Non-Compete Clause Challenge in a Startup Environment
Disclaimer: I tried looking up existing threads on this, but couldn't find any. If there is enough, please redirect me there and we can close this thread.
A senior member of a startup leaves after 7 years with complete clearance and exit formalities. After 6 months, he starts a new company, working more or less in the same sphere. There was a vague 2-year non-compete clause in the appointment letter. His ex-bosses call him up and softly let him know about their tracking of this individual's work and suggest that he exercise caution in approaching former clients or the ex-company's core clients.
This guy had so far been clear about his intentions not to directly compete for projects, but now intends to challenge this bullying. He also enjoys the fact that the ex-company actually fears losing business to a one-man startup, thus showing their lack of confidence in their abilities and their concern about how much business this new startup can take away by leveraging.
From India, Mumbai
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139Disclaimer: I tried looking up existing threads on this, but couldn't find any. If there is enough, please redirect me there and we can close this thread.
A senior member of a startup leaves after 7 years with complete clearance and exit formalities. After 6 months, he starts a new company, working more or less in the same sphere. There was a vague 2-year non-compete clause in the appointment letter. His ex-bosses call him up and softly let him know about their tracking of this individual's work and suggest that he exercise caution in approaching former clients or the ex-company's core clients.
This guy had so far been clear about his intentions not to directly compete for projects, but now intends to challenge this bullying. He also enjoys the fact that the ex-company actually fears losing business to a one-man startup, thus showing their lack of confidence in their abilities and their concern about how much business this new startup can take away by leveraging.
From India, Mumbai
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Dear friend,
Situations of this kind are not so common, but they do happen. What is your product or service? You have not mentioned that.
A very prominent plywood company has a competitor in the form of their own ex-employee. A large number of small courier companies are owned by ex-couriers or managers working in courier companies. In Marathi, there is a proverb "Kurhadicha danda, gotas kaal." At times, something of this kind happens in business.
Running a business is not that easy. So far, he has worked under the umbrage of the MD. Now he does not have that protection. No employee can be a master in operations, sales/marketing, etc. He could face myriad problems, and he may have to shut down as well. You may have to show patience until that time.
To avoid situations of this kind, it is better to keep a close eye on employees who have entrepreneurial ambitions. But now that time has passed.
A very prominent spice powder-making company from Kerala has a large number of franchisees. Many of them are their ex-employees. Try exploring this option. If you make him your company's franchisee, then you will be able to protect your clients.
You are worrying about this person's ability to convert your clients. I doubt it. Companies are tied to the products/services and not to persons. Possibly, he may start selling his product or service at a reduced price. But then, no business has succeeded in the long run by selling at a low price. A classic example is Reliance Infocom. They started their mobile service with a 40 Paisa per minute rate about a decade ago. Today they show a debt of Rs. 38,000 Crore (INR 380 billion) on their balance sheet.
As far as the non-compete agreement is concerned, I am doubtful about how effective it will be. You may consult some lawyer on this.
Thanks,
Dinesh V Divekar
From India, Bangalore
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Situations of this kind are not so common, but they do happen. What is your product or service? You have not mentioned that.
A very prominent plywood company has a competitor in the form of their own ex-employee. A large number of small courier companies are owned by ex-couriers or managers working in courier companies. In Marathi, there is a proverb "Kurhadicha danda, gotas kaal." At times, something of this kind happens in business.
Running a business is not that easy. So far, he has worked under the umbrage of the MD. Now he does not have that protection. No employee can be a master in operations, sales/marketing, etc. He could face myriad problems, and he may have to shut down as well. You may have to show patience until that time.
To avoid situations of this kind, it is better to keep a close eye on employees who have entrepreneurial ambitions. But now that time has passed.
A very prominent spice powder-making company from Kerala has a large number of franchisees. Many of them are their ex-employees. Try exploring this option. If you make him your company's franchisee, then you will be able to protect your clients.
