Non-compete clauses in employment agreements are receiving increased public scrutiny. While federal legislation addressing non-compete agreements[1] has been unable to get a floor vote,[2] President Biden has urged the Federal Trade Commission (FTC) to take regulatory action,[3] and several states have passed legislation limiting the practice.[4] Going even further, Colorado has criminalized attempts to enforce overly broad non-compete clauses.[5]
The term “non-compete clause” or “non-compete agreement,” often shortened to “non-compete,” describes the covenant, or future obligation, of an employee not to compete with his or her current employer following the termination of employment. In Colorado, non-compete agreements are statutorily prohibited as a matter of law unless they fall within one of four available statutory exceptions (discussed below).[6]
Colorado courts generally consider the following to be statutorily-prohibited non-compete agreements:
(a) provisions that prohibit an employee from working for a competitor after the current employment relationship ends, even if only for a certain period of time;
(b) provisions that prohibit an employee from offering the same services as the employee’s prior employer; [7] and
(c) provisions that prohibit an employee from soliciting the clients or customers of their prior employer following employment.
Provisions that restrict employees from soliciting the employees of a former employer do not receive the same scrutiny as non-compete agreements and, in many cases, are permissible under Colorado law. Courts and scholars have long discussed the underlying power dynamics of non-compete agreements, often advocating for limited enforceability, or none at all.[8]
In Colorado, “[a]ny 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,” except for:
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; [and]
d) Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.[9]
Subsections (b), allowing for the protection of trade secrets, and (d), exempting executives and their direct staff, are the most common exceptions relied upon by employers to achieve durable restrictive covenants.[10] Non-compete agreements that do not fit within one of the aforementioned statutory exceptions are void ab initio as opposed to simply void, meaning that such agreements are void as of the time they are made and cannot be resurrected by a subsequent change in circumstances. For example, a non-management employee who enters into a statutorily prohibited non-compete agreement with his or her employer will not subsequently be required to comply with the non-compete agreement if he or she is promoted to a management position. Agreements that are within the scope of a statutory exception must contain restrictions that are no greater than necessary to protect an employer’s legitimate business interests, and the restrictions must cover only a reasonable geographic area and period of time.[11] In drafting restrictions for a non-compete agreement, employers must abstain from utilizing any “force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place [they see] fit.”[12]
Beginning on March 1, 2022, a violation of Colorado’s statutory prohibition against non-compete agreements will be considered a class two misdemeanor and, as such, will entail a maximum sentence of 120 days in jail, carry a fine of up to $750, or both.[13] This is a doubling of the previous maximum sentence of 60 days in jail and a three-fold increase of the previous fine ceiling of $250.[14] In light of the new penalties, employers should review their current non-compete agreements for compliance with Colorado law.[15] Going forward, prudent employers should take a conservative approach to negotiating restrictive covenants by ensuring that any non-compete clauses clearly fit into one of the statutory exceptions and should consider alternative methods of accomplishing their goals, including the use of robust confidentiality agreements.[16] Employers who believe their non-compete agreements may be unenforceable or who believe such agreements may expose them to potential liability should contact legal counsel to discuss best compliance strategies.
[1] See, e.g., Freedom to Compete Act of 2021, S.2375, 117th Cong. (2021) (constituting Senator Rubio’s second, and Senator Hassan’s first, introduction of a bill limiting non-compete clauses, after introducing a bill of the same title in 2019. See Freedom to Compete Act of 2019, S.124, 116th Cong. (2019)). See also, Workforce Mobility Act of 2021, S.483, 117th Cong. (2021) (which “essentially would ban all employee noncompete agreements,” infra, note 3). See also, Employment Freedom for All Act, H.R.5851, 117th Cong. (2021) (Introduced by Rep. Tenney, this bill seeks to make non-compete agreements unenforceable if the employee in question was terminated due to noncompliance with a COVID-19 vaccine mandate. Infra, note 3.).
[2] See, e.g., Melissa Maione, Update: The Future of Non-Compete Agreements in 2022, JDSupra (Jan. 13, 2022), https://www.jdsupra.com/legalnews/update-the-future-of-non-compete-5370657/.
[3] Robert G. Lian, Jr. et al., Noncompete Laws: 2021 Year in Review, Lexology (Jan. 13, 2022), https://www.lexology.com/library/detail.aspx?g=2280524b-ec2b-439a-a16f-2d477e87381b. Apparently, if vaguely, following the President’s wishes, in its draft Strategic Plan for Fiscal Years 2022–2026, the FTC proposes the strategy of “study[ing] and investigat[ing] the impact on worker wages and benefits from . . . non-compete and other potentially unfair contractual terms resulting from power asymmetries between workers and employees.” Id.
