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Lawyer for Accountants, Accountancy
Corporations and Accounting Practices
Article #6 – May an accountant compete against his or her
former practice?
This is Article #6 in my 9-part series on
the basic corporate, business and contract law issues for
accountancy corporations and accounting practices in
California. The articles in this series are:
If you are in a group accounting practice,
you might wonder, “Can I or another accountant in this
practice set up a competing practice?” “Will a
non-competition agreement prevent it?” These questions are
crucial both to the existing group and the accountant who
would set up the competing practice.
In this article I give a brief roadmap of
the issues relevant to when an accountant sets up a
competing practice. I give legal and common-sense
advice to all concerned parties. The issue is
important because, when an accountant leaves a group to set up a competing
practice, invariably the former group is unhappy and
litigation is a real threat.
The contract might not be worth the paper
it’s written on.
After termination of employment, a
contractual non-competition clause usually is unenforceable.
Under California law, an accountant
ordinarily may compete with his or her prior practice or
group, even if the accountant signed an agreement that
prohibits competition. Of course, there are exceptions to
this rule. In relevant part, a non-competition clause can
be enforceable if it was (i) entered into as part of the
sale of a practice; or (ii) entered into pursuant to a
partnership agreement or shareholders agreement that
prohibits a withdrawing accountant’s competition in a
limited geographic area.
Who gets the clients or referral sources?
Although a non-competition agreement
usually is unenforceable, the departing accountant still may
not engage in unfair competition. Unfair competition
includes the use of confidential information and trade
secrets of the practice, including for example lists of
clients or referral sources. In general, the law
prohibits an accountant from using data from the practice, but only
if the following two elements exist: (i) the data is a trade
secret; and (ii) the accountant misappropriates the data.
As to the first element, whether a client
or referral list is a trade secret, we must analyze the
facts and circumstances to make a determination.
As to the second element, once the
practice or group has proven that the data at issue is a
trade secret, it then must prove that the accountant
misappropriated (stole) the data. California courts look to
whether the departing accountant actually solicited the
group’s clients or referral sources, as opposed to merely
announcing a change in professional affiliation. In other
words, the accountant may announce his or her new status,
but may go no further. The distinction between solicitation
and mere announcement is a shifting line, however, and the
departing accountant must take great care not to cross it.
Who gets the employees?
The rule for the solicitation of office
managers, bookkeepers and other employees is similar to the
rule for the solicitation of clients. A departing
accountant may not solicit or ask the employees to leave
the former group. Rather, the departing accountant may
only announce the move. The accountant must then back
off, and permit the employees to initiate the next contact –
by requesting to join the departing accountant in the
competing practice.
Finally, please keep in mind that the law
of competition is by its nature fluid and gray. There are
few hard and fast rules, and no guarantees can be given on
the outcome of any particular dispute. Moreover, the costs
of litigation (let alone losing in litigation) are such that
one does best to avoid it altogether. Use your
common-sense, and above all, act in a decent and fair
manner. Courts try to protect the good guys in a dispute,
so be that person.
This article only gives a short roadmap of
the issues raised by a departing accountant’s competition
with his or her former group or employer. There is a lot
more to this subject than introduced here. Before you do
anything, get competent legal counsel to help you.
Call me to schedule a
legal consultation: 510-796-9144 | 