You are worrying about this person's ability to convert your clients. I doubt it. Companies are tied to the products/services and not to persons. Possibly, he may start selling his product or service at a reduced price. But then, no business has succeeded in the long run by selling at a low price. A classic example is Reliance Infocom. They started their mobile service with a 40 Paisa per minute rate about a decade ago. Today they show a debt of Rs. 38,000 Crore (INR 380 billion) on their balance sheet.
As far as the non-compete agreement is concerned, I am doubtful about how effective it will be. You may consult some lawyer on this.
Thanks,
Dinesh V Divekar
From India, Bangalore
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Understanding Competition in Business
An interesting question arises: Is this case legally punishable? Facts are more powerful in their existence, though they can be annoying.
The most important thing to know is that there is nothing in business that cannot be competed against. Most organizations that exist today are evolutions of similar cases. There is always one person with a great or good idea to start a business, and this idea is often copied to multiply. This is history. Entrepreneurship is not a single person's forte. It has been true since the days of the first business, dealing with a product or service. Competition can be on product ranges, expected needs, product packages, service needs, price, quality, markets, etc. The world is a huge market for as many players as it can hold.
In fact, during my early days of training, an entrepreneur who was a trader turned manufacturer was worried about competition from one of his early employees who also became a trader in the same business arena. This led to a considerable loss of business for him. This is where one should consider making the employee-turned-trader a competitor now as a franchisee or agent, as Mr. Dinesh has rightly pointed out.
This evolution is true and will keep happening. The important learning, therefore, is:
1. Do not fear competition.
2. Do not be scared of losing the so-called secrets of business such as market information, design, etc.
3. Do not waste your time worrying about people who might steal the secrets because it is not easy becoming a successful entrepreneur. Remember that you have been the pioneer, and you have your own strengths.
4. Use all your time and energy in looking at the business proactively based on consumer and market needs.
5. You are still the pioneer, and do not lose your position to someone due to fear.
Thanks,
Nalina K.
[Phone Number Removed For Privacy Reasons]
Trainer & OD Consultant
email: [Email Removed For Privacy Reasons]
From India, Tiruppur
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An interesting question arises: Is this case legally punishable? Facts are more powerful in their existence, though they can be annoying.
The most important thing to know is that there is nothing in business that cannot be competed against. Most organizations that exist today are evolutions of similar cases. There is always one person with a great or good idea to start a business, and this idea is often copied to multiply. This is history. Entrepreneurship is not a single person's forte. It has been true since the days of the first business, dealing with a product or service. Competition can be on product ranges, expected needs, product packages, service needs, price, quality, markets, etc. The world is a huge market for as many players as it can hold.
In fact, during my early days of training, an entrepreneur who was a trader turned manufacturer was worried about competition from one of his early employees who also became a trader in the same business arena. This led to a considerable loss of business for him. This is where one should consider making the employee-turned-trader a competitor now as a franchisee or agent, as Mr. Dinesh has rightly pointed out.
This evolution is true and will keep happening. The important learning, therefore, is:
1. Do not fear competition.
2. Do not be scared of losing the so-called secrets of business such as market information, design, etc.
3. Do not waste your time worrying about people who might steal the secrets because it is not easy becoming a successful entrepreneur. Remember that you have been the pioneer, and you have your own strengths.
4. Use all your time and energy in looking at the business proactively based on consumer and market needs.
5. You are still the pioneer, and do not lose your position to someone due to fear.
Thanks,
Nalina K.
[Phone Number Removed For Privacy Reasons]
Trainer & OD Consultant
email: [Email Removed For Privacy Reasons]
From India, Tiruppur
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A good question, but please note one thing – anybody is free to start a business of any kind. Now, you don't expect a person to leave an organization and start a business in a field in which he/she is not an expert. Definitely, an ex-employee can also have full rights to become an entrepreneur and start a business in their field. So, you cannot stop anybody. If he is pulling your customers, then you have to dig into the root cause in your organization to understand why you are not able to satisfy your customers and why they plan to move to somebody else, rather than finding fault in your ex-employee. This only means that your ex-employee is providing better service or trying to do so. There is virtually no law that prohibits starting competition, as it is a part of society to prove who the best is. There is nothing called a monopoly in any business.
