Preparing to Quit: Employee Competition versus Corporate Opportunity

Before leaving a job, employees and corporate fiduciaries are generally permitted to take preparatory steps to form a new, directly competing business and to conceal such plans from the company. This article identifies this principle as the Preparations to Compete Doctrine. This is the first article to comprehensively assess the nationwide case law on the Preparations to Compete Doctrine and to explain what is permitted and what is prohibited when employees make preparations to leave and to compete with their employer. To that end, this article will identify and propose solutions for two ambiguities in the case law: the slippage some courts have allowed between this doctrine and the law of corporate opportunity, and the treatment of co-workers who make plans to depart together, rather than acting alone. It will also address the effect of contract terms on such preparations. The Preparations to Compete Doctrine allows employees and officers to secretly make plans to compete without disclosing such plans to the employer. The Corporate Opportunity Doctrine, by contrast, is a well-known principle of agency and corporate governance law that requires certain fiduciaries to inform the company about the existence of potential business opportunities before acting on them for self-gain. Both doctrines serve the public good, for different reasons. But courts sometimes conflate these distinct bodies of law to the detriment of employees making plans to leave. To distinguish these doctrines, and to protect the latitude otherwise provided to departing executives and employees, courts should draw a clear line between ideas that are the product of the departing person's mind, and business opportunities that exist externally and independent of the departing person's thoughts. A plan to leave and start a new company is not the same thing as a business opportunity that arises independently, from a third party, and which is distinct from the employee's own preparations to leave. Even if unusual scenarios may blur these lines in atypical cases, striking this balance will protect the important public policy rationales behind both doctrines while keeping the lanes clear for the societal benefits that flow from providing employees a runway for their departures.