How to Avoid Conflicts with Your Employer as You Start Your New Business in California

With the exception of a handful of college students who start their new businesses  between mid-terms and dorm parties, most entrepreneurs  develop their start-up business ideas when they are employees of other companies.  If you are currently employed when you start your new venture, or even if you recently left a job to begin working on your new business, you must be careful not to run afoul of your former employer’s rights.  Otherwise, you may find yourself with an un-financeable company and, possibly, on the wrong side of a lawsuit. 

What are the Rules?

Navigating the development of your new business while departing from your employer in California requires the balancing of often conflicting public policies:  (i) protection of an employee’s mobility; and (ii) protection of an employer’s proprietary rights, including its trade secrets.  

You may compete.

Unlike many states, California has a strong public policy of allowing employees to use their talents and skills for any employer, and to move from employer to employer.  That concept is embodied in the California Business and Professions Code Section 16600 which provides that, subject to certain limited exceptions generally involving the sale of a business, “...every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  This prohibition means that even if a California-based employee signs a non-compete agreement with her employer (that may be headquartered within or outside of California) that is narrowly tailored to the precise scope of the employer’s business and is only for a limited period of time, that non-compete agreement is very likely to be unenforceable in California.[1] 

But you may not use your employer’s trade secrets or other confidential information.

However, as with most green pastures, a little rain must fall.  California, like most states, also favors protecting businesses’ trade secrets and honoring employee confidentiality and invention assignment agreements.  Regardless of whether or not you have signed a contract agreeing not to use or disclose your employer’s trade secrets, you may not “misappropriate” them (i.e., take them and use them as your own).  The definition of a trade secret is quite broad in that it is any information that derives economic value to its owner from not being generally known to others, and is the subject of reasonable efforts to protect its secrecy.

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You Can't Take It With You.
Here are some examples of information that may be considered trade secrets:

• customer and prospective customer names, contacts and related information
• marketing plans (including plan for advertising campaigns, new product announcements)
• product designs
• not-yet-announced new product names
• formulas

• pricing (including discounts)
• costs of inputs to the products
• manufacturing specifications and processes
• network infrastructure
• financial information, including sales and revenue amounts
• employee information (experience, expertise and compensation)

Plan ahead to avoid a tug-o-war over IP.

Also, if you signed a confidentiality or similar agreement, not only are you not permitted to use your employer’s trade secrets, but you will likely have to comply with the terms of that agreement and not use or disclose your employer’s other confidential information.  Employee confidentiality agreements sometimes include a prohibition against soliciting your fellow employees for a period of time after you leave your employment, so take great care in sharing your excitement about your new business with your co-workers.[2]

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You may use your development work depending on where, when and how you created those developments. 

Entrepreneurs, again, get some help from California public policy and law, as well as have a bit of a tightrope to walk.  California Labor Code 2870 provides that an employer cannot require an employee to assign her inventions developed entirely on her own time without using her employer's equipment, supplies, facilities, or trade secret information except for those inventions that are (i) related to the employer’s actual or “demonstrably anticipated research or development” or (ii) the result of work performed by the employee for the employer. 

What do you do?

Although you should meet with experienced legal counsel to help you navigate starting your new company while departing from your employer, here are a few general suggestions to consider:

• Read and make sure you understand all of the agreements you signed with your employer.
• Conduct your research and development on your own time, without your employer’s resources (watch those company issued PCs, tablets and phones!)
• If you can, tell your employer about your new business.  This will prevent your employer from feeling blind-sided by your new venture and may even garner you a new investor or business partner.
• Don’t take any employer information or equipment, and keep records of when and how you came up with your business plan and inventions.
• Don’t solicit your colleagues or your employer’s customers.
• If you didn’t know about it until your work with your employer and the only way you reasonably could know about it is through your employer, think twice about adopting it as your own.

[1] The enforceability of non-competition agreements varies from state to state, so if you have signed a non-compete agreement and work outside of California, please check with your legal counsel about its implications.
[2] While the California Supreme Court in Edwards v. Arthur Andersen LLP (2008) upheld the strong prohibition on non-competition agreements in California, it did not directly address the question of non-solicitation provisions.  Some practitioners believe that narrowly tailored non-solicitation provisions carefully designed to protect trade secrets may still be enforceable



With contributions from Ilene Goldberg.