Trade Secret / Non-Competition Agreements / Other Laws Against Improper Competition
Baird Quinn regularly represents businesses and employees with respect to non-competition agreements, non-solicitation agreements, and trade secret issues. Our commercial attorneys have extensive experience providing advice regarding the enforceability of non-competition agreements and non-solicitation agreements, drafting such provisions, and prosecuting and defending trade secret and non-competition litigation. We understand that, when trade secret/non-competition litigation occurs, clients need immediate access to knowledgeable and aggressive attorneys to protect their interests.
Colorado Law Governing Non-Solicitation and Non-Competition Agreements
Due to the passage of new legislation in 2022, Colorado has two standards for the enforceability of non-competition and non-solicitation agreements. The standard for enforceability differs based upon when the agreement was entered into with the employee.
A. Agreements Entered Into On or After August 10, 2022
On June 8, 2022, Governor Jared Polis signed HB 22-1317 (passed by the Colorado legislature in May 2022) into law. This legislation significantly restricts the enforceability of non-competition and non-solicitation agreements in Colorado. The new law is effective on August 10, 2022, and applies to agreements entered into after that date.
HB 22-1317 limits non-competition and non-solicitation agreements to:
- Non-competition agreements accompanying the sale of a business;
- Non-competition agreements signed by “highly compensated employees,” defined in 2022 as those making more than $101,250 per year at the time the contract was entered into and at the time it is sought to be enforced;
- Non-solicitation of customer agreements that are no broader than necessary to protect the employer’s trade secrets for employees earning, at the time the contract was entered into and at the time it is sought to be enforced, sixty percent (60%) or more of the highly compensated threshold of $101,250 (2022 value), or $60,750 per year.
Importantly, HB 22-1317 voids non-competition and non-solicitation agreements absent notice to the employee of the agreement and its terms at least fourteen (14) days prior to the effective date of the agreement itself or the consideration (e.g., a pay raise ) relied upon to support the agreement, or for prospective employees, the employee’s acceptance of the agreement. The notice must be in writing in a separate document, use clear language, and be signed by the employee.
HB 22-1317 still permits training cost recovery agreements, if the amounts sought to be recovered are reasonable and the recovery sought decreases proportionately based upon the number of months that have passed since the employee completed the training.
While confidentiality provisions are allowed, they may not prohibit disclosure of information obtained from general training, knowledge, skill or experience, information readily available to the public, or information that the employee otherwise has a protected right to disclose.
HB 22-1317 also preserves existing law that voids non-competition agreements with physicians, but allows employers to recover reasonable damages for any such competition.
The new law also provides that non-competition and non-solicitation agreements may not require enforcement proceedings outside of the State of Colorado.
Employees may request copies of any such agreement at least once per year.
The law imposes significant penalties for non-compliance, including a $5,000 penalty per employee if the employer enters into, attempt to enforce, or presents to current or prospective employees any noncompete that is void under the new statute. The penalty is discretionary with the Court and may be avoided if the employer shows that it acted in good faith and had a reasonable belief that it was acting in accordance with the law. The law also reaffirms the existing criminal penalties for anyone who uses force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation.
B. Agreements Entered into Before August 10, 2022
For agreements entered into before the new law became effective (August 10, 2022), non-solicitation and non-competition agreements are deemed “void,” except in the following limited circumstances: (1) contracts for the purchase and sale of a business or the assets of a business; (2) agreements with executives, management personnel, and their professional staff; (3) contracts for the protection of trade secrets; or (4) contracts for recovery of expenses for educating and training an employee who has been employed for less than two years. Most litigation under this law involves the exception for executives or managers or the exception for the protection of trade secrets.
The Colorado non-compete statute also has a specific provision relating to non-competition provisions with physicians. This provision voids “any covenant not to compete provision that restricts the right of a physician to practice medicine.” Given this provision, physicians may not be prevented from practicing medicine, even if they agreed to such a restriction in an employment or partnership agreement. Colorado’s non-compete statue also provides, however, that other provisions in a physician agreement are enforceable, including provisions that require the payment of damages in an amount “reasonably related to the injury suffered”. Thus, while a physician may not be enjoined from competing based upon a non-compete provision, the physician may be ordered to pay damages arising from a breach of a non-compete provision. These damages, however, must be reasonably related to the “injury suffered”; otherwise, the provision will not be enforced.
