business

It's Hard to Stop a Runaway Rep

When salespeople jump ship and set up shop on their own, there's not a lot a former employer can do about it

By Karen E. Klein

Q: Is there any law that would allow me to stop former salespeople competing against my company for a period of time, say, 90 days? They didn't sign contracts agreeing not to compete, but I've heard that there are stipulations prohibiting groups of departing employees conspiring to take customers. Is that true? -- D.C., Mt. Laurel, N.J.

A:

In general, employees who have not signed a "noncompete agreement" are free to leave one job and go to work at another, or to start their own businesses -- even if the new job or company puts them in competition with their old employers. In several states, in fact, agreements not to compete are unenforceable, because the law reflects a strong sentiment that people should be able to earn a living in their chosen fields.

However, as with everything, there are limits. Certain employees owe special obligations -- called "fiduciary duties" -- to their employers, says Dan Park, a lawyer with Sheppard, Mullin, Richter & Hampton. "An employee with a fiduciary duty has a responsibility to put the employer's interests ahead of his own," he explains. "Examples of employees with fiduciary duties include officers and directors of a corporation." For those kinds of employees, conspiring with co-workers to set up a competing business could be judged a breach of fiduciary duty.

Another limitation on an employee's ability to change jobs is the requirement that a former employer's "trade secrets" can't be used to set up a competing business. Depending on the circumstances, a customer list could be considered a trade secret -- one the law would protect.

DAMAGE CONTROL

  "The unfair-competition and trade-secret laws permit a court order stopping employees who have stripped out a core business area of a company using its trade secrets," says Mark Terman, a partner with Reish Luftman McDaniel & Reicher in Los Angeles. "The more egregious the stealing and conspiring, the less likely a court will be to err on the side of the former employee who will say he did nothing wrong and is just exercising the right to earn a living in their chosen field."

If you believe a court would or could prevent your former salespeople from competing for a reasonable, limited time, you should consult with an experienced attorney, Park recommends.

More than legal measures, however, the best way to preserve your business is for senior management to visit key customers at the first hint that important employees are leaving. "Assure the customers that the company will continue to service their needs and that the customer need not consider competitors," Terman advises. In other words, sell your company strengths to retain your customers.

Have a question about your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.

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