Can I Stop My Business Partner From Starting A Competing Business?
The Governing Documents Should Explicitly Forbid Competition
From the beginning you should make sure that the governing documents of your company (usually a partnership or operating agreement) clearly spell out what each of the partners can and cannot do. The governing documents should explicitly prevent partners from engaging in business that directly competes against the company. For instance, there should be language which prevents partners from using the company’s trade secrets (client lists, proprietary systems and procedures) or the company’s intellectual property (software, algorithms, etc.) for any other purpose than in service of the company.
California Law Protects Against Misuse of Trade Secrets and IP
Even absent explicit language, California law prohibits partners from engaging in direct competition with the company or from using company trade secrets and IP. Partners owe fiduciary duties to the company and to their partners, shareholders, or LLC members of loyalty and care. This means that they may not enter into self-interested transactions or take a corporate opportunity for themselves. Moreover, using company trade secret for their own gain can amount to theft and constitute violations of the California Trade Secrets Act and Federal Defendant Trade Secrets Act.
Conclusion: You May Sue Your Business Partner For Misuse of Company Trade Secrets and IP
If your business partner is engaging in direct competition with the company and/or misusing company trade secrets and intellectual property you may sue them for damages (any profits they made) and also move for a court injunction to stop them from continuing such practices.