From India, Mumbai
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From India, Mumbai
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Thanks, Dinesh, Nalina, and Moiz. In different ways, all of you have helped answer a complex problem. Yes, from the former company's point of view—it is indeed pettiness and insecurity that are making them nervous about a start-up. Maybe they realize that there is potential in this breakaway to take away clients. From the entrepreneur's point of view, the insecurity among his ex-bosses is just an amusing irritation and an oblique proof of his confidence.
Legal Position and Concerns
However, the legal position remains unanswered. Is he/his venture sue-able? I believe not, but some enterprises are simply vindictive for the sake of being vindictive. What is the best course to follow then?
Oh yes, by the way, I am talking for the new entrepreneur and not from the old one's desk :)
From India, Mumbai
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Legal Position and Concerns
However, the legal position remains unanswered. Is he/his venture sue-able? I believe not, but some enterprises are simply vindictive for the sake of being vindictive. What is the best course to follow then?
Oh yes, by the way, I am talking for the new entrepreneur and not from the old one's desk :)
From India, Mumbai
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In case the ex-employers are not pursuing legal options, it could be that the lawyers have advised them that in this case, the MRTP Act could apply. Nobody can monopolize any business. If the employee is smart enough, he could create documents of this bullying by recording telephone calls, etc., and invoke the Unfair Trade Practices Act. It's an open world. Anyone can do business anywhere. Recommend the movie Rocket Singh to the ex-employers. They will then understand how business is built—not by arm-twisting.
From United+States, San+Francisco
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From United+States, San+Francisco
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In any business, competition is inevitable. No one can restrict or prevent someone from starting a business. However, as per business ethics, the newly emerged entrepreneur should not copy the product or design, that is all.
You have an entire gamut of products ranging from pressure cookers, umbrellas, shoes, toothpaste, hotels, and whatnot. A manager working with a realtor starts his own real estate business a little later. You must be a master of your own trade. Running or owning a business is not that easy. It requires a high degree of skills and entrepreneurship. Money alone will not help.
Then why fear competition?
Regards,
V. Balaji
From India, Madras
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You have an entire gamut of products ranging from pressure cookers, umbrellas, shoes, toothpaste, hotels, and whatnot. A manager working with a realtor starts his own real estate business a little later. You must be a master of your own trade. Running or owning a business is not that easy. It requires a high degree of skills and entrepreneurship. Money alone will not help.
Then why fear competition?
Regards,
V. Balaji
From India, Madras
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In the cutthroat competition, you cannot expect someone to be so honest unless he is paid to be honest. In other words, he has the full right to survive and use his skills for his livelihood; there is no bonded labor system now.
Non-Disclosure Agreement (NDA)
An agreement, such as a Non-Disclosure Agreement (NDA), can work if it is executed between both parties. You have paid him an amount for the next two years not to start the same work or to maintain the confidentiality of the business.
The relationship comes to an end if an employee leaves the organization.
Regards
From India, New Delhi
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Non-Disclosure Agreement (NDA)
An agreement, such as a Non-Disclosure Agreement (NDA), can work if it is executed between both parties. You have paid him an amount for the next two years not to start the same work or to maintain the confidentiality of the business.
The relationship comes to an end if an employee leaves the organization.
Regards
From India, New Delhi
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Thanks, everyone. I appreciate your balanced responses. I guess I didn't mention it, the work here is in the Service segment, and hence there obviously is no copyright infringement. In fact, the little horizontal growth the previous company did achieve was for this new entrepreneur, and I think he has every right to use his skills for himself rather than a pack of losers. What say?
