May an accountant compete against his or her former practice?
By Matt Dickstein
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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 and 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.
For more on this, read Stealing employees.
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.