Colorado Criminalizes Attempts to Curb Competition

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Yet another state has made it harder for businesses to implement restrictive covenants—this time with criminal penalties.

Colorado’s restrictive covenants statute already provides that it is unlawful to “use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation,” and further states that non-competes are invalid unless they fall into one of four categories:

  1. Covenants made in connection with the purchase and sale of a business (or the assets of a business);
  2. Covenants made for the protection of trade secrets;
  3. Covenants for the recovery of expenses incurred in educating and training employees who were employed for less than 2 years; and
  4. Covenants for executive and management personnel (and their professional staff) and officers.

That has been the law in Colorado for years—but a new, draconian portion of the statute will go into effect in just over a month.

On March 1, 2022, any violations of the statute will constitute a class 2 misdemeanor, with a penalty of a $750 fine or up to 120 days’ imprisonment per violation—or both.

Obviously, this creates challenges for Colorado employers (or businesses with Colorado employees, who may seek to have Colorado law apply to a dispute regarding enforceability of a non-compete). Such businesses should take extra care to only use non-competes with employees who fall within the four categories described above. As an example, employers should avoid issuing non-competes to rank-and-file employees who don’t fit the definition of professional staff for executives or managers and who don’t have access to trade secrets. Frankly, given the speed with which state legislatures are passing restrictive covenants legislation as well as the increased focus at the federal level on non-competes, all businesses should be carefully considering which categories of employees will be subject to non-competes, but in light of this new provision, it is especially important for employers with workers in Colorado.

Two questions remain unanswered. The first is: what constitutes the use of force, threats, or “other means of intimidation”? This issue is undecided, but presumably could include an ultimatum that an employee must sign a non-compete or risk termination. Oftentimes, employers will require execution of a restrictive covenants agreement as a condition of continued employment, particularly to avoid a patchwork of agreements where some employees are bound by non-competes, but other similarly situated employees are not. This can be important so that an individual seeking to avoid their contractual obligations cannot quibble with the proffered legitimate business interest supporting the agreement (i.e. “Joe has the same job and access to the same information I have, but you didn’t make him sign a non-compete, so it can’t be that important!”). But if the Colorado statute criminalizes an employer’s requirement that employee’s sign a non-compete as a condition of employment, this strategy of requiring execution of non-competes could backfire in a substantial way.

The other open question is whether mere inclusion of a non-compliant non-compete in an agreement will constitute a violation of the statute or if a violation will be limited to attempts to enforce such provisions. In some jurisdictions (like Illinois, whose new statute just went into effect), penalties are only assessed if the business actively seeks to enforce an invalid agreement. In others (like California), mere inclusion of an invalid covenant—even if the company does not intend to enforce it—can be a risky proposition, potentially subjecting the business to liability. Arguably, given the way the statute is drafted, Colorado falls into the latter category, such that the mere use of a non-compliant covenant could subject an employer to criminal penalties, even if it never seeks to enforce the covenant. This further underscores the need for careful consideration of which Colorado-based employees will be bound by restrictive covenants.

The bottom line, in Colorado and elsewhere, is that businesses need to be mindful of new (and existing!) rules in crafting and rolling out their restrictive covenants agreements, lest they inadvertently open the company up to stiff penalties. Especially for multi-state employers, it is becoming more and more critical to work with knowledgeable legal advisors to stay abreast of common pitfalls and implement a restrictive covenants plan that is reasonable, efficient, and enforceable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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