Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer’s legitimate business interests from an unfair competitive advantage with the employee’s right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Colorado
In general, Colorado statutes prohibit any non-competition agreements that restrict the right of any person to receive compensation for skilled or unskilled labor. There are, however, three employment situations in which such agreements will be permitted and they are:
- When necessary to protect trade secrets, known as a “non-disclosure agreement”
- To recover training expenses for persons employed less than 2 years or
- When they involve executive or management employees or their professional staff
Reasonableness in Time and Geographic Scope
Colorado courts will allow such agreements provided that they are reasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement (known as using the “blue pencil rule”) so that it does not unduly infringe on the former employee’s ability to work.
Examples of non-compete agreements that Colorado courts have found to be reasonable include:
- A 1-year restriction on a former employment agency recruiter from contacting customers the employee had actually contacted during his last year of employment.
- A 5-year, 1-county restriction on a former partner in a medical practice.
- A 5-year, 50-mile restriction against an electrical contractor’s management employee.
- A 2-year restriction on a music instructor from soliciting former employer’s students.
The courts have found restrictive covenants unreasonable or used the “blue pencil” rule to modify agreements in these situations:
- A perpetual and worldwide restriction on an independent distributor of artificial vampire fangs by a manufacturer of vampire fangs where the distributor made and sold its own line of fangs.
- A 12-month restriction on a former employee of a recruitment agency from contacting any candidate he had access to during the previous 12 months.
- A restriction on a headhunter account executive did not fall under the executive and management personnel exception because the employee was not “in charge” of the employer’s existing contracts and did not act in an unsupervised capacity.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.