Many employers rightfully fear adverse consequences when a valuable leaves employment. Among the fears are the disclosure of customer identity, purchasing habits, the sale of trade secrets and damaging competition from the former employee. Employers attempt to protect themselves from the consequences of losing a key employee by asking all employees to sign non-compete agreements before they commence work. The issue is whether such a contract can be enforce in Colorado. The Colorado legislature has passed and amended a statute that limits the effectiveness of non-compete agreements, but the statute has a number of exceptions, and it does not provide a categorical answer to the question that forms the title of this post.
The general rule
The Colorado statute begins by stating a general prohibition against using “force, threats or other means of intimidation” to prevent any person from engaging in “any lawful occupation.” The statute then lists a number of exceptions to this prohibition:
- A contract for the purchase or sale of a business
- Any contract for the protection of trade secrets
- Any contractual provision requiring the employee to reimburse the employer for specialized training or education
- The employment of executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
The first three exceptions are fairly clear, but the fourth exception is filled with ambiguity, and its meaning is far from clear. The Colorado Supreme Court has issued a number of opinions that limit the scope of the general prohibition and the various exceptions.
The rule of reason
In order to be enforceable under the statute, a non-compete agreement must be reasonable in its geographic scope and duration. In other words, a non-compete must be limited to a reasonable geographic scope. A nationwide non-compete would not be enforceable, whereas a non-compete limited to the firm’s historic market area, say a contiguous area of three or four states, would be enforced. Agreements whose prohibition on re-employment extends for too great a period, say 10 years, would not be enforced, whereas a ban that lasts for a shorter time, say two years, is likely to pass muster.
The answer to this difficult question for both the employer and a prospective employee is to seek the advice of an experienced employment attorney. A knowledgeable attorney can judge the effectiveness of a proposed non-complete agreement and provide an opinion on whether it provides legitimate protection for the employer without imposing unreasonable restrictions on the former employee’s ability to see employment in the same or a related field.
