3. Trade secrets + customer lists = company gold.

Don’t take from others and don’t let others take yours.

                We must pause in this journey toward building an overwhelmingly successful business with an admonition that may seem obvious to some and completely sail over the heads of others.  Most entrepreneurs arrive at the starting line of a new business with a vision for the future and some degree of experience from the past.  Often, that experience comes from being employed within a business that was similar, but whose senior management may have missed or deliberately ignored what the entrepreneur sees as a great opportunity.

                And most senior and middle level managers will understand when a subordinate comes to them to resign and begin a new business.  But all will immediately question whether the new business will compete in any way with their enterprise, and react to the future entrepreneur in either of two very distinct ways based upon those fears.

[Email readers continue here…]      If the employee who is about to resign is off to conquer the world in a completely new arena, there is almost always the unspoken sigh of relief and a cooperative attitude that flows from the senior manager  from that point on in the conversation.

                But if the employee is even a little bit reticent to tell of the plan envisioned,  the result is the first stage of what could become an outright war between the present employer and a newly separated past employee, sent away that day with an escort out the door. 

                The same attitudes from past employers can be expected if a past employee resurfaces after a layoff, resignation or after being fired, with a plan for a competitive business.  Most employers have all their employees sign non-disclosure and confidentiality agreements to protect the company’s trade secrets, customer lists and business plans.  Many states recognize the right of a former employee to work, even if in direct competition with a past employer.  But that right clearly stops when the entrepreneur uses any trade secret data from the past employer, especially customer lists for contacts and confidential business plans as bases for new businesses. 

                Anyone can be sued even if without merit, and responding to a suit can be traumatic in many ways – from expenditure of cash and valuable time to emotional drain from worry over a negative outcome, to loss of industry goodwill by an entrepreneur perceived to have stepped over the line.

                This is especially true for someone who has sold a business only to surface later to compete in some way with the buyer.  Never underestimate the venomous response from such a threat.  

                So no matter what your circumstance, never, ever be guilty of using trade secret materials or ideas from your past employer, especially customer lists.

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2 Responses to 3. Trade secrets + customer lists = company gold.

  1. Mike says:

    David,

    Are there any circumstances in which the customer list could be up for grabs?

    For example I am working with a client who is starting a competing business with her former employer. Her employer proved to be completely unethical and completely ignored all his customers after losing enormous amount of their money in extremely ill advised or fraudulent investments. Her former employee breached her employment contract and has not paid her for months and is now considering bankruptcy.

    Throughout this process my client took all the heat from the customers and was there for them day in and day out (while not even being paid). In the process she earned herself a reputation with these clients as both an astute investor and ethical and supportive service provider. These clients are asking where she is going and what she is doing ‘next’ as they want to maintain a relationship with her. She has signed to confidentiality agreements at all with her former employer and many of the customers on the list she brought in herself.

    Given these circumstances should she still steer clear of previous clients?

    Thanks for your input.

    Mike.

  2. Dave Berkus says:

    Mike,
    The problem you describe is more steeped in the emotion of the moment than in the law. The fact that your client’s former employer may have made ill-advised or even fraudulent moves and may be close to bankruptcy are all conjecture until the bankruptcy is public and the trustee awards the assets to a purchaser. Until then, your client’s former employer retains its rights to all confidential property, including customer lists. That said, many, many people leave firms and send out notices of a change of address. As long as that notice does not solicit business directly and the person receiving it volunteers to call the new number, and as long as the list was not derived “directly” from the previous employer, no court will stop a former employee from independently finding names and mailing out an address change. The line is drawn at the point where a customer list from the past employer is used. Courts have long since biforcated “knowledge about customers” from use of a list of names obtained from the former employer. Hope this helps.
    -Dave

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