When an employee decides to leave an employer to join a competing entity or become a competitor, he or she is permitted to take certain preparatory steps before the departure. However, other preparatory steps are out of bounds. The rules as to what is permissible apply regardless of whether or not the employee signed a post-employment non-competition agreement. Often, it is in stepping across these bounds during the employee's remaining time with the employer that the employee creates a cause of action for the employer that he or she might have avoided with prudence and better judgment.

The general rule is that after employment termination, an employee is free to compete with his or her employer or to solicit the employer's customers, absent a covenant not to compete or fraud. However, prior to termination of employment, an employee continues to owe his or her employer a duty of loyalty. In Illinois, such a duty is not confined to officers and directors, but extends to employees of lesser rank and requires that employees act solely for the benefit of their employers in all matters within the scope of their agency. Officers and directors, however, owe an even more stringent duty of loyalty, as they also may not actively exploit their positions within the corporation for their own personal benefit or to hinder the ability of a corporation to continue the business for which it was developed.

Preparatory Steps: What Is and Isn't Permissible

Employees may take certain preparatory steps toward competing, provided that these actions do not involve a violation of their duties of loyalty to their employer. Examples of usually permissible preparatory actions include the following:

• Incorporating a business that will be competing after an employee leaves
• Purchasing machinery or supplies for the new business
• Negotiating a lease for the new business
• Obtaining trademark registration

On the other hand, there are a number of activities that go beyond permissible preparatory steps and compromise a departing employee's duty of loyalty:

• Soliciting customers for one's own business while still employed
• Collaborating with or assisting a competitor of one's employer after having accepted an offer of employment with that competitor, but before having resigned from one's current position 
• Sharing trade secret, confidential or proprietary information with a competitor prior to departure, or removing or copying materials important for servicing an employer's customers that can be used to perform services for such customers after departure
• Cooperating in soliciting coworkers to join a competitor or one's new competing enterprise
• Taking a business opportunity or keeping important information for oneself without first disclosing the information, opportunity or conflict to the employer

May employees who plan to terminate their employment inform clients of their intent to resign? The answer depends on the circumstances. If the employee does not also tell the employer of his or her intent, and if the nature of the client communications are such that they can be construed as being solicitations, then such actions may be viewed as improper. Under Illinois case law, for example, whether a particular client contact constitutes an illicit solicitation depends upon the method used and the intent of the employee to target a specific client in need of his or her services. If the target would have understood a particular contact as a solicitation for business, that suffices to show solicitation even absent direct evidence of the party's intent and even in the face of a denial of an intent to solicit. See Merrill Lynch Pierce Fenner & Smith, Inc. v. Cross, 1998 U.S. Dist. LEXIS 3188, at *4 (N.D.Ill.1998) (finding improper solicitation where the employee personally contacted the former customers who he knew had a need for his financial services, and the employee informed them that he had joined a competitor).

Implications of a Recent Pro-Employer Decision

A recent case out of the Circuit Court of Cook County took a strict, pro-employer view of what constitutes permissible preparatory activity. Citadel Investment Group, LLC v. Tecza Technologies, LLC, slip op., 09 CH 22478 (Circuit Court of Cook County, October 16, 2009), affirmed, No. 1-09-2828 (Illinois Appellate Court, 1st Dist., 2010). Although the case arose in the context of preparatory activity undertaken during a post-employment period covered by a non-compete pledge, its reasoning could be applied to a situation where the preparatory activity is undertaken before employment terminates.

In Tecza, two employees of a high-frequency trading group were subject to a non-compete agreement that restricted them from engaging in a "competitive enterprise" for nine months after termination. Following their resignations, the employees formed a competing business, assembled a workforce, set up a trading platform, conducted research, and developed an infrastructure and a source code repository. They did not, however, actually start trading securities, nor did they intend to do so until after the nine-month period expired. The circuit court nevertheless concluded that these preparatory steps constituted business activities that were identical to those conducted by the employer, and therefore violated the non-compete agreements.

While the Tecza case might be unique given the industry involved and the particular non-compete language, the lesson learned is that the courts will carefully consider an employee's preparatory activities in determining whether he or she violated any pre-employment termination duty of loyalty or any post-employment non-competition pledge. In this electronic age, it is easier than ever to capture and prove such preparatory activities (or efforts to hide them), especially when many of those activities leave telltale electronic fingerprints.