UNFAIR COMPETITION

Unfair Competition Generally

The entrepreneur should be aware of the law of unfair competition so that he or she will be in a position to prevent company from inadvertently creating legal exposure to liability for infringing on another's rights, as well as to ensure that the company's rights are not violated by competing businesses in an unfair and unlawful manner. In the former context, if the founders or key technical employees have been previously employed by another company in the same or similar business, the entrepreneur should carefully review the factual situation to determine whether there were any confidential data agreements, covenants not to compete or employment agreements which restrict the ability of the employees to utilize any information gained in such former employment, or otherwise to compete by soliciting employees or customers of the former employer. In absence of an agreement, the law of unfair competition may protect the former employer's trade secrets under common law.

Unfair Competition Between Companies and Former Employees

If an employee leaves to work for a competitor, and engages in unfair competitive activities, the company may be able to enjoin such acts under various tort theories – misappropriation of trade secret, breach of an implied covenant of fair dealing and good faith arising from the employment relationship, breach of confidential relationship, again arising from the former employment relationship, breach of fiduciary duty, interference with prospective economic advantage and interference with contractual relations. In addition, if the company had entered into an employment agreement or invention and secrecy agreement, which restricted the disclosure or use of trade secrets, a contractual cause of action would be available to the company. Thus, an employer may be able to restrict the employee's activities with his or her new employer through a covenant not to compete, an assignment of inventions agreement, or a confidentiality agreement.

Solicitation of Customers by Former Employees

If an employee agrees not to solicit customers, at least for some specified period of time after termination of his or her employment, such a covenant might be enforced under the laws protecting trade secrets, or under an implied covenant of good faith and fair dealing contained in contracts. If there is nothing confidential about the identity of customers, a covenant not to solicit them will generally not be enforced by the courts against a former employee who solicits such customers. Similarly, the courts will protect an employee's mobility and will not restrict the employee's right to transfer his or her employment between companies even where he or she is working on technological proprietary products or processes, as long as he or she does not misappropriate trade secrets.

Soliciting Company Employees

If a former employee solicits former colleagues to work for a competitor, the courts have often held such actions to be unfair business practices. The courts generally uphold restrictive covenant against former employee in which he or she agreed not solicit former colleagues. The courts also held that a former employer might recover damages for intentional interference with an at-will employment relation under the same standard applicable to claims for intentional interference with prospective business advantage. On the other hand, the courts noted that what is prohibited is only the solicitation of employees, and that former employees cannot be prohibited from accepting job applications from their former colleagues and then acting on those applications.

Organizing a Competing Business

Generally, an employee may leave a company and organize a competing business. Within limits, he or she may even take certain steps to organize such competing business before his or her termination of employment. Before the end of his employment, an employee can properly purchase a rival business and upon termination of employment, immediately compete. He is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's business. An employee is subject to liability if, before or after leaving the employment, he causes fellow employees to break their contracts with the employer. On the other hand, it is normally permissible for employees of a firm, or for some of its partners, to agree among themselves while still employed, that they will engage in competition with the firm at the end of the period specified in their employment contracts. However, the courts may find that it is a breach of duty for a number of the key officers or employees to agree to leave their employment simultaneously and without giving the employer an opportunity to hire and train replacements.

Wrongful Termination of Distributorship or Agency

A wrongful termination of an agent's or distributor's relationship with a manufacturer may give rise to claims of unfair competition and antitrust violations. Generally, if a distributorship contract does not have a fixed date for expiration, it may be terminated at any time by either party unless one of the parties acquires a vested interest in the continuation of the contract by the expenditure of money, or considerable efforts to develop the distributorship which is done with the consent or acquiescence of the other party. In these situations, the courts may imply an intention to continue the contract. However, where the manufacturer unfairly enters into competition with the former distributor, the courts have held that such conduct constitutes unfair competition.