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Colorado and Denver Non-Compete Agreement Attorney and Non-Solicitation Agreement Attorney
Determining whether or not an employee non-compete agreement or employee non-solicitation agreement is enforceable under Colorado law can be a nuanced task. Accordingly, hiring a Colorado and Denver non-compete agreement attorney and non-solicitation agreement attorney to review enforceability can help determine employer and employee obligations under the agreement.
– Non-compete agreement attorneys and non-solicitation agreement attorneys can help determine if you are the category of employee non-compete agreements and non-solicitation agreements are enforceable against
– Non-compete agreement attorneys and non-solicitation agreement attorneys can help determine if an agreement is enforceable because it relates to trade secrets
– Non-compete agreement attorneys and non-solicitation agreement attorneys can help determine if an agreement is enforceable because it pertains to the purchase or sale of a business or franchise
– Non-compete agreement attorneys and non-solicitation agreement attorneys can help determine if an agreement is enforceable because it pertains to executive and management personnel or their professional staff
Importantly, while Colorado law strictly construed non-compete agreements and non-solicitation agreements, the factors for determining whether a particular non-compete agreement or non-solicitation agreement is enforceable are relatively ambiguous.
Accordingly, a non-compete agreement attorney or non-solicitation agreement attorney can help put the relevant factors in context and, in turn, help determine the likelihood of enforcement. This article discusses aspects of non-compete agreement law and non-solicitation agreement law in Colorado.
Non-Competition Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Analyze the Purpose of Such Agreements Under Colorado Law and Why Competition Is Protected
The general purpose of non-compete employment agreements and non-solicitation employment agreements is to restrict employees from working for a competing employer, starting a competing business after their employment ends, or taking important proprietary information from one business to another.
In other words, the purpose of non-compete employment agreements and non-solicitation employment agreements is to allow businesses and companies the ability to keep their competitive advantage by either limiting competition or limiting the flow of valuable business information to competitors.
Because non-compete agreements and non-solicitation agreements discourage competition, which is generally disfavored in our economic system, such agreements are disfavored in the eyes of the law and are narrowly construed by Colorado courts faced with interpreting them.
Along these same lines, in Colorado non-compete are generally unenforceable unless they meet specific requirements. This article discusses those requirements as well as general considerations for non-compete agreements in Colorado.
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Assess and Interpret Colorado Statutes Governing Such Agreements
In Colorado, the enforceability of non-compete agreements has been codified at Colorado Revised Statutes (“C.R.S.”) § 8-2-113(2). The default under the statute is that non-compete agreements and non-solicitation agreements, which are also a restraint on competition, are generally void unless the agreement fits into a specific, exempt category.
In particular, the statute states:
Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void, but this subsection . . . shall not apply to:
(a) Any contract for the purchase and sale of a business or the assets of a business;
(b) Any contract for the protection of trade secrets;
(c) Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years;
(d) Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
Notably, the third category pertains to payment for education and training, and does not relate to a prohibition on employment.
Accordingly, in order for non-compete agreements in Colorado to be enforceable they must fall into one of the three other categories:
– Agreements for the sale of a businesses or its assets;
– Agreements to protection a business’s trade secrets; and
– Agreements that apply executive and management personnel, and their professional staff.
Non-competition covenants and non-solicitation covenants in Colorado commonly are asserted under the executive and management personnel exemption and the trade secret exemption. Put simply, companies attempt to protect their proprietary information by characterizing it as trade secrets.
Additionally though, while these types of non-compete agreements are commonly asserted, non-compete and non-solicitation agreements applicable to the sale of a business also frequently arise, especially in the context of franchise agreements.
Importantly, even if an agreement does fall into one of the above categories, that does not automatically mean that the agreement is enforceable. Instead, Colorado courts have adopted additional requirements that the non-compete agreement must meet in order to be enforceable.
Non-Compete Employment Agreement Attorneys and Non-Solicitation Employment Agreement Attorneys Can Help Determine If the Agreement Is Reasonable in Scope and Duration
In addition to non-compete agreement only being enforceable for the categories listed in the statute, the non-compete employment agreement’s restrictions must also be reasonable in duration and geographic scope.
In order to be reasonable, a non-compete agreement must not be broader than necessary to protect the interests of the party benefiting from the non-compete, and it must not impose an undue hardship on the party bound by the non-compete.
Examples of the scope of non-competes that have been found to be reasonable include non-compete agreements for terms of up to five years and terms that exclude employment within distances of 100 miles. See Reed Mill & Lumber Co., Inc. v. Jensen, 165 P.3d 733 (Colo. App. 2006).
