Colorado Law Change on Restrictive Covenants

Betty Q. Hixson

Colorado statutory law has traditionally limited enforcement of restrictive covenants.  C.R.S. § 8-2-113, entitled “Unlawful to intimidate worker – agreement not to compete,” provides that all contractual restrictions on a person’s post-employment competitive activity are “void” unless they fit into one of four categories: (1) contracts for the purchase and sale of a business or the assets of a business; (2) contracts for the protection of trade secrets; (3) contracts providing for recovery of expenses of educating and training an employee who have served an employer less than two years; and (4) agreements with executives, management personnel, and their professional staff.  This statute applies not only to non-compete agreements, but also to agreements not to solicit customers or employees.  Most companies trying to defend their restrictive covenants do so under the exception to protect trade secrets or the exception for executives/managers/professional staff.

Regarding qualifying as an executive or manager, early case law limited the exception to only those personnel who could be said to be a “key man and very heart of the business.”  “Professional staff” was also limited to the learned professions such as engineering, science and medical practice.  More recent case law has broadened application of the exception somewhat, although it remains a question of fact for the court.  An individual with significant responsibility and supervisory capacity over others, or a mid-level manager with substantial (perhaps “top-level”) compensation, autonomy, and decision-making capacity can be considered “management.”

The trend toward more liberal enforcement of restrictive covenants in Colorado, however, may be in danger.  A small part of a 304-page bill enacted in Colorado in 2021, SB 21-271 (which becomes effective March 1, 2022), adds a new subsection 4 to C.R.S. § 8-2-113, providing that “[a] person who violates this section commits a Class 2 misdemeanor.”  In Colorado, a Class 2 misdemeanor carries possible punishment of 120 days in prison, a $750 fine per violation, or both.

Should employers be worried?  Can a human resources professional be sentenced to jail for asking an employee to sign an overbroad non-compete?  That seems unlikely, but now with an uncertain possibility of criminal liability/fines, employers certainly should review their existing restrictive covenant agreements, and evaluate their practices going forward, to ensure compliance with C.R.S. § 8-2-113.

An important consideration to keep in mind arises from C.R.S. § 8-2-113(1), which provides “[i]t shall be unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.”  This general language has been subject to little interpretation by courts so far, but could be the basis for challenging employers who engage in practices of threatening former employees with litigation where unwarranted or even sending cease and desist letters that could be seen as unduly heavy-handed.

The actual effect of the approaching criminalization of the Colorado statute will not be known for some time (perhaps years), but employers using restrictive covenants should be aware of the risks the new law may present.


©2022 Epstein Becker & Green, P.C. All rights reserved.
National Law Review, Volume XII, Number 13

https://www.natlawreview.com/article/small-change-colorado-law-could-have-large-effect-criminalizing-restrictive

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