[4] Id. See also, Michael F. Ryan, Is it Unfair to Restrict Unfair Competition? The FTC May Soon Make Their Stance Known, The National Law Review (Sep. 27, 2021), https://www.natlawreview.com/article/it-unfair-to-restrict-unfair-competition-ftc-may-soon-make-their-stance-known.
[5] Rachel Powitzky Steely & Michael F. Ryan, Employers Beware: Colorado Criminalizes Enforcement of Overbroad Non-Competes, The National Law Review (Jan. 24, 2022), https://www.natlawreview.com/article/employers-beware-colorado-criminalizes-enforcement-overbroad-non-competes.
[6] LS3 Inc. v. Cherokee Fed. Sols., L.L.C., 2021 U.S. Dist. LEXIS 186460 at *9 (Sep. 29, 2021) (citing King v. PA Consulting Group, Inc., 485 F.3d 577, 586 (10th Cir. 2007)).
[7] See, e.g., Jenna L. Brownlee & Caitlin A. Kelly, Recent Development: To Compete or Not to Compete: Illinois’ Movement to Eliminate Noncompete Agreements, 48 Loy. U. Chi. L.J. 1233, 1233 (2017). See also, Thomas W. Foley, Freedom of Contract vs. The Right to Work: An Analysis and Some Thoughts on Iowa’s Covenant Not to Compete Law, 61 Drake L. Rev. 205, 207 (2012).
[8] See, e.g., Daniel D. Barnhizer, Inequality of Bargaining Power, 76 U. Colo. L. Rev. 139, 147 n.28 (citing Heyde Cos. v. Dove Healthcare, LLC, 654 N.W.2d 830, 833, 837 (Wis. 2002)), 149 n.36 (citing Note, The Enforcibility of a Promise Not to Compete After an Employment at Will, 29 Colum. L. Rev. 347, 348 (1929)) (2005).
[9] Colo. Rev. Stat. §8-2-113(2). Exceptions for partnerships between physicians exist. Colo. Rev. Stat. §8-2-113(3)(a)–(b).
[10] Roger G. Trim et al., Colorado Cracks Down on Restrictive Covenant Agreements, Authorizing Potential Criminal Penalties, The National Law Review (Jan. 15, 2022), https://www.natlawreview.com/article/colorado-cracks-down-restrictive-covenant-agreements-authorizing-potential-criminal.
[11] Jessica Folker, Employers with Illegal Non-Competes Face New Criminal Penalties in March, Law Week Colorado (Feb. 7, 2022), https://www.lawweekcolorado.com/article/employers-with-illegal-non-competes-face-new-criminal-penalties-in-march/.
[12] Colo. Rev. Stat. §8-2-113(1).
[13] This is the result of the abolition of the three-tier misdemeanor system in Colorado, classifying former class three misdemeanors as class two. See A Bill for an Act Concerning the Adoption of the 2021 Recommendations of the Colorado Criminal and Juvenile Justice Commission Regarding Sentencing for Offenses, S.21-271, 73rd Colo. Gen. Assembly (2021). See also, Colo. Gen. Assembly, Misdemeanor Reform. Concerning the adoption of the 2021 recommendations of the Colorado criminal and juvenile justice commission regarding sentencing for offenses, and, in connection therewith, making an appropriation–Bill Summary, https://leg.colorado.gov/bills/sb21-271.
[14] Taylor Brook et al., Colorado Increases Its Criminal Penalty for Violations of Its Noncompete Law, JDSupra (January 25, 2022), https://www.jdsupra.com/legalnews/colorado-increases-its-criminal-penalty-2479107/#:~:text=Effective%20March%201%2C%202022%2C%20the,21%2D271.
[15] Supra, note 10. See also, supra, note 3.
[16] Id.
Questions? Please contact Jody Duvall at [email protected] or (970) 225-6700 or Fabian Eichentopf at [email protected] or (970) 225-6700. Mr. Duvall is an attorney with Coan, Payton & Payne, LLC, and practices in business, corporate, real estate, and employment law. Mr. Eichentopf is an attorney with Coan, Payton & Payne, LLC, and practices in business, corporate, and real estate law.