In 2018, the non-competition statute was amended to allow physicians to continue to care for patients with rare disorders, as defined by criteria developed by the National Organization For Rare Disorders, Inc., or any successor organization, even if they signed a non-compete agreement.
Even if a non-competition and/or non-solicitation agreement falls within a statutory exception, it will only be enforced if it is reasonable with respect to duration and geographic scope. In determining “reasonableness,” courts typically evaluate whether the restrictions are necessary to protect the employer’s business as well as the impact of enforcement on the employee. Any agreement that prevents a former employee from working for any competitor at any location will be subject to greater scrutiny. A well-drafted non-competition or non-solicitation agreement should restrict an employee from working for a competitor only in the region where the company competes for business. Further, if the agreement does not contain any restrictions with regard to duration or geographic scope, the provision will likely be struck down by the court.
Finally, as with any contract, a non-solicitation/non-competition agreement must be supported by adequate consideration. Absent adequate consideration, the agreement will not be enforced. As a general rule, offering an applicant a job, or an existing employee a promotion, pay increase, bonus or other new benefit, will be deemed adequate consideration to support a non-competition agreement. An employer’s agreement to continue the employment relationship will also suffice, as established by the Colorado Supreme Court’s decision in Lucht’s Concrete Pumping, Inc. v. Horner.
Uniform Trade Secrets Practices Act
Colorado has adopted the Uniform Trade Secret Practices Act, which prohibits and imposes liability for the misappropriation of trade secrets. See C.R.S. § 7-74-101. The term “trade secret” is defined as any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. In determining whether something is a trade secret, courts consider: (1) whether the information is known outside the business; (2) the extent to which the information is known to those inside the business; (3) the efforts by the company to keep the information secret; (4) the value to the company in keeping the information from competitors; (5) the cost to obtain and develop the information; and (6) the amount of time and expense it would take others to acquire and duplicate the information.
The most litigated trade secret involves customer lists and information. A customer list may not constitute a trade secret if a company has not treated it as “secret,” that is, taken appropriate steps to guard against its disclosure to others. At a minimum, a company should protect the confidentiality of customer information by restricting access to the information, requiring employees to enter into non-disclosure agreements, and marking or stamping the information “confidential.”
Duty of Loyalty
Even in the absence of a non-competition and/or non-solicitation agreement, an employee may be exposed to potential liability by competing against his or her current employer. As a general rule, employees owe a duty of loyalty to their employer. This common law duty of loyalty was adopted by the Colorado Supreme Court in Jet Courier Service, Inc. v. Mulei. As a result, an employee may not engage in unauthorized competition or solicitation against their employer during the employment relationship. They may, however, prepare to compete. The line between actual competition and the preparation for competition is often uncertain. Any employee thinking about starting a competing business should consult with legal counsel to obtain guidance on this critical issue.
Computer Fraud and Abuse Act
The Computer Fraud and Abuse Act, 18 U.S.C. § 1030, provides businesses with another potential claim in the event computer data is misappropriated by a current or former employee. In order to prevail on a claim under the Computer Fraud and Abuse Act, a business must show: (1) that an employee knowingly accessed a computer either without authorization or exceeding his or her authorization; (2) that he or she did so with the intent to defraud the business; and (3) as a result, the business incurred losses exceeding $5,000.00.
Trade secrets are often the most valuable asset owned by a business – and should be protected accordingly. Businesses can take several inexpensive and practical steps to protect confidential information and customer relationships. These steps should be taken proactively, preferably before an issue arises regarding solicitation or competition by a current or former employee:
• Companies should adopt, maintain and disseminate trade secret policies, with a specific description of the information deemed to be a trade secret;
• Employee handbooks or manuals should contain provisions restricting outside employment during the employment relationship, addressing conflicts of interest, and prohibiting the use of company information for non-company purposes.
• All employees should sign non-disclosure agreements, and all managers should sign strong non-solicitation and non-competition agreements.
• Companies should specifically identify and label trade secrets as “confidential,” and otherwise identify trade secret information for employees.
• Computers with trade secret information should be accessible only by password. Passwords should be changed with some regularity.
• Departing employees should be reminded of their obligation to preserve the confidentiality of the Company’s trade secrets after termination of the employment relationship.
Please feel free to contact Baird Quinn’s non-competition, non-solicitation, and trade secret lawyers, if you have any questions regarding non-competition agreements, non-solicitation agreements or misappropriation of trade secret issues. You may obtain additional information about our Non-Competition lawyers, Non-Solicitation Lawyers, and Trade Secret Lawyers by going to the following link.