Noncompete Agreements in Colorado and New Jersey
The Rules and Exceptions
QUESTIONS AND BRIEF ANSWERS
- Are Noncompete Agreements Enforceable in Colorado?
- My employer made me sign one to stay employed, is that legal?
- All of my employees sign noncompete agreements. One is now opening a competing business. What can I do about that?
Short Answers: Non-competes are enforceable in Colorado in certain circumstances. Considerations include the type of employee signing the agreement, whether the agreement is necessary to protect trade secrets or in connection with the sale of a business or for reimbursement of certain training expenses. C.R.S. §8 -2-113, C.R.S. § 8-2-113(2). An employer may require an employee to sign a non-compete as a condition of continued employment and the courts have held that no additional consideration is required. A Colorado employer may fire an employee for refusing to sign a non-compete.
Are Non-Compete Agreements Enforceable in Other States, Such as New Jersey?
Short Answer – in most states, including New Jersey, a non-compete agreement will be enforced by a court if it is reasonable in scope, geographic restriction and duration. PSB Law is licensed in New Jersey as well as Colorado.
PSB Law has successfully handled numerous non-compete cases on behalf of employees and employers, including the following sampled below:
- Colorado-based wind turbine engineer leaves employment to join a competing company that also performs service and maintenance of wind turbines. Engineer had signed a non-compete agreement that prohibited him from working for a competing business. Prior to his departure, PSB Law performed an analysis of whether the non-compete agreement was enforceable, considering, among other things, the employee’s relative rank in the company (i.e. whether the employee was an executive or managerial employee or professional staff to such an employee) and whether the employee had acquired trade secrets while working for the first employer. PSB Law wrote an analysis in which it concluded that the non-compete agreement is likely unenforceable under Colorado law. The employee shared the memo with his prospective employer, which then hired the employee.
- PSB Law represents several medical practices and individual physicians and has helped both navigate the intricacies of Colorado’s rules and narrow exceptions regarding physician non-competition agreements.
- Director-level sales manager seeks to leave his employer of 27 years. This employee is sufficiently senior to be bound by a non-compete agreement pursuant to C.R.S. 8-2-113(2)(d), however all of his experience and contacts are in a certain segment of apparel so he believes that he is only employable in that industry segment. When the employee was asked to sign a new, enhanced non-compete agreement, PSB Law helped the employee negotiate the non-compete terms so that his competition was effectively restricted to the largest direct competitors. When he found a new employer willing to hire him, the new employer’s attorney contacted PSB Law to discuss the non-compete limitations and evaluate whether the new employment violated the non-compete. Because the new employer was not one of the expressly named competitors and based upon the explained course of negotiation of the revised non-compete provisions, the employee was offered, and accepted, the new position, facing no subsequent legal challenge.
- Director signed a non-compete while at one division of a company, was then transferred to another division and subsequently resigned her position with the company. PSB Law successfully defended Director for claimed violation of her non-compete agreement, arguing that the agreement was invalidated by Director’s transfer to another division, changed job duties and the company’s failure to present a new non-compete to the employee to cover her position at the new division.
Non-compete agreements are sometimes called by another name: Confidentiality Agreement, Non-Solicitation Agreement, or Non-Disclosure Agreement. All of these agreement types may be enforceable, subject to Colorado statutes. On the other hand, an employer may not circumvent the Colorado statute prohibiting non-competes by renaming the agreement as a “non-solicitation” agreement. If the employer does not have the power to enforce a non-compete agreement against an employee, then an employer will not be permitted to enforce a non-solicitation agreement against that employee, either. Phoenix Capital, Inc. v. Dowell. 176 P3d 835 (Colo. App. 2007), cert. denied (2008).
NON-COMPETE LEGAL CONSIDERATIONS SUMMARY
Enforceability of a non-compete is determined based upon the employee’s position at the time of signing the non-compete Phoenix Capital, supra. A restrictive covenant signed by an employee who was not covered by an exception to the law against non-competes at the time of signing, is “void ab initio” and may not be revived by a subsequent promotion of the employee. Instead, the employee must sign a new non-compete agreement at the time of a promotion for an agreement to be valid (Id).
Under Colorado law, an agreement that restrains an employee from competing with an employer is only valid in certain limited situations, including where necessary to protect trade secrets and if an employee is a managerial or executive employee or their professional staff. Non-competes in Colorado are unenforceable as per C.R.S. § 8-2-113 EXCEPT in the following circumstances, including:
- Sale of a Business: Non-competes in connection with the sale of a business are enforceable based upon value received. C.R.S. § 8-2-113(2)(a).
- Trade Secrets: A trade secret must be both “secret” and of value. C.R.S. § 8-2-113 (2)(b). Here are some factors considered by the courts in determining if a covenant is necessary to protect trade secrets:
- Whether the company has taken measures to obtain or develop the information.
- The company’s interest in keeping the information secret.
- What the company has done to keep the information secret.
- The information’s relationship and value to the business.
- Whether the information is available to the public or may be “reverse-engineered.”
- Recovery of Training Expenses: in certain circumstances, an employer may recover the costs of training an employee if that employee leaves within two years of being hired by the employer. C.R.S. § 8-2-113(2)(c).
- Executive and Management Employees and their Professional Staff: An employee who is a manager or higher and has at least some amount of autonomous decision-making power may fall within the non-compete statute exception for executive and managerial exception. C.R.S. § 8-2-113(2)(d). High level support staff for executives may also qualify due to the quantity of confidential information to which they are privy.
If a non-compete agreement qualifies for one of the above exceptions, it still only be enforced if reasonable. While Colorado courts have the power to “blue pencil” a non-competition agreement (meaning they may sever the unenforceable provisions and enforce the rest, or otherwise change the agreement to render it enforceable), Colorado courts have historically chosen to throw out, and decline to enforce, overbroad and unenforceable non-compete agreements.
When determining the reasonableness of a noncompete agreement, courts look at three criteria:
- Duration: The duration of a non-compete should be no longer than necessary to protect against unfair competition. While Colorado courts have enforced agreements with a duration of up to five years, in fast-changing fields such as data management, digital marketing and biotechnology, a non-compete in excess of two years could be held to be overbroad, because any trade secrets possessed by the former employee would be in the public domain or obsolete within one or two years.
- Geographic scope: Like the duration restriction, whether the geographic scope is reasonable is determined based upon the scope of the company and former employee’s business activities. A company with a national clientele, for example, may reasonably restrict competition anywhere in the country, while a restriction that prohibits a former worker from working outside of the company’s area of operation would likely be unreasonable. A non-compete may be worldwide if such a scope is necessary to protect the company’s legitimate business interests. Additionally, if an employee only works in a specific area of a company, it may be unreasonable to prevent her from working in a different area of a competitor.
- Breadth of Prohibited Activities: While a business may wish to keep a person or company from taking part in any competing activities, it can only prevent a former employee from participating in activities that relate to the former employee’s work at the company and the information taken away by that employee.
Colorado and New Jersey non-competition laws are complex and merit thorough exploration. Contact PSB Law at 303-442-5111 or email today with questions regarding your non-compete, non-solicitation, confidentiality or other restrictive covenant agreement in Colorado and New Jersey.