The Enforceability of Non-Compete Agreements

Otten Johnson Alert December 2012

Employers and business people sometimes forego including a non-compete agreement in their contracts out of a mistaken belief that such covenants are unenforceable. However, a carefully drafted non-compete agreement is enforceable in Colorado and can be instrumental in protecting valid business interests.

To be enforceable in the State of Colorado, a non-compete agreement must fall into one of the following four permitted categories:

(i) the agreement is made in connection with the sale of a business or substantially all of its assets;

(ii) the agreement protects trade secrets;

(iii) the agreement recovers the training or education costs of an employee who has worked for less than two years; or

(iv) the agreement is for "executive and management personnel," or officers and employees who are professional staff to executive and management personnel.

In addition, the non-compete agreement must be narrowly tailored and reasonable as to its duration and its geographic scope. An employer or purchaser of a business must be careful not to make the covenant overbroad or unduly restrictive. Instead, the covenant needs to be carefully drafted so that it protects the valid interests of the employer or business purchaser without unduly restricting the other person's ability to make a living. There are no hard and fast rules as to what is reasonable, particularly with an agreement's geographic scope, which must be considered carefully given the global reach of many businesses in the Internet age. Therefore, every situation must be assessed on its own merits.

Finally, a non-compete agreement must be supported by valid consideration. If the agreement is part of an initial employment contract or a purchase and sale agreement, then the employment or the purchase price is the consideration for the non-compete covenant. If the non-compete covenant is signed by a current at-will employee then, based on a recent Colorado Supreme Court case, the right to continued employment is considered to be sufficient consideration for the non-compete agreement (so long as the employer does not terminate the employee shortly thereafter in bad faith). However, if the current employee is not at-will, then he or she will need to be provided with new value (a cash payment, a salary increase, a new benefit, etc.) in order to make the agreement enforceable.

Non-compete issues arise in various contexts both at the front end of transactions and in enforcement stages. The attorneys in our Litigation practice group and our Business Transactions & Capital Markets practice group can help you understand, plan for, and navigate issues involving non-compete agreements. For more information on this Alert or for help evaluating your current situation, contact the litigation practice group (click here) or the Business Transactions & Capital Markets group (click here).