Trade Secret / Non-Competition Agreements
Baird Quinn regularly represents businesses and employees with respect to non-competition agreements, non-solicitation agreements, and trade secrets. 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. See recent decisions: Favorable-Judgment-Noncompetition-Case; Preliminary-Injunction-Entered-NonCompete-Agreement.
Colorado Law Governing Non-Solicitation and Non-Competition Agreements
Colorado statutory law governs the enforceability of non-solicitation and non-competition agreements. Generally, under Colorado law, 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 involves the exception for executives or managers or the exception for the protection of trade secrets.
The law specifically provides:
(2) Any 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, but this subsection (2) shall not apply to:
(a) Any contract for the purchase and sale of a business or the assets of a business;
(b) Any contract for the protection of trade secrets;
(c) 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;
(d) Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
See C.R.S. § 8-2-113. Colorado-Non-Compete-Law.
The Colorado non-compete statute also has a specific provision relating to non-compete 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. See Enforceability of Liquidated Damages Clauses in Physician Non-Compete Agreements.
In 2018, the non-compete 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-compete 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,” the court 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. See Lucht’s-Concrete-Plumbing-Decision
Uniform Trade Secret Protection 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. See Jet Courier 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 other employment during employment, 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.