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Defending the Small Business: Part 10. Competition 10/23/2008 5:46:43 PM
Competition is a major cause of small business failure, so the small business owner must be well aware of the many varied ways competitors will seek to derail them.
Competition is a major contributor to small business failure. When the big chain store or franchise operation moves in down the street, it’s just a matter of time before the small business folds. The big chain and franchise stores buy in bigger quantities, which allows them to undercut the prices charged by the small business owners. They have much larger reserves and can keep prices low until they put you out of business. The only defense against this is to run a tight operation and provide better and more personal services to your customers so they will be willing to pay a little more for your product. Customer loyalty takes time to build, but when it is finally achieved, it can provide stability and insulation from competitive forces.
But what I want to concentrate on are those types of competition that you can guard against and do something about should they threaten your small business. These practices are called "unfair competition," and they can literally destroy a small business overnight. They include libel and slander, personnel raiding, breach of confidentiality, dissemination of trade secrets, interference with contract, and price-fixing.
Recently I got a call from a client who was in the consulting business. The client was very upset because a salesmen in a competitive business was telling the client's existing and potential customers that they had infringed on the competitor's copyright. It was a lie and an obvious attempt to subvert the business relationship of the parties. If this type of slander were allowed to go unanswered, our client would no doubt have lost that customer and maybe the business.
Our response was to send a cease-and-desist letter advising the competitor that our client was prepared to go to court should they persist in slandering our client. In most cases this will stop the unfair business practice but, if it doesn’t, it’s important to follow through with your threats and seek a temporary injunction. Once the competitor knows you are serious about protecting your rights, they will usually back off.
A more subtle attack on a small business is theft of employees. Almost every business will have one or more key employees who are instrumental to the success of the business. They might be sales representative, technical personnel, or administrators. The competition soon learns who these people are and
will start plotting a way to steal them from you. And if it isn’t the competition, often it’s one of these employees themselves who suddenly realize they are the key to the business’ success. So they decide to go out on their own, expecting to get rich themselves rather than make an ungrateful employer rich.
Invariably these key people will try to take others with them. The loss of one or two key employees like this can devastate a business and quickly put it in jeopardy. Luckily, this is a danger that can be easily avoided simply by having properly drafted employment contracts with these key people. These should be drafted carefully by an attorney and include appropriate non-competition, non-solicitation, and non-disclosure agreements. Typically these key employees will be prohibited from going into business in the same territory for several years after their termination, prohibited from soliciting employees from the business for this period, and prohibited from disclosing any proprietary information or trade secrets learned during their employment.
Theft of proprietary information and trade secrets is another way a small business can be placed in jeopardy. I once represented a software engineer who was employed by a video game company. While employed by the company, the engineer developed video game technology that was state of the art and very valuable. Although the company had paid him everything he was due under his employment contract, he realized how valuable his technology had become and was bitter that he didn’t own it. Fortunately for the company, they had a good employment contract which stipulated that any technology developed for the company belonged to the company.
Nevertheless, the employee felt like it was his technology and decided to quit and take the technology to a competitor who would pay him a handsome sum for it. If the employer had allowed this to happen, they not only would have lost the technology, but their competitor would have been in a position to bury them. Because they had properly documented their ownership of the technology, they were able to file a complaint for theft of a trade secret with the District Attorney. This is when I was hired by the employee, who was about to go to jail.
I explained to him that when he accepted employment with his employer, he had sold any rights to anything he developed while being employed by the company. He was bitter because he claimed the owners had promised him stock options, bonuses, and other fringe benefits that they hadn’t delivered. This may well have been true, but none of those things were in the employment contract he had signed. I told him his mistake was signing an employment contract without advice of counsel.
A few days later I arranged an informal negotiation session to try to resolve the dispute. It was a very tense and bitter meeting as both parties had a lot at stake. Finally, we reached a compromise whereby the engineer would get a nice, 90-day severance package to give him time to find a new job, the employer would sign a non-prosecution agreement, and the engineer would acknowledge the company’s ownership of the technology. As we were driving away, the engineer let out a sigh of relief. I turned and smiled at him. He said he was glad they had settled, because if they hadn’t he was prepared to put them out of business. When I asked him how he could have done that, he said that before he left the company he had sabotaged all the company’s computers. He pulled a remote control device from his pocket and waived it in front of me. Then he smiled and said, "Push this little button and BOOM! It would be all over."