However, whether a particular non-compete agreement fits into one of the three statutory exemptions for enforceable agreements, and whether the scope of the agreement is reasonable are fact specific inquiries determined on a case-by-case basis.
Due to the fact specific nature of these assessments, retaining a non-compete agreement attorneys or non-solicitation agreement attorney to review the agreement is advisable.
More specific aspects of non-compete agreements for each of the three exemption categories will be discussed next.
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Determine Whether the Business Sale Exemption Is Applicable
The business sale exemption under Colorado applies to both the sale of ownership interest in a business – such as sales of stock – as well as asset acquisitions from the business.
For non-compete agreements in this category, Colorado courts have recognized that the buyer of the business has a vested interest in protecting the goodwill of the business in addition to the business’s capital and assets.
That is, a buyer purchasing a company has a certain interest in the continued and repeated public patronage of the business, otherwise known as the goodwill of the company.
The purpose for allowing non-compete agreements in this context stems from the fact that if a buyer of a company were unable to protect his purchase of the company’s goodwill, the sellers of the company could simply start a new company and take their old customers with them effectively rendering the buyer’s purchase useless.
Non-compete agreements can prevent this from happening as the sellers would be prevented from working in a competing industry or developing a competing business for at least some period of time, thereby allowing the buyer to capitalize on her purchase. See King v. PA Consulting Group, Inc., 485 F.3d 577 (10th Cir. 2007) (discussing one purpose of non-compete agreements is to prevent “brain drain” of the company).
Accordingly, because the policy for allowing non-compete agreements in the sale of a business focuses on goodwill, the reasonableness of a non-compete agreement and, thus, its enforceability, depends on whether the restraint on competition provides fair protection to the buyer’s purchase of that goodwill.
Where a restraint is too broad or too cumbersome, it will be found unenforceable. See Reed Mill & Lumber Co., Inc. v. Jansen, 165 P.3d 733 (Colo. App. 2006) (finding a non-compete unenforceable where its application to an employee-shareholder six years after the company was purchased was found to be unreasonable in time).
Additionally, where a non-compete agreement has been entered into pertaining to the sale of a business, if the business ceases to exist at a later date the non-compete agreement will cease to be enforceable as well.
That is, the buyer of a business cannot continue to enforce a non-compete agreement against the seller of the business once the purchased business ceases to exist. See Gibson v. Eberle, 762 P.2d 777 (Colo. App. 1988).
Overall, although non-compete agreements are generally construed narrowly in Colorado, agreements arising under the business sale exemption are given a more liberal construction compared to other non-compete agreement categories.
However, they are still construed narrowly and still must be reasonable in both duration and geographic territory in order to be enforceable. See The Law of Trade Secrecy and Covenants Not to Compete in Colorado-Part II, 30 Colo.Law 5 (2010).
Non-Compete Agreement and Non-Solicitation Agreement Attorneys Can Help Determine Whether the Trade Secret Exemption Applies
The second major category that non-compete agreements and non-solicitation clauses can fall into under is agreements to protect trade secrets. In the trade secret context, in order to be enforceable the non-compete agreement or non-solicitation agreement must be necessary to protect against the disclosure of the trade secret.
Importantly, non-compete agreements in the trade secret exemption are construed more narrowly than non-compete agreements for business sales.
More specifically, in determining whether a trade secret non-compete agreement is enforceable Colorado courts have adopted a two-step analysis.
First, the presiding court must look at the facts of the situation to determine whether a restrictive agreement is justified at all. That is, whether trade secrets actually exist.
Second, the trial court must examine the specific terms of the non-compete restriction to determine the reasonableness of its effect. Only where a non-compete agreement is justified and reasonable will it be enforceable. See Saturn Systems, Inc. v. Militare, 252 P.3d 516 (Colo. App. 2011).
While the reasonableness inquiry is factually dependent on the specific circumstances of each case, generally the narrower and limited in time the non-compete agreement is the more likely it will be enforceable.
Accordingly, in drafting a non-compete agreement in the trade secret context, the employer should ensure that the restrictions are focused on the protection of the trade secret, as opposed to generally prohibiting an employee from working for competitors, and are not indefinite or overly broad scope in duration and territory.
Non-Compete Employment Agreement Attorneys and Non-Solicitation Employment Agreement Attorneys Can Help Determine Whether the Executive, Management, and Personal Staff Exemption Applies
The third category that non-compete agreements and non-solicitation agreements may fall into is agreements limiting the ability of executives, management, and their professional staff to work for competitors.
Similar to other non-compete agreement and non-solicitation agreement categories, whether an individual qualifies as an executive, management, or professional staff, and whether the agreement is reasonable are questions of fact that must be determined by the trial court. See Porter Industries, Inc. v. Higgins, 680 P.2d 1339, 1342 (Colo. App. 1984).
