Are Non-Compete Agreements Enforceable in Colorado?

Non-compete agreements are used to attempt to restrict a company’s employees, members, executives, independent contractors, customers and vendors from engaging in competitive activities with that company. C.R.S. Section 8-2-113, states that it is unlawful to use threats, force or any other means of intimidation to prevent a person from engaging in any lawful occupation.   It also states that “any covenant not to compete which restricts the right of any personal to receive compensation for performance of skilled or unskilled labor for any employer shall be void.” What does that mean? Well, the general rule is that non-competes are not allowed in Colorado, unless the situation falls into an exception. The exceptions are:
  • Is the non-compete being used to protect trade secrets
  • to protect the purchaser in connection with the sale of a business and/or the business’ assets
  • to recover the expense of education or training an employee of less than two-year duration
  • to restrict executive and management personnel or professional staff to those personnel
 Sale of a Business: Non-compete agreements are often included in the context of buying of a business. To protect the buyer’s intention of buying a successful established company, the buyer usually negotiates a non-compete so that the value of that business is not undermined by the seller starting a new, identical business that is in direct competition with the company being purchased. Trade Secrets: Trade secrets are defined as information that the company has taken steps and an interest in protecting and that has measurable value to the business. For the non-compete agreement to be valid, a company must prove that the information is included in the non-compete qualifies as a trade secret, which is not necessarily an easy task, unless you’re holding the formula for that soda company. Management of the Company: Executives and management of a company often have an intimate knowledge of the Company’s inner workings. Especially, if you are a member of an LLC or someone who oversees other employees.  The company may be able to ask executive and management members to sign non-competes and those agreements can be enforceable in certain situations. Who or what qualifies as management, or an executive is still largely a subject of discussion for the courts. Even if a business can establish that its non-compete falls into one of these exceptions, the Company still must prove the restrictions are reasonable. A court will look at three main criteria to determine if the agreement is reasonable:
  • The duration of the restriction
  • The geographic scope of the restriction
  • Whether the Agreement is overly restrictive.
 These agreements have several layers to make them valid. Additionally, The recently introduced Workforce Mobility Act of 2021 (“WMA”) is something we are watching.If enacted, it would:
  • Largely limit the use of non-competes to situations where there’s a sale of a business or dissolution of a partnership.
  • Authorize the U.S. Department of Labor to take steps to educate the public about the limitations surrounding the use of non-compete clauses.
  • Give workers a private right of action to sue for violations of the WMA.
The bottom line is the agreements need to be tailored to meet the requirements of enforceability in Colorado. Attorneys are there help their clients decide whether a non-compete is the right agreement for a company or if one could or should even be enforced. Basecamp Legal offers a range of legal services for new and growing companies. We will help you make the important, early legal decisions so you hit the ground running. As you grow, we will help you with your day-to-day legal needs so you can focus on your business. We help companies throughout Colorado, California, Idaho, Washington, and Wyoming. You can learn more about our business services here.

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