Employers Beware: Colorado Criminalizes Enforcement of Overbroad Non-Competes

Foley & Lardner LLP

Foley & Lardner LLPIn keeping with the national trend of aggressively pursuing limitations on or prohibitions against non-competition agreements, the State of Colorado recently enacted first-of-its-kind criminal penalties for employers seeking to enforce illegal non-competes. If you are an employer that utilizes non-competition agreements, this development is one to watch as it may be the start of a new wave of limitations on restrictive covenants.

In general, Colorado law prohibits non-competition agreements restricting a person’s right to receive compensation, unless such agreement falls into one of four narrow categories:

  1. a contract for the purchase and sale of a business;
  2. a contract for the protection of trade secrets;
  3. a contract for the recovery of the expense to educate and train an employee who has served an employer for less than two years; or
  4. the employee qualifies as an executive, officer, management personnel, or their professional staff.

Colorado law also prohibits the use of force, threats, or other means of intimidation to prevent a person from engaging in any lawful occupation. This prohibition has not received much attention in Colorado courts to date, but could be interpreted to include enforcement of a non-competition agreement that an employer knows to be overbroad or unenforceable.

The recent change to the law in Colorado was subtle, but powerful. Amidst hundreds of pages of revisions to Colorado’s sentencing laws, the legislature added a single clause, officially declaring that a violation of the Colorado law on non-competition agreements constitutes a class 2 misdemeanor, punishable by up to 120 days in jail, a fine of up to $750, or both. While these new criminal penalties do not amount to an outright ban of non-competes or otherwise change the scope of permissible non-competition restrictions under Colorado law, they do increase the risk to employers of entering into and enforcing such post-employment restrictions in Colorado. It remains to be seen if other states will follow Colorado’s lead.

Many states, while restricting non-competition agreements, still broadly (or narrowly) permit employers to enter into non-solicitation of customers provisions with their employees, through which employers may accomplish many of the same goals of non-competition agreements without the same restrictions on their enforcement. States like Colorado, however, treat non-solicitation agreements as a form of non-competition agreement, and therefore these new criminal penalties under Colorado law apply equally to non-competition and non-solicitation agreements.

In preparation for the March 1, 2022 effective date of these new criminal penalties, employers with Colorado operations would be wise to review their existing non-competition and non-solicitation agreements to ensure they comply with Colorado law.

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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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