Specific factors courts look at in determining if an employee is an executive or manager are whether that employee is in charge of a significant portion of the plaintiff’s business.
That is, Colorado courts have indicated that in order to be part of the executive and management group, an employee must have significant responsibility for the business and act in a supervisory capacity. See Alexander & Alexander, Inc. v. Hall and Co., Civil Action No. 88-A-1621 (D. Colo. 1990).
Additionally, for the professional staff portion of the exemption, Colorado courts have interpreted the statute to require some amount of a professional degree or training in order to qualify as professional staff under management or an executive.
Further, in order to qualify as professional staff, the individual must work closely enough with an executive or manager such that the individual would be considered a key member in the manager’s or executive’s implementation of management or executive functions.
Employees merely administering management decisions, such as salespeople and purely administrative staff, would not qualify as professional staff to executive or management personnel. See Phoenix Capital, Inc. v. Dowell, 176 P.3d 835 (Colo. App. 2007).
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Determine Whether a Non-Compete Agreement or Non-Solicitation Agreement Applies to Independent Contractors
Colorado courts have determined that non-compete agreements apply equally to independent contractors as well as employees. That is, whether a person was employed as an employee or as an independent contract is irrelevant to whether a non-compete agreement can be enforced.
However, one important exception is that independent contractors may not be considered professional staff for purposes of the executives and management exemption discussed above. See Colorado Supply Co. v. Stewart, 797 P.2d 1303 (Colo. App. 1990).
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Determine If an Agreement Is Enforceable Against Doctors and Physicians
While C.R.S. § 8-2-113(2) provides general categories that non-competition agreement may be valid under, the statue also goes on to explicitly void any non-compete agreements for physicians. Specifically, C.R.S. § 8-2-113(3) provides:
Any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians that restricts the right of a physician to practice medicine, as defined in section 12-240-107, upon termination of the agreement, is void; except that all other provisions of the agreement enforceable at law, including provisions that require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement, are enforceable. Provisions of a covenant not to compete that require the payment of damages upon termination of the agreement may include damages related to competition.
However, as provided for in the statute, while the non-competition portion of a non-compete may be void against physicians, the statute allows a doctor or physician to be liable for damages reasonably related to increased competition as a result of a doctor or physician terminating an employment agreement.
In other words, while a physician cannot actually be prevented from practicing with a competitor pursuant to a non-competition agreement, Colorado’s non-compete law still allows for competition related damages to be chargeable against the physician as damages under the contract, so long as those damages are reasonably related to competition related injuries.
Because of this nuance, hiring or retaining a non-compete agreement attorney or non-solicitation agreement attorney can help assess potential liabilities a doctor or physician faces in dealing with such agreements.
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Determine Contractual Remedies and Defenses
Importantly, C.R.S. § 8-2-113(2), the statute governing non-compete agreements in Colorado, does not direct or address specific civil remedies for breaches of non-compete agreements or non-solicitation agreements.
Accordingly, normal contractual damages principles apply to non-compete agreements meaning the plaintiff, if she prevails, may recover lost net profits that are the proximate result of the breach of the agreement.
Similarly, because non-compete agreements are contracts, in civil cases the same defenses that would render a contract void or unenforceable in a breach of contract claim apply to non-compete agreements as well.
That is, a defense to enforcement of a contract would also apply to enforcement of a non-compete agreement. Examples of defenses applicable to contracts include duress, undue influence, and failure of consideration. See The Law of Trade Secrecy and Covenants Not to Compete in Colorado – Part II, 30 Colo.Law. 5 (2001).
However, while Colorado’s non-compete agreement statute does not include specific language governing civil remedies, C.R.S. § 8-2-115 does indicate that any “person, firm, or corporation violating any provision of sections 8-2-112 to 8-2-115 is guilty of a misdemeanor.”
Accordingly, there are theoretical criminal penalties an employer could face for enforcing an invalid non-competition agreement or non-solicitation agreement.
Non-Compete Agreement Attorneys and Non-Solicitation Agreement Attorneys Can Help Assess Colorado Non-Compete Case Law and Non-Solicitation Case Law
As discussed above, under Colorado law the enforceability of a non-competition contract or non-solicitation contract is a fact dependent analysis. Accordingly, non-compete case law and non-solicitation case law can be helpful in assessing the validity of non-compete agreements and non-solicitation agreements. Below are some Colorado cases discussing or interpreting Colorado’s non-compete statute.
