July 2007

July 2007

EMPLOYEE COVENANTS NOT TO COMPLETE IN COLORADO B
ARE THEY ENFORCEABLE?

Employers invest substantial time and money on employees at all levels. Some employees will leave their employment voluntarily and some will leave involuntarily. In both cases, a terminated employee may start a business that competes with the former employer or become employed by a competitor of the former employer. Frequently, the employee will have information the former employer will consider confidential and that the employer will want to protect. In many cases, it is inevitable the employee will disclose some of that information to a new employer simply because the information has become a part of who the employee is.

Any person who leaves employment of one employer to take work with another employer is likely to take some amount of confidential information of the former employer to the new employer. The inevitability of this happening has led some states to support non-competition agreements based on the Ainevitable disclosure@ doctrine. States that have adopted the doctrine by legislation or court opinion permit an employer to obtain a non-competition agreement from an employee for a reasonable period of time (for example, one or two years) and the agreement will be enforced because it is Ainevitable@ the employee will share confidential information of the former employer with the new employer.

Colorado does not follow the Ainevitable disclosure@ doctrine. In fact it is fair to say Colorado does not favor non-competition agreements. Colorado=s courts have interpreted a Colorado statute as establishing a legislative policy against non-competition agreements. The statute says, AAny 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.@ That is strong language. There are only four exceptions to the statutory prohibition in the statute itself:

• Non-competition contracts given by a seller in connection with the purchase and sale of a
  business
• Any contract for protection of trade secrets
• 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
• Covenants from executive and management personnel and officers and employees who constitute professional staff to executive and management personnel

The burden of proving a non-competition agreement does not violate this statute falls on the employer who obtained the agreement from the employee and is seeking to enforce the agreement.

It has generally been understood for any covenant not to compete to be enforceable it must be reasonably restricted as to length of time and breadth of geography and types of business it covers. In addition, when the non-competition agreement includes provisions seeking to prohibit a former employee from using the employer=s confidential information to compete or help others compete against the former employer, the definition of confidential information must not be overbroad. It must be specific enough to identify items that are unique to the former employer and could truly be used in competition against the former employer.

It may be possible to accomplish generally the goals of a non-competition agreement through a trade secret agreement that Colorado=s courts do favor because of the legislative adoption of the Uniform Trade Secret Act in Colorado.

What are trade secrets? How do they differ from confidential information? What is needed to define them? A future newsletter will explore these questions.

This Newsletter is provided for information purposes only. Accordingly, the information is general in nature and is not intended to address a specific issue or problem. The reader should seek legal counsel of his or her choice for specific problems. The receipt of this Newsletter does not create an attorney-client relationship with the author or the law firm of Dean, Dunn & Phillips LLC.