From India, Mumbai
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From India, Mumbai
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Validity of Non-Compete Agreements
A non-compete agreement is valid only if:
- The party has sold their business and agreed not to compete for a limited period of time.
- The individual was a promoter/co-promoter and not an employee, and agreed to a non-compete for a limited time (and was not removed by unfair means).
If the person was an employee, then the non-compete does not apply even if they were part of the original team that started with the company. Your client can very well go ahead and speak directly to each of the existing clients and secure their business. The old company can do nothing about it.
Thanks, Dinesh, Nalina, and Moiz. In different ways, all of you have helped answer a complex problem. Yes, from the former company's point of view, it is indeed pettiness and insecurity that is making them nervous about a start-up. Maybe they realize that there is potential in this breakaway to take away clients. From the entrepreneur's point of view, the insecurity among his ex-bosses is just an amusing irritation and an oblique proof of his confidence.
However, the legal position remains unanswered. Is he/his venture sue-able? I believe not, but some enterprises are simply vindictive for the sake of being vindictive. What is the best course to follow then?
Oh yes, by the way, I am speaking for the new entrepreneur and not from the old one's desk.
Regards,
From India, Mumbai
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A non-compete agreement is valid only if:
- The party has sold their business and agreed not to compete for a limited period of time.
- The individual was a promoter/co-promoter and not an employee, and agreed to a non-compete for a limited time (and was not removed by unfair means).
If the person was an employee, then the non-compete does not apply even if they were part of the original team that started with the company. Your client can very well go ahead and speak directly to each of the existing clients and secure their business. The old company can do nothing about it.
Thanks, Dinesh, Nalina, and Moiz. In different ways, all of you have helped answer a complex problem. Yes, from the former company's point of view, it is indeed pettiness and insecurity that is making them nervous about a start-up. Maybe they realize that there is potential in this breakaway to take away clients. From the entrepreneur's point of view, the insecurity among his ex-bosses is just an amusing irritation and an oblique proof of his confidence.
However, the legal position remains unanswered. Is he/his venture sue-able? I believe not, but some enterprises are simply vindictive for the sake of being vindictive. What is the best course to follow then?
Oh yes, by the way, I am speaking for the new entrepreneur and not from the old one's desk.
Regards,
From India, Mumbai
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Non-Disclosure and Non-Compete Agreements in India
Here's a post on why Non-Disclosure and Non-Compete agreements, and under what conditions they would remain invalid, in India.
[Legal case discussion on NDA and NCA](https://www.citehr.com/463384-how-stop-employees-joining-our-competitors.html#post2065478)
From India, Mumbai
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Here's a post on why Non-Disclosure and Non-Compete agreements, and under what conditions they would remain invalid, in India.
[Legal case discussion on NDA and NCA](https://www.citehr.com/463384-how-stop-employees-joining-our-competitors.html#post2065478)
From India, Mumbai
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I read the post with great interest. However, there is an important point that seems to have been missed. An employee cannot be restrained from joining competing companies in any case. Only promoters or owners can be restrained. An employee can, at best, be prevented from sharing confidential information of the previous company and its trade secrets.
Even in the case of Hurd of HP, the aim was not to prevent him from joining Oracle as such. It was to prevent him from working in a certain position where he would use the company's trade secrets (which he knew on account of being CEO) against the company. Additionally, it was a case where he had received a golden handshake that included an extra amount for a period of time when he would not be working for anyone (though I am told it was written wrongly).
From India, Mumbai
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Even in the case of Hurd of HP, the aim was not to prevent him from joining Oracle as such. It was to prevent him from working in a certain position where he would use the company's trade secrets (which he knew on account of being CEO) against the company. Additionally, it was a case where he had received a golden handshake that included an extra amount for a period of time when he would not be working for anyone (though I am told it was written wrongly).
From India, Mumbai
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Non-Competition Agreements May Not Hold Up In Court.doc
Legal Clarification on Negative Covenants in Employment Agreements.pdf