– Core Progression Franchise LLC v. O’Hare, Civil Action No. 21-cv-0643-WJM-NYW (D. Colo. Apr. 1, 2021): Where a fitness franchisee had signed a non-competition agreement in connection with the franchise and then began opening a competing business. The court granted a preliminary injunction preventing the franchisee from opening a competing business on the basis there was a substantial likelihood of success that the non-compete was enforceable. Specifically, the court found it plausible that the non-competition term fell under the trade secret exemption or executive and management exemption, and that there was a substantial likelihood that it was reasonable in scope and duration. The non-compete term prevented the franchisee from opening a competing business within 25 miles of the franchise business for one year after termination of the agreement.
– 23 Ltd. v. Herman, 2019 COA 113, 457 P.3d 754, (2019): Where a legal recruiting accounting executive had signed an agreement including non-compete terms and non-solicitation terms prohibiting her from, in the event her employment was terminated, starting a competing business within 30 miles of her employer or contacting clients of her employer for 12 months after termination. The court upheld the that the non-solicitation was unreasonable in scope and, thus, unenforceable because it effectively prevented the employee from contacting any person or entity in any of the industries which the employer had any contact with, regardless of relevance to the legal industry. The court also upheld the jury verdict that the employee had not actually started a competing business because it was not sufficiently related to legal recruiting and, thus, the employee had not breached the non-compete portion of the agreement. Further, with respect to the argument that the trial court should have altered or “blue penciled” the scope of the agreement to reduce its breadth and make it enforceable, the court held that while courts in other circumstances have altered an agreement to render it enforceable, there is no requirement that a court do so. Thus, the trial court did not err in declining to do so here.
– Crocker v. Greater Colo. Anesthesia, P.C., 463 P.3d 860, 864 (Colo. App. 2018): Where a physician owned shares in a medical practice group and was subject to a non-compete agreement that provided for liquidated damages in the event employment was terminated. The medical practice group merged with another company, the physician exercised his dissenter shareholder rights to not participate in the merger, and the non-competition provision and liquidated damages provision was found to be unenforceable because the interplay between exercising dissenter shareholder rights and the non-competition clause would be unreasonable and impose undue hardship on the physician. Additionally, the liquidated damages provision was also unenforceable because it was not reasonably related to damages the company would actually incur due to the physician’s departure.
– DigitalGlobe, Inc. v. Paladino, 269 F.Supp.3d 1112, (2017): Where an employee of a geospatial satellite company had signed a non-compete agreement and non-solicitation agreement that prohibited the employee from soliciting any customer or client of the company with whom the employee had dealings with or acquired proprietary information from for one year after termination of employment. The court found that the non-compete and non-solicitation prohibitions were likely valid under the trade secret exemption and management exemption since the employee had been promoted to a position where he was in charge of over 30 employees and the company likely had trade secret information. However, the court denied a preliminary injunction that would have prohibited the employee from working at another company because the employer could not point to specific information the employee allegedly knew that would cause damage to the employee. Thus the employer did not have a reasonable likelihood of demonstrating damages, a necessity for obtaining a preliminary injunction on a breach of contract claim.
– Big O Tires, LLC v. JDV, LLC, Civil Action No. 08-cv-1046-WYD (D. Colo. Oct. 31, 2008): Where a Big O Tire franchisee defaulted on the terms of the franchise agreement. The agreement included a non-competition clause that prohibited the franchisee from operating a competing business within 10 miles of the franchisee’s location for two years. The court granted a preliminary injunction finding that a franchise agreement is analogous to the sale of a business and, therefore, fits within the sale of a business exemption to Colorado’s non-compete statute. The court also found there was a reasonable likelihood of success since the non-competition restrictions were reasonable in scope and duration.
– Wojtowicz v. Greeley Anesthesia Services, 961 P.2d 520, 521 (Colo. App. 1998): Where a doctor had signed an employment agreement with an anesthesiologist practice group that contained non-competition related clauses and provided for liquidated damages where, if the doctor terminated the employment agreement, the doctor would owe 50 percent of fees generated from the doctor’s prior two years of employment with the practice group. The non-competition clauses and liquidated damages were found unenforceable because there was no evidence that after the doctor terminated his employment the practice group suffered any business loss. Thus, the liquidated damages provision was not reasonably related to actual damages the company incurred as a result of increased competition or loss of goodwill and was, therefore, unenforceable.
These cases are representative of the types of lawsuits employers have brought in Colorado courts seeking to enforce non-competition agreements and non-solicitation agreements. The factual circumstances of each case are different and, frequently, the non-competition agreements and non-solicitation agreements at-issue contain different terms as well.
Hiring a non-competition agreement attorney or non-solicitation agreement attorney can help put these cases in context and help determine whether a particular non-compete clause or non-solicitation clause is enforceable.
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