Just over a year has passed since significant amendments to Colorado’s non-compete statute, C.R.S. § 8-2-113, went into effect last August (the “New Law”). This article summarizes the New Law and serves as a reminder to employers to make appropriate changes to company policies and employee agreements that fall within the scope of the New Law now, rather than waiting until an issue arises.
The New Law is not retroactive, so agreements that were signed prior to August 10, 2022, are not affected by the changes. But keep in mind that those prior agreements must of course comply with the previous version of the law, which itself still prohibited a significant swath of non-compete agreements. Regardless, this may be a good time for employers to review their non-compete agreements and make any changes to ensure they are enforceable.
As of the date of this article, no Colorado appellate court or federal court has interpreted the New Law. But as discussed below, much of the existing law interpreting the reasonableness of the scope of non-compete agreements remains good law as expressed by the General Assembly.
Under the New Law, covenants not to compete are void and unenforceable unless: (1) the agreement is with a worker who meets the threshold pay for a “highly compensated worker”, (2) the agreement is for the protection of trade secrets, and (3) the agreement is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
If any of the three requirements is not met, then the non-compete agreement is void.
Each year, the Colorado Department of Labor and Employment sets the threshold amount for a worker to be deemed a highly compensated worker under the New Law. For 2023, any worker earning at least $112,500 annually is a “highly compensated worker.”
Because both the old law and the New Law addressed covenants not to compete for the protection of trade secrets, the General Assembly clarified that the New Law’s provisions regarding permissible non-compete provisions for the protection of trade secrets did not overturn existing case law on that issue. Thus, to determine whether a covenant not to compete under the New Law is no broader than is reasonably necessary to protect an employer’s interest, a case-by-case analysis will still be necessary to determine whether a non-competition agreement is reasonable as to both duration and scope.
For the first time, the New Law now expressly addresses non-solicitation agreements. Agreements with employees that prohibit solicitation of customers are enforceable against employees earning at least 60 percent of the threshold amount for highly compensated workers and if the non-solicitation agreement is no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets.
In 2023, a worker must earn at least $67,500 for a non-solicitation to be enforceable.
The New Law does not address non-solicitation agreements that prohibit the solicitation of a business’s own employees. But Colorado courts have previously enforced these provisions and likely will continue to do so.
The New Law permits reasonable confidentiality agreements that are: (1) relevant to the employer’s business; and (2) do not prohibit disclosure of information arising from a worker’s general training, knowledge, skill, or experience, or prohibit disclosure of information that is readily ascertainable to the public or prohibits disclosure of information that a worker otherwise has a right to disclose as legally protected conduct.
The New Law allows non-compete agreements related to the purchase and sale of a business or the assets of the business.
Repayment for Training, Education, or Scholarships
The New Law allows covenants which provide for repayment of a scholarship provided to an individual working in an apprenticeship if the individual fails to comply with the conditions of the scholarship agreement.
The New Law also allows covenants providing for the employer’s recovery of the expense of education and training a worker where the training is distinct from normal, on-the-job training. But any such covenant for the recovery of expenses must be limited to the reasonable costs of training and decrease proportionally over the course of two years after the training.
Covenants Related to Physicians
The New Law did not make changes to the law regarding physician non-compete agreements. The New Law continues to provide that any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians that restricts the right of a physician to practice medicine is void. But all other provisions of a physician employment or partnership agreement are enforceable, including provisions that require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement. Despite the prohibition on covenants not to compete, payment of damages upon the termination of an agreement may include damages related to competition.
One of the most critical aspects of the New Law to ensure non-compete agreements are enforceable, is its specific notice requirements:
If an employer does not comply with these notice requirements, an otherwise valid non-compete or non-solicitation agreement will be void, unenforceable, and subject to the penalties for noncompliance described below.
Choice of Law / Venue
The New Law provides that even if the non-compete agreement includes a choice of law provision, Colorado law will still apply if the worker primarily resided and worked in Colorado at the time of termination of employment.
The New Law also prohibits venue provisions forcing a worker to adjudicate claims outside of Colorado if, at the time of termination, the worker primarily resided and worked in Colorado.
Penalties for Non-compliance
The New Law provides for both a private and public cause of action against an employer in violation of the New Law. The New Law provides that an employer is liable for actual damages and a penalty of $5,000 per worker or prospective worker harmed by the conduct. The New Law also allows aggrieved workers or prospective workers to recover their reasonable costs and attorney’s fees in a private action. With this one-way attorney’s fee provision, it will incentivize plaintiffs’ attorneys to bring cases even if the potential monetary damages are limited. But if an employer can show that the complained of acts or omissions were done in good faith, then a court has discretion to not award the $5,000 penalty.
For larger companies, an enforcement action brought by the attorney general can have substantial ramifications even if an employee or prospective employee has not brought a complaint.
If your business has not already updated its non-compete or non-solicitation agreements, it should do so now. It is particularly important to have this ready as part of an offer letter for a prospective worker. Any non-compete agreement should be reasonably tailored to the trade secrets it seeks to protect. Any non-compete agreement that is unnecessarily broad in scope or duration will be unenforceable, and will subject the business to penalties. Employers should be diligent in ensuring that all notice requirements have been met, and if an employee requests the agreement it is provided. If the notice requirements are not met, an otherwise enforceable agreement will be void and subject an employer to statutory penalties, attorney’s fees, and actual damages.