not compete, the only way is if you compensate them. If you have someone sign an employment agreement that says if I can you or you leave, you can't compete with me for x period of time. Where x could be forever.

Also, your going to tell your client that he can't use the start up company? I don't think so.

[lendaddy]

Originally Posted by Hugh R

Len,

How could it be legal in any state? You can't hire an employee and say "Oh, if you leave me, you can't work anywhere else doing the same thing" That's rediculous. You can probably be sued for taking proprietory info, but your contact list? What if you don't take the contact list, but you remember their names, phone numbers and who those old clients were? I'm not a lawyer, or anything like that. But people leave companies every day and woo away old clients all the time. If you want to have an ex-employee not compete, the only way is if you compensate them. If you have someone sign an employment agreement that says if I can you or you leave, you can't compete with me for x period of time. Where x could be forever.

Hugh, non competes are very common and the employee signs it before they become employed. Many are limited to X miles or a certain region(and certainly a time period), but yes the very purpose is that they not take the same job elsewhere as a competitor using the knowledge and training you've invested in them.

[Dottore]

It's called free enterprise.

Unless restrained by contract - they can do what they like.

Even if restrained by contract - courts tend to enforce those provisions in a very narrow way i.e., in favour of the person being restrained - except in cases where they received big $ for signing the contract.

[lendaddy]

I want to add that I'm not claiming to be right, I'm just stating the way I understand it. Many of my friends and associates have them in place so I'm curious what the point is if they are non enforceable.

[Dottore]

Originally Posted by lendaddy

I want to add that I'm not claiming to be right, I'm just stating the way I understand it. Many of my friends and associates have them in place so I'm curious what the point is if they are non enforceable.

They are enforceable. But courts are often reluctant to do so - particularly if they are unreasonable.

In other words the restraint imposed has to bear some relation to the money paid to the person being restrained.

[lendaddy]

Looks like Cali is different, this from Wikipedia:

A non-compete clause, or covenant not to compete (CNC), is a term used in contract law under which one party (usually an employee) agrees to not pursue a similar profession or trade in competition against another party (usually the employer). As contract provisions, a CNC is bound by traditional contract requirements, including the consideration doctrine. The use of such clauses is premised on the possibility that upon his or her termination or resignation, the employee might begin working for a competitor or starting a business, and gain competitive advantage by abusing intimate knowledge of the employer's operations to release trade secrets or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.
Conversely, a business might abuse a non-compete covenant to prevent an employee from working elsewhere at all. Most jurisdictions in which such contracts have been examined by the courts have deemed them to be legally binding, so long as the clause contains reasonable limitations as to the geographical area and time period in which an employee of a company may not compete. Courts have held that, as a matter of public policy, an individual can not be barred from carrying out a trade in which he has been trained except to the extent that is necessary to protect the employer.^{[citation needed]}
These are becoming more popular among companies within the United States and abroad and may or may not be enforceable in particular states within the United States.

Enforceability in the State of California

Unlike the situation in other states, non-compete agreements are illegal in California and against public policy. (California Business and Professions Code Section 16600

[Hugh R]

Fair enough. Notice in the first definition it mentions the "consideration" doctorine. That means paying money, as in "You pay me my salary for a year after I leave, and I won't compete with you during that year".

[lendaddy]

Originally Posted by Hugh R

That means paying money, as in "You pay me my salary for a year after I leave, and I won't compete with you during that year".

If that's the case it's news to me...but then many things are news to me

[stuartj]

Dunno abpout the US, but unless there is theft of confidential information, or some breach of clear "no compete" agreement, courts are generally reluctant to stop someone form plying their trade.

It can get very messy and expensive. Afriend of mine is currently involved in an action to restrain a new competive company that was started with funds paid to the priciples in regard to sale of the original business. In other words, they went around the corner and opened up in opposition in clear breach of the sale agreement. Its still proving messy and expensive to restrain them.

[Hugh R]

Stuart that's different. The contract may have prohibited them from opening a competing business as a condition of the sale of the original company (read: consideration, as in paid money not to compete as part of the sale).

[Dottore]

Originally Posted by Hugh R

Stuart that's different. The contract may have prohibited them from opening a competing business as a condition of the sale of the original company (read: consideration, as in paid money not to compete as part of the sale).

Right. A non-compete agreement in the case of the sale of a business is something else altogether from a non-compete in individual employment severance agreements.

[stuartj]

Quite true gents. The similiraity I didnt acticulate to make the connection (duh) was the use of, or theft of, confiential information in this case- which IME is often the thing that restraining clauses placed on individuals turns upon.

[artplumber]

Originally Posted by Hugh R

Fair enough. Notice in the first definition it mentions the "consideration" doctorine. That means paying money, as in "You pay me my salary for a year after I leave, and I won't compete with you during that year".

Not quite Hugh. It means that the employee must pay the prior employer a portion of the profits or income if the former employee violates the noncompete clause. Usually however, noncompetes are limited to a specific time from severance.

(I think this is what lendaddy means)

[911Rob]

Nope, nothing to worry about.
Have at 'er!

The concept works like this:
Best to train your employees and lose them to competition; than not to train them and keep them.

Cheers,