Rules for joining the competition
Almost all employees are free to leave their employer and work for a competitor. It happens every day, usually without controversy. However, if you run afoul of your obligations to your former employer, both you and your new employer may be sued.
My firm recently represented TSI International Group Inc. in a case that illustrates what can go wrong and did for John Formosa, a senior executive, and Stephen Nielsen, a senior executive and corporate director, as well as John Massih, TSI’s IT contractor. TSI is in the land banking business in Ontario and attracts many foreign investors. When Formosa and Nielsen failed to purchase TSI in 2014, following the death of one of the founders, they plotted to set up a competing company, while still employed by TSI. Both had signed agreements confirming their obligations to TSI.
But that didn’t stop them from incorporating a company with the same name as the trade name and logo being used by TSI for a new business. They also opened a bank account at the branch used by TSI, copied its business forms and advertising using TSI copyrighted material and even deleted some of TSI’s paper and electronic files in an attempt to cover their tracks.
The pair co-opted Massih to remove TSI backup hard drives, which contained confidential information including personal data for TSI’s thousands of investors. Using an office rented by Richard Taylor, a commercial real estate agent they enlisted, they met with a TSI foreign business agent (who was under contract to a TSI affiliate) and a foreign investor.
When TSI confronted Nielsen about his activities, he lied or evaded answering questions. Nielsen and Formosa were terminated for cause and TSI sued and sought immediate injunctive relief, which was granted by the Ontario Superior Court.
Following are some things employees should consider when leaving their employer to embark on a new venture or job: ❚Have you signed an agreement that prevents you from soliciting customers or suppliers or other employees, or competing with your former employer? if so, have it examined by an employment lawyer to determine whether such clauses are legally enforceable. Where such clauses are too broad geographically or temporally, or are not specific enough, or the agreement is signed after you start, a court will declare them unenforceable. ❚Do you have access to confidential information such as trade secrets, customer lists, marketing plans and financial information? If so, whether you signed a confidentiality agreement or not is irrelevant. You are prohibited from using or disclosing such information after you leave your employment as long as that information remains confidential. Moreover, do not use any of your employer’s intellectual property such as trademarked or copyrighted materials. If you do any of this, the employer has considerable remedies against you; ❚Do you have a list of customers or a special relationship with valued customers or suppliers such that if you left and solicited them they would follow you? If so you may have an obligation not to solicit them as you may be deemed a fiduciary. ❚Are you an officer or director? If so, you will virtually certainly be considered a fiduciary and enjoined from soliciting customers or other business opportunities.
If you fall into any of these categories you may be prevented from working for a competitor, including starting a new company with the intention to compete. Even if you don’t fall into any of these categories, if you are leaving with someone who does, you can be fixed with the same obligations as that person.
Finally, be sure to inform your new employer (or business partners) of your obligations to your former employer to give them the option of continuing with you. If you fail to and your new employer is sued, you can be fired for cause for failure to disclose material facts.