I am pleased to introduce my partner, Adrian Castro, of Fairfield and Woods, P.C.'s litigation and employment law departments. In this post, Adrian discusses a recent law passed by the Colorado Legislature which specifically makes violation of Colorado's non-compete laws a criminal offense. Other states around the country have also criminalized violation of non-compete laws, as well as imposing civil liability. Employers attempting to enforce non-compete agreements should be careful not to overreach.
On March 1, 2022, Colorado Senate Bill 21-271, approved on July 6, 2021, goes into effect. While the overall goal of the bill is to reform sentencing provisions related to misdemeanors and petty offenses, it also made the violation of a number of statues potential criminal infractions. With respect to non-compete agreements, the bill adds a new section to the applicable statute, C.R.S. § 8-2-113, making a violation of the statute a class 2 misdemeanor. A class 2 misdemeanor will be punishable by up to 120 days in jail, a fine of up to $750, or both.
C.R.S. § 8-2-113 is entitled "Unlawful to intimidate worker – agreement not to compete." It presently contains three (3) different sections concerning worker intimidation and non-compete agreements.
The first section, dealing with direct intimidation, is relatively straight forward. It is "unlawful to use force, threats, or other means of intimidation to prevent a person from engaging in any lawful occupation at any place he sees fit." Violations of this section are rarely if ever reported (the author knows of none). The third section deals with non-compete agreements for physicians, which are handled differently from other non-competes and are a topic for separate discussion.
The second section deals with non-competes for employers and is the section most commonly encountered in practice. Under C.R.S. § 8-2-113(2), non-competes in Colorado are void except for those arising under the following circumstances: (1) the purchase and sale of a business (or its assets); (2) the protection of trade secrets; (3) the recovery of educating and training expenses associated with an employee on the job for less than two years; and (4) executive and management personnel, and officers and employees who are considered there personal staff. Even if an exception applies, non-competes must be reasonable in temporal and geographic scope to be enforceable.
It is common to deal with employers attempting to enforce a non-compete through the "trade secret" exception, especially given the limited applicability of the other sections. In seeking to enforce a non-compete, it is not uncommon for employers to categorize significant portions of not practically every aspect of their business as a trade secret; however, that is not how Colorado law defines a trade secret. A trade secret must be a "secret" that provides a business with a competitive advantage. Public, easily identifiable information is not secret; nor is information previously disclosed without protection. Colorado law requires a business to use reasonable efforts to maintain the secrecy of the trade secret. Companies that do nothing to protect their "trade secrets" may not seek to enforce a non-compete under that exception.
SB 21-271 makes a violation of ANY section of C.R.S. § 8-2-113 a class 2 misdemeanor. Accordingly, even a violation of C.R.S. § 8-2-113 arguably constitutes a class 2 misdemeanor subjecting employers to incarceration, a fine, or both. SB 21-271 raises concerns that employers who take aggressive, dubious, or frivolous positions regarding the enforcement of a non-compete may subject themselves to criminal liability. This is particularly concerning with respect to the "trade secret" exception of C.R.S. § 8-2-113(2), which is easy to misinterpret.
While only time will tell how Colorado elects to enforce the new misdemeanor provision of C.R.S. § 8 – 2-113, in the interim Colorado employers are urged to exercise caution on how they enforce non-compete agreements. To the extent doubt or questions exist, employers are advised to seek the advice of counsel before acting, as they could potentially subject themselves to misdemeanor criminal liability.
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