CHAPTER II
What if You Have Already Signed a Non-Compete Agreement and Now Want to Leave and Start Your Own Business?
We get the following call frequently from prospective clients:
“I have been working at Virginia Corp., Inc., for the last five years. I think I signed a contract when I started, but am not sure. I now want to leave and start my own business; what should I do?”
We will provide practical and legal advice, but as discussed in the Introduction, the courts will examine the facts of each case individually. There is no magic litmus test to determine whether your agreement is a valid or enforceable contract.
This makes it absolutely impossible for attorneys to tell clients definitively what will happen if they leave their jobs and start their own business. If a Virginia attorney tells you they are 100% sure you are not in breach – hang up the phone and call someone else. No attorney can guarantee a specific result from a Virginia court.
We can, however, walk you through the process of leaving your job and advise what actions may be a breach of your contract. So Client #1 would hear the following from our law firm:
1. Get a copy of the agreement.
Did you save a copy of the agreement? If not, you need to get one. It is preferable to learn whether your employer still has your signed copy. It will be difficult for your employer to claim or prove breach if it cannot prove you ever entered into an
agreement.
Get a copy of the agreement, and if other documents were signed, you will need copies of all subsequent agreements. Sophisticated employers will have their attorneys re-draft agreements as case law in Virginia changes. I have seen small businesses present a new non-compete agreement to employees every year. It is important to know which one you signed, and get a copy.
2. Have an attorney review the agreement.
Even if you are hell-bent on starting your own business, or convinced your new venture will not breach your old agreement, have an attorney review the contract.
Although an attorney cannot guarantee results, or what a court would say about your contract, you will be much better equipped to handle the risks of starting a new business. Even if you had an attorney review the contract when you signed
it 5 years ago, laws change and you will need counsel to review the contract again.
3. Don’t plan your new business at work!
This is not a joke. We cannot count how many times prospective clients have used company email, computers, cell phones, etc., to plan their new business ventures. This type of activity is so disfavored in Virginia, it could lead to other legal actions such as breach of fiduciary duty, Virginia Computer Crimes Act, etc.
Ignore temptation and do not plan your new business at work. This includes the following prohibited activities:
- Do not use office email to discuss your new business.
- Do not solicit co-workers to join your new business.
- Do not perform internet searches on your office computer on how to start a business, etc.
- Don’t start your new business (by registering with the State Corporation Commission, Better Business Bureau, etc.) while still employed.
- Don’t tell clients/customers about your new business plans.
- Don’t copy or download documents or client lists and email them to your new email address.
Anything you do on your office computer, cell phone, etc., will be used against you by your employer. (I know, sounds like you are being read your Miranda Rights). You have no right to privacy on your office computer and I guarantee your colleagues will not keep the secret you have asked them to keep. Please be smart, and DO NOT PLAN YOUR NEW BUSINESS WHILE STILL EMPLOYED.
4. Do not advertise your new business until you know your non-compete agreement is not an issue.
As an attorney, I hate it when my client is made to look like a liar during litigation. The following situation has occurred in more than one case:
QUESTION: “Mr. Smith, did you start planning your new business before leaving Virginia Corp, Inc.?”
ANSWER: “No, Mr. Bad Guy corporate lawyer, I didn’t even consider starting my own business until months after I left.”
QUESTION: “Mr. Smith, what day did you leave Virginia Corp, Inc.?”
ANSWER: “I left January 1, 2006.”
QUESTION: “Mr. Smith, didn’t you file for a Federal Tax ID Number, organize an LLC with the State Corporation Commission, hire two employees, post an update on LinkedIn, and notify friends and family in a Christmas letter that you were planning on starting your own business all before December 15, 2005?”
Even if you did everything above board, advertising your business too soon will make you look like a jerk. Judges are only human, and if you are made to look like a liar who planned this new business for many months, it will be much harder for the judge to focus on the legal issues and not the bad facts.
I have even had people attend conferences, take out phone book ads, and create business cards for businesses months before they left their own employer. Although I cannot cite a study to prove it, this type of planning is so hurtful to employers, it almost always leads to litigation.
Be smart – and don’t advertise your business in any way. This includes social media sites like LinkedIn, Facebook, Squidoo, My Space, etc. This type of action will also subject you to additional claims from your employer, such as breach of fiduciary duty or duty of loyalty.
5. Be Honest.
Please don’t act so surprised that an attorney is asking you to be honest. If you plan on leaving to start your own business or join a competing business, maybe something can be worked out with your employer. Buying out your employment agreement is an option. Often it is both financially and psychologically satisfying for employers to be offered a sum of money to release an employee from a non-compete agreement.
One way or another being forthright and honest about your plans saves everyone time and money in litigation.
6. Seek legal action to determine validity of the agreement.
I often ask clients, “Would you like to know, before you even start your new business, whether your employment agreement will be considered valid and enforceable in a Virginia court?”
So far, everyone has responded to that question in the affirmative. Then I tell them we can find out how a court will rule on their agreement by merely asking the court…in advance. This type of legal action is called a Declaratory Judgment action in Virginia. You file a lawsuit and simply ask the court to determine whether the agreement is valid and enforceable under Virginia law.
Yes, it means attorneys’ fees and court costs, and going to court, but it also could save you a lot of money and time. The average breach of contract case filed by the employer takes over a year to litigate, and probably over $25,000 in attorneys’ fees for both sides. Even then, if you lose you may have no right to operate your business and could owe your former employer money damages.
However, if the court tells you after four months of litigation in a Declaratory Judgment action that your agreement is enforceable, you will have saved thousands of dollars in attorneys’ fees, damages and a failed business. On the bright side, if the court rules the contract is NOT enforceable, you can proceed with your new business in peace.
Either way, sometimes asking the court to rule is the best option for everyone.
So for those Virginians wanting to pursue the American dream and start your own business, start by considering the employment agreement you have signed. Ultimately, you must decide what risks you are willing to take, but you may find it is worth the effort of negotiating with your employer,filing a Declaratory Judgment action, etc.