Our firm represents small businesses and employees in the areas of non-competition non-solicitation and non-disclosure agreements whether it is a small business faced with how to retain quality employees and prevent unfair competition or employees, including executives, managers, highly-compensated salespersons and other employees who are either thinking about leaving their current employment, starting their own business, or joining a competitor, Arckey & Associates, LLC has both the transactional and litigation experience to represent you.
These situations commonly give rise to issues of real and potential unfair competition, either by potential or actual misuse or misappropriation of information, or questions as to what are the acceptable pre-termination of employment steps to compete authorized under Colorado law. Our attorneys have had numerous client situations where the economic affect these issues present are in the millions of dollars.
We have handled intangible asset matters where either the survival of a business or a person’s ability to continue employment in his or her chosen field is directly at stake. Colorado law recognizes the right of a business to protect its legitimate business interest and the right of an individual to work and earn a fair wage. Our attorneys have substantial courtroom experience in addressing these competing tensions in Colorado employment and business law.
Colorado Non-Compete Law
Colorado’s legislature adopted a statute, C.R.S. § 8-2-113, which provide significant rights and restrictions on workplace agreements that involve non-competition, and non-solicitation and non-disclosure agreements. In addition, Colorado has adopted the Uniform Trade Secrets Act, C.R.S. § 7-74-101, et. seq., which sets forth requirements for information to be deemed a trade secret, including the requirements of secrecy and protective measures.
Colorado also has criminal statutory provisions governing theft of trade secrets (with possible civil remedies available against the wrongdoer), along with a well-developed body of law regarding the level of loyalty owed by employees to current and ex-employers, as well as misappropriation of trade “values,” i.e. those intangible assets of a business which, although not secret, still represent the manifestation of skill, labor or expense of the business. Colorado law in these areas presents unique drafting and systemic challenges for effective and enforceable competition and disclosure restrictions.
Trade Secrets: State/Common-Law Protections; Trade Secrecy, Covenants not to Compete, Trade “Values” and the Duty of Loyalty
Trade Secrecy Under the UTSA, C.R.S. §7-74-101, et. seq. Various state law protections exist for intangible information and Arckey &Associates, LLC stands ready to provide its clients with the best representation possible regarding this component of today’s business environment. Included in the state law system is the Uniform Trade Secrets Act (“UTSA”), which provides protection for “trade secrets.” In order for information to constitute a trade secret, the UTSA requires that it be both secret and of value. Value will likely be assumed for any information that has any type of recognized commercial value, so the real issue under the UTSA is usually that of secrecy. Secrecy means what the term implies – that the information not be generally known to those outside of a select number of people to who access is given to such information on a need to know, commercial necessity basis. This does not necessarily mean that the information is unknown to anyone outside the company, but universal knowledge of information clearly removes its status as anyone’s secret.
For secrecy to exist, the UTSA requires that the reputed owner of the information take “protective measures” to guard against unwarranted disclosure of such information to those persons to whom access should not be given. What will be sufficient protective measures is a case-by-case issue, and likely depends upon the type of information professed to be secret. For instance, customer lists, a segment of information that business owners routinely believe is secret, may or may not be afforded trade secret status, dependent upon the circumstances of each case.
Non-Competition Agreements and Covenants Not to Compete
Colorado law permits reasonable protection against competition, including existing business lines and customer base.. The restrictions in these agreements may range from a prohibition against post-termination solicitation of certain customers or co-employees, to a broad form, across the board bar against post-termination competition of all types.
Restrictions, Part I: Time and Geographic Reasonableness. Non-compete agreements must be reasonable both as to time and geographic scope. What is a reasonable geographic or time restriction will depend on the circumstances, but it does appear that the courts will routinely enforce non-competes which fall within certain time periods and certain geographic limitations. What is reasonable for one employer or industry may not be reasonable for another, however, and the owner should seek legal advice on this issue. For instance, a large geographic territory for a non-compete between general practice dentists might not be reasonable since most patients of most dental practices, at least small dental practices, come from a geographic area which is fairly close to the practice itself, but a very broad geographic zone might be reasonable for a non-compete entered into to protect a developer of software that serves a world-wide market.
Restrictions, Part II: Colorado’s Statutory Prohibition, C.R.S. §8-2-113(2). Secondly, and more importantly at least in Colorado, a statute exists which prohibits non-competes and which requires extra care in drafting to ensure enforceability. C.R.S. §8-2-113(2) provides that all contractual restrictions on a person’s post-employment competitive activity are “void” unless they fit into one of four categories – a non-compete entered into as part of the sale of a business or the assets of a business, a non-compete for training employees, non-compete agreements entered into for the goal of protecting trade secrets, and a non-compete is entered into between an employer and management or executive personnel or employees who constitute professional staff thereto.
The sale of business exception is fairly straightforward. A non-compete entered into with an owner who is selling his or her business or the assets thereof is enforceable. This makes sense, since goodwill is almost always one of the assets being sold.
Two of the exceptions, trade secrets and the management exceptions have spawn a great deal of litigation. For the trade secrecy exception, the courts may not always enforce an agreement that bars all competition by an ex-employee under the trade secrets exception when a restriction barring such person from using information that is truly a trade secret, as defined by Colorado statute. Recent Colorado appellate decisions have better defined who are employees that constitute managers, executives or professionals. Professionals likely include persons within the traditional licensed professions, but it is uncertain how far beyond this limited category such exception reaches. Managers and executives must be shown to have certain management or executive functions as part of their job, or they must be shown to be a key employee or control over the business. A Manager in title only will not likely be prohibited from competing.
When you are dealing with non-compete and trade secrecy issues in your business, it is wise to seek competent legal assistance. With significant expertise in the area of non-competition covenants, the attorneys at Arckey &Associates stand ready to help you navigate the complexities of the law and protect you and the interests of your company. Likewise, if you are an employee or ex-employee burdened by an agreement that restricts competition, it is fundamental to obtain competent legal assistance in determining future competitive activity strategy.
Restrictions, Part III: Physicians, C.R.S. §8-2-113(3). A special rule exists for non-compete agreements between physicians. The rule is set forth in C.R.S. §8-2-113(3), which was added to the Colorado non-compete statute a number of years after the main provision was enacted. Provisions that prevent “physicians” (a term which obviously includes medical doctors, most likely osteopathic physicians, but it is unsure what other medical specialties), from practicing in any specific location are void in Colorado. Instead, physicians can agree to certain damages provisions in the event a physician leaves a practice to engage in a competing practice. There are specific case law restrictions on how such damages can be calculated, however, and it is strongly recommended that competent legal counsel be retained prior to drafting covenants not to compete involving a medical doctor. Our firms’ lawyers have a wealth of experience designing, enforcing and defending against covenants not to compete between physicians and have successfully represented doctors in court regarding these special covenants.
The Duty of Loyalty and Trade Values
There are other non-statutory protections available under state common-law relating to competition. Among them is the duty of loyalty which certain employees owe to their employer, as well as the doctrine of trade “values,” trade values being information which is not itself secret, but is nonetheless valuable, and represents the manifestation of the owner’s labor, time or expense. These doctrines may provide substantial protection for a business owner, but resort should be made to an attorney who specializes in intangible information protection for guidance. For instance, the duty of loyalty may not apply to all employees, and qualifying non-secret information as a trade value depends upon a number of factors, which competent legal counsel can analyze.