Non-Compete Agreements and Criminal Penalties

February 26, 2022

A state law passed last year will soon increase criminal penalties for violating the Colorado statute on non-compete agreements. First, an overview of that statute might be helpful.

Covenants Not to Compete

Under Colorado law, a covenant not to compete (or non-compete agreement) is void unless it falls within at least one of four specific exemptions. The relevant statute says:

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 or management personnel.

If a court determines that one of the statutory exemptions applies, the court then examines whether the non-compete agreement is reasonable in its geographic and temporal limitations. For example, a non-compete agreement that is national in scope would be unreasonable if the company’s market is not nation-wide. As to temporal limitations, courts usually find one to three years to be reasonable. In some cases, longer periods might be enforceable. The reasonableness of the restrictions depends on the specific facts.

Exemptions (b) and (d) have generated more litigation than the other exemptions. For example, exemption (b) usually raises a couple of questions. First, does the information the company wants to protect qualify as a trade secret under Colorado law? (I won’t go into that issue here.) If it does, is a non-compete agreement necessary to protect that information?

Colorado courts enforce non-compete agreements under exemption (b) only to the extent necessary to protect the company’s legitimate trade secrets. If a non-disclosure agreement is sufficient to protect the employer’s trade secrets, a court will probably rule that the non-compete agreement is void. In other words, if a former employee can work for a competitor without using or disclosing your company’s trade secrets, it is unlikely a court will enforce a non-compete agreement.

Penalties

Currently, an employer that violates the statute may be subject to a fine of between $10 and $250, and/or confinement in county jail for not more than 60 days. However, effective March 1, 2022, violation of the statute will be a Class 2 misdemeanor, with a maximum penalty of $750, imprisonment for 120 days, or both. (By the way, we do not yet know what constitutes a violation of the statute.)

The enhanced penalties should not dissuade employers from using non-compete agreements in situations where they are appropriate and lawful. Sometimes there are legitimate reasons for requiring employees to sign non-compete agreements. But it is important to know that, while Colorado does not completely ban non-compete agreements, their use is circumscribed by statute. Therefore, it is advisable to consult an employment lawyer if you want an employee to sign a non-compete agreement. If any of your employees signed non-compete agreements that were drafted without a lawyer’s assistance, you should consider having those agreements reviewed by an attorney.