Articles

Compete or not Compete: that is the question.

Let's say you're a long time insurance agent for a local insurance company. You spend many years helping the business grow increasing in the client's and revenues. No matter how hard you work, one thing remains clear: this is a family business. Translation: you will probably never end up in an ownership position, or see the true profits of your labors. You get a salary, expenses, and commissions; occasionally you get bonus. But the big bucks stay with the family ownership.

You also realize over the years that your talents and efforts have not been adequately rewarded. You think about opening your business, but realize that it might take five years or more to built an adequate income, when starting from ground zero. You also realize that many of the clients like you, recognize your name, and would probably give you their business if you left your employer.

You begin to be haunted by evil thoughts about this. Finally you decide that the only way you will ever be adequately compensated is to leave the business and take as many of the clients has you possibly can. There is only one hitch: you signed an agrement not to compete at the time you originally joined the insurance company.

What would happen if, in the above situation, you follow up with your plan, quit the firm, take employer's client lists, and succeed in taking over a third of the business when you open your own insurance firm?

In a similar case, the Washington Supreme Court recently decided the employer could sue the employee for violation (1) of their non-competition agreement, (2) Uniform Trade Secrets Act, and (3) other civil damage claims. The Court said:

"As a general rule, an employee who has not signed an agreement not to compete is free, upon leaving employment, to engage in competitive employment However, the former employee, even in the absence of an enforceable convent not to compete, remains under a duty not to use or disclose, to the detriment of the former employer, trade secrets acquired in the course of previous employment. Where the former employee seeks to use the trade secrets of the former employer in order to obtain a competitive advantage, then competitive activity can be enjoined or result in an award of damages."

Trade secrets include any information, which has "independent economic value". This would, of course, include lists of clients and other income producing information known to the employer.

Washington State has adopted a statue called the "Uniform Trade Secrets Act." This statue provides that the employer can sue a former employee for a violation of the statue, including misappropriation of trade secrets (which includes customer lists.)

In the recent case that I mentioned above, the fact the employee memorized the information, rather than taking a written list made no difference. The employer could still sue the employee. The court noted:

"While customer lists may or may not be trade secrets depending on the facts of the case, we conclude that trade secrets protection does not depend on whether the lists the lists are taken in written form or memorized."

The Supreme Court concluded that the damages awarded to the employer at trial should be affirmed. This included 1.5 times the actual commissions received. In addition, the Court prohibited the employee from using the memorized customer list in the future.