Are You Thinking About Leaving Your Employer for a Competing Venture? Know the Steps You Can Take Before Resigning

by:  Amy M. Gibson

If you are an employee and are thinking about leaving your company to either join a competing venture or form your own rival company, it is imperative for you to be aware of the steps that you are permitted to take to avoid opening yourself up to liability.

Under Illinois law, an employee owes his employer a duty of fidelity and undivided loyalty and is prohibited from acting in a manner which is inconsistent with the interests of his employer.  The employee’s duty is not exclusive, but is an obligation to act solely for the benefit of the employer in all matters connected to the employment.

Generally speaking, however, absent a non-competition or other similar agreement, an employee has a right to enter into competition with his former employer after he has left the company.  Indeed, an employee may legitimately go so far as to form a rival corporation and outfit it for business while still employed by his employer.  Under Illinois law, this is referred to as the “outfitting rule.” 

Under the “outfitting rule,” the following acts, among others, have been held not to violate an employee’s fiduciary duties to his employer:

• Planning, forming and outfitting a competing company;
• Signing a loan application for the new company;
• Opening a bank account for the new company; and
• Purchasing machinery.

On the other hand, the following acts have been held to violate an employee’s fiduciary duties to his employer:

• Commencing a rival business while still employed;
• Creating a customer database for the new company before resigning;
• Extending offers of employment to employees of the current employer before resigning; and
• Soliciting customers from the current employer while still employed.

It is important to note that there is a very fine line between what types of behavior are permissible and what types of behavior are not.  If you are contemplating leaving your employer for a competitor or forming your own rival company, make sure you know your boundaries and understand what actions you may take before resigning.  Taking an impermissible course of action may result in a lawsuit being filed against you or, even worse, being enjoined from engaging in your new business altogether. 

If you would like further information on the “outfitting rule” or recent publications on this topic, or require assistance in defending against a claim by your former employer, please contact us.