Noncompete Agreements

Noncompete Agreements Hobble Junior Employees read The Wall Street Journal headline on February 2, 2016.  The article went on to discuss how a noncompete agreement crippled a young journalist in her job search but the prevalence and impact of noncompete agreements ranges far beyond journalist.  I was prompted to write this post after a few clients had recent concerns regarding noncompete agreements.

Restrictions on employment and competition among business is disfavored in Colorado.  In fact, Section 8-2-113 of the Colorado Revised Statutes explicitly states: “It 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.”  However, this does not stop some employers from requiring noncompete agreements.  It does not protect employees from demands for compensation for alleged violations of these agreements.  The unwitting use of void noncompete agreements could also open employers to liability for unfair employment practices claims.

Before entering into a noncompete agreement it is important to understand the permissible bounds of such an agreement.

Know the Permissible Restrictions.  State law varies, but in Colorado any restriction on the right to receive compensation for the performance of skilled or unskilled labor for any employer “shall be void” absent notable exceptions.  These exceptions are (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 the expense of educating or training an employee who has served for less than two years; or (4) executive and management personnel and “professional staff” to executive and management personnel.

What is a Trade Secret.  The noted exceptions are fairly straight forward from a layman’s perspective – with the exception of the “trade secrets”.  What can be classified as a “trade secret” varies and merely citing protection of “trade secrets” does not necessarily render a noncompete clause valid.

The Colorado Uniform Trade Secrets Act (UTSA), defines a trade secret as: The whole or any portion or phase of any scientific or techincal 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.

As you can see, much of the work of an architect could fall within the definition of “trade secret”.  However, Colorado consider several additional factors to determine whether a “trade secret” exists under this definition – and will further review the noncompete clause to determine if whether the noncompete truly enhances trade secret protection or is solely a restriction on competition.

In one case, the Court of Appeals determined a separate nondisclosure provision in the employment agreement was sufficient to protect trade secrets thus the noncompete clause was void.

Reasonableness. Noncompete agreements within the four permitted exceptions must still be “reasonable.”  The broader a noncompete clause, the less likely it is to be enforceable.  Courts emphasize the need for a reasonable limit to the time (length) and place (geographic area) of restrictions.  If the scope of the noncompete is overly restrictive, a Court may void the agreement in its entirety irrespective of the employer’s expectations.

Void, Not Merely Voidable.  If the Court determines an agreement is void then there is no liability for breach by a former employee.  The void agreement may as well have never existed.  As an employer, you could lose all protections you anticipated if your agreement is determined void as a whole.  Dismissal of claims can then subject you to exposure for the prevailing parties’ costs and fees.

Conclusion.  Know and understand the permissible restrictions of a noncompete agreement; carefully review and discuss the restrictions when you draft (or before you sign) the agreement.  Employees can avoid the fate of the young journalist in The Wall Street Journal article and employers can work within the law to protect their business.

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