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Commercial & Corporate Law

Non-Compete Agreements in Colorado: A Guide for Business Owners

updated:
9.28.21
Non-Compete Agreements in Colorado: A Guide for Business Owners

A non-compete agreement is a contract between a business and another party that restricts the right of that party to compete with the business. Many states strictly limit the enforceability of non-compete agreements. So is a non-compete enforceable in Colorado? Yes, but only under certain circumstances.

What Is a Non-Compete Agreement?

In a non-compete, a Colorado business typically seeks a non-compete agreement with another business, or with a contractor or an employee. The agreement prevents that party from revealing or using company proprietary information to benefit a competitor.

The buyer of a business, for example, might seek to prevent the seller from revealing the proprietary information, or an employer might seek to prevent an employee from working for a competitor for a period of time after the employee leaves the company.

Colorado Non-Compete Law: Exceptions to Remember

A non-compete agreement in Colorado violates state law unless it falls within one of the below-described exceptions to the general Colorado rule against non-compete agreements. The reason for the rule is that although businesses have the right to prevent unfair competition, they do not have the right to eliminate all competition. Another concern is that a non-compete agreement can violate public policy by restricting people’s right to seek gainful employment.

Sale of a Business

When you purchase a business, you are not normally purchasing only the equipment, etc. You are also purchasing the business’s trade secrets and its relationships with its clients (known as “goodwill”). The seller could undermine you by divulging your new business’s trade secrets or by pilfering your clients. This sort of behavior would be unfair to you because it undermines the value of the business you paid for.

Of course, you cannot expect the seller to abandon the company’s line of business simply because they sold the company. It would be bad for the economy to forbid someone from doing business in a field where they have expertise. Colorado law attempts to draw a balance between competing concerns. Under Colorado law, non-compete agreements incident to the sale of a business are legal.

Trade Secrets

Trade secrets are unique among the various forms of intellectual property. Few legal protections exist compared to patent, trademark, and copyright protections. The upshot is that trade secret protection can potentially last forever, without the time limitations imposed upon other types of intellectual property.  Colorado allows non-compete agreements that protect trade secrets.

Nevertheless, you can’t protect information simply by calling it a “trade secret.” It has to qualify as a trade secret under Colorado law. To qualify as a Colorado trade secret:

  • The company’s work product must be involved. It must have developed the information on its own, or it must have purchased it from someone else.
  • The company must have a competitive interest in maintaining the confidentiality of the information (a list of clients, for example).
  • The information must be related to the company. The identity of the CEO’s mistress, for example, is not a trade secret because it does not relate to the company’s business.
  • The information is valuable to the company.
  • The owner of the information has taken concrete steps to protect the confidentiality of the information.

The information must meet all of the foregoing criteria in order to qualify as a trade secret.

Management

A company can enter into a non-compete agreement with a member of company management who is likely to have access to highly confidential information. The non-compete agreement is valid to the extent that its terms are designed to protect confidential information with minimal restrictions on the manager.

Does an Exception Guarantee That a Court Will Enforce a Non-Compete Agreement in Colorado?

Even if a non-compete agreement clearly falls within one of the foregoing exceptions, Colorado courts might not allow it. Proving that the agreement falls within an exception, however, is only the first step. The second step is to prove that the agreement is reasonable and not overly restrictive, taken as a whole.

Main Features of a Reasonable Non-Competition Agreement

The main features of a reasonable non-compete agreement include the duration and geographic scope of the restrictions as well as the actual content of any prohibited work activities.

Duration of the Restriction

Non-competes in Colorado cannot last forever. They must include a specific end date, and the total duration of the restrictions must be reasonable. Nevertheless, Colorado enforces no specific duration that is valid under every circumstance. At least one Colorado court has enforced a non-compete agreement with a duration of five years, for example. In other cases, courts have thrown out agreements with shorter durations.

Five years might be far too long, for example, to restrict the employment of a software engineer, for example. That is because the software industry moves so quickly that today’s software becomes obsolete within a time frame that is far shorter than five years. On the other hand, depending on the industry and the nature of the restrictions, a non-compete agreement might be enforceable beyond five years.

Geographic Scope of the Restriction

A non-compete agreement in Colorado must include a geographic scope restriction. It might, for example, forbid an employee from working for competitors within Colorado. Colorado courts will not enforce an overbroad geographic restriction, however. Although the limits of geographic scope restrictions have been defined by Colorado courts, there is no specific boundary. Courts enforce geographic restrictions based on the totality of the circumstances.

Despite the impact of globalization, for example, it is almost certain that a company operating only in Colorado cannot prevent an employee or contractor from working overseas or even nationwide. Colorado courts probably will, however, enforce nationwide restrictions as long as the company operates throughout the United States.

Whether the Agreement is Overly Restrictive

The third consideration that courts use is the specific contents of the restrictions. Suppose, for example, that a company concludes a non-compete agreement with a finance manager that purports to prevent the manager from taking a marketing position with a competitor. A Colorado court would likely find this restriction excessive since a finance manner does not normally possess confidential information pertaining to a company’s marketing efforts.

This principle remains true even though a former finance manager for Company A, now working in the marketing department of Competitor B, would likely have the opportunity to divulge Company A’s confidential financial information to Competitor B’s finance department. This possibility probably would not be enough to preserve the enforceability of a non-compete agreement that forbade a finance manager from working in marketing.

We’re Waiting to Hear From You

Our business lawyers are highly experienced with Colorado non-compete law. At Sequoia Legal, we stand ready to help you draft an enforceable non-compete agreement and fully protect your trade secrets. Act decisively to protect your company’s vital interests! Simply call (303) 476-2851 or contact us online to schedule a free consultation.

Written by:

Hunter Boone

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