Employee Starting a Competing Business? Your Next 5 Steps Are Critical

You just heard the news—a trusted employee is quietly starting a competing business.

The next 48 hours are critical.

Your mind races with questions: Are they using my client list? Is my confidential information at risk? It’s a moment that tests any business leader.

The worst thing you can do is panic.

This situation requires a swift, strategic, and business-first response, not an emotional one.

This article provides the five step process to take control of the situation and protect your business.

1. Revoke access to company computer systems

The first step in protecting your business is to stop any potential loss of clients, data, and intellectual property.

Before you do anything else, you must contain the threat.

• Revoke all system access: Immediately disable the employee's access to email, CRM, cloud storage, internal servers, and all other company platforms.
  
  
• Secure company property: Recover all company-owned assets, including laptops, mobile phones, keys, access cards, and any other technology.
  
  
• Preserve digital evidence: Make sure that all data on company owned technology is not erased. Not only will this show what, if any, information the employee took, but it can also be critical evidence if a lawsuit were ever necessary.

2. Conduct an internal audit

With the immediate threat contained, your next move is a rapid damage assessment. You need to gather the facts to understand your position.

Pull the employee’s file and locate all signed agreements. Find any employment contracts, non-compete agreements, non-solicitation agreements, confidentiality agreements, or anything else that the employee signed. These documents will serve as a starting point for determining what options you will have moving forward.

You will also want to review all company owned computers, cell phones, and other technology the employee used to determine if any confidential business information has been taken.  

3. Contact your business attorney

After the audit is complete, the next step is to contact your business lawyer and get an opinion about what options you have to protect the business.

The law surrounding employee agreements in Illinois is complex, and has changed substantially in recent years, so getting up to date advice is a crucial next step.

Some potential claims your counsel will evaluate include:

Violation of a non-compete or non-solicitation agreement

If the employee signed a restrictive covenant, this is your most direct path.

However, it is critical to understand that these agreements can be difficult to enforce in Illinois.

The Illinois Freedom to Work Act imposes several strict requirements. 

When deciding whether a non-compete or non-solicit is enforceable, courts will consider:

• Do the salary thresholds bar enforcement? The Act makes non-competes unenforceable for employees earning $75,000 or less and non-solicitation agreements unenforceable for those earning $45,000 or less.
  
  
• Is there adequate consideration?Generally, this means either the employee worked for at least two years after signing the agreement, or was provided other specific financial or professional benefits in exchange for the restrictions.
  
  
• Does it protect a "legitimate business interest?"You must be able to show the agreement protects things like your confidential information or the near-permanent customer relationships you've invested in.
  
  
• Is it narrowly tailored?The restrictions cannot be broader than what is necessary to protect your business, cannot impose an undue hardship on the former employee's ability to earn a living, or harm the public interest.

Misappropriation of trade secrets

Separate from any contract, Illinois law provides protection for a company's trade secrets via the Illinois Trade Secrets Act.

The Act defines a  trade secret as information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Essentially, it is confidential information about your business that has economic value tied to it being kept confidential to you.

However, keep in mind that you must have made reasonable efforts to keep the information secret.

In order to bring a claim for misappropriation of a trade secret, you will need to show that (1) a trade secret existed, (2) the secret was improperly acquired, disclosed, or used, and (3) that you suffered damages.

Your attorney will use the evidence from your internal audit to give you advice about whether you have a viable claim, and the chances of success.

4. Analyze the business impact and respond if necessary

Just because you can pursue a legal claim does not mean you should. The smart response is proportional to the business threat.

The first step is to analyze the impact that this has on the business. Quantify the risk. Here are some initial questions you should consider:

• What is the potential revenue loss from stolen clients?
  
  
• How valuable is the intellectual property at risk?
  
  
• Is there reputational damage to your brand?
  
  
• What will be the total cost of legal fees to pursue a lawsuit?
  
  
• If we pursue legal action, what is the cost of the operational drag on the business as resources and time are diverted to the lawsuit?

Legal action always comes with costs that are obvious, and some that are less obvious. Whether to pursue legal action should be viewed through a business lens to ensure that the response is what is best for the business.

After you have thought through the business impact, talk with your attorney about the pros and cons of the responsive options.

• Do nothing: If you believe the impact to your business will be low to non-existent, doing nothing is certainly a viable option. Monitor the situation and decide on a different response if it becomes necessary in the future.
  
  
• Send a cease and desist letter: A cease and desist is essentially a formal threat of legal action from your attorney. It outlines the employee's misbehavior, demands they stop any activity they are not allowed to do, and puts them on notice that you are prepared to enforce your rights.
  
  
• Negotiate a resolution: If the threat is contained but real, you may be able to negotiate a business solution. This could involve the former employee agreeing not to contact a specific list of clients for a period of time, saving both parties the cost and distraction of litigation.
  
  
• File a lawsuit: If the employee's actions pose a significant and immediate threat, your attorney may recommend filing a lawsuit. Often these lawsuits begin by seeking an order from the court to the other party to stop what they are doing, also called an injunction. This prevents the other party from harming your business while the merits of the lawsuit play out.

5. Evaluate what happened and plan for the future

Once the immediate crisis is under control, it is time to develop a plan to make it less likely to happen again. You can use this unfortunate event to strengthen your competitive position. Here are a few things you may want to consider moving forward:

• Update your employment agreement: Review and update your employment agreements, non-competes, and confidentiality clauses to meet the current, strict standards of Illinois law. Work with your employment lawyer to craft agreements that are as enforceable as possible in light of the restrictions in place.
• Create a formal off-boarding procedure: Standardize your exit process. Ensure that the process for revoking access to technology and data for departing employees is quick and uniform across the board.  
• Conduct regular training: Periodically train your staff on their duties to protect company confidential information and the importance of data security.

The best defense is a proactive one

Knowing what to do when an employee becomes a competitor is the first step in protecting your competitive position.

By following a clear, strategic process, you can move from a position of shock and vulnerability to one of control. Acting quickly to contain the threat, gathering the facts, and engaging expert counsel allows you to protect the business you've worked so hard to build.

If you are facing a critical situation like this and need to deploy a rapid response, or if you want to proactively protect your competitive position with a strategic legal framework, click the button below to schedule a consultation with our team.

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Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.