When Comrades Go Bad

Entrepreneur, June, 2000 by Jacquelyn Lynn

Protecting yourself from business allies turned business competitors

It's a nightmare you don't even want to think about: The "reliable" supplier you've been using for years has unexpectedly bypassed you...to sell to your customers. Worse yet, because of your past business relationship and their knowledge of your company, it's become an especially strong competitor. What should you do? And, equally important, what can you do to prevent such a scenario from ever happening in the first place?

Unfortunately, you can't stop another company from changing its direction, but you can take steps to prevent it from using your business as a springboard. Begin by recognizing the value of your proprietary information, says William H. Robbinson Jr., an attorney with Winderweedle, Haines, Ward & Woodman in Orlando, Florida. "Companies have a variety of proprietary information that they develop or acquire that has great value to them and can be protected in a number of ways."

Protection may be in the form of patents, copyrights, trade secrets or even basic company policies. Whatever method you use, establish internal procedures that demonstrate your efforts to preserve confidentiality. For instance, Robbinson says, a customer list may be considered a trade secret--but only if it's maintained as confidential. If you leave a copy in your lobby, where anyone who walks in can see it, you're not treating it as a trade secret.

Whether or not your information meets the legal requirements of a trade secret, it's a good idea to be cautious and conservative about whom you share it with. Critical information should be shared with employees and vendors on a need-to-know basis only, Robbinson advises. "Don't give your vendor the opportunity to become your competitor by sharing things that don't need to be shared," he says.

If exposing confidential information to an outside source is unavoidable, use noncompete, nonsolicitation and/or confidentiality agreements to restrict potentially competitive activities by that vendor in your market. Such agreements, which are fairly simple to draw up, stipulate that the vendor will maintain as confidential any information they obtain through working with you that is unique to your business and not otherwise in the public domain. Further, it stipulates that they won't solicit your clients while working with you or for a specific time period afterward. Have an attorney who understands restrictive covenants, trade secrets and intellectual-property issues check the agreement to be sure it's effective and enforceable. Should the vendor violate the agreement, you can take the issue to court to stop their activities and recover lost sales.

Although he advises companies to take these contractual steps, Robbinson notes that the best defense against all competitors is keeping your customers happy. "Make sure you're giving your customers good service," he says. "If you're doing everything they need, why would they go anywhere else?"