Colorado Non-Compete Law Blog

Colorado Non-Compete Law Blog

Insight and commentary on Covenants Not to Compete (Including Unfair Competition, Trade Secrets & Nondisclosure Agreements)

New Mexico adopts new noncompete law for health care practitioners

Posted in Physician Non-Competes

We are Colorado lawyers and typically don’t appear in cases outside of Colorado. Nonetheless, we monitor developments in noncompete law in other states, particularly in the states near Colorado. Those developments often expose unresolved issues in Colorado, or highlight choices made in Colorado’s noncompete statute and caselaw.

In 2015, health care practitioners in New Mexico caught a break when New Mexico adopted a new statute that limits the enforcement of noncompete agreements against them. In general, the New Mexico law bars the enforcement of noncompetes against health care practitioners, but allows the recovery of relocation expenses and signing bonuses, authorizes the enforcement of non-solicitation provisions and allows the recovery of reasonable liquidated damages. About twenty five years ago, Colorado adopted legislation that bars the enforcement of noncompetes against physicians. The impetus for the legislation in the two states appears to have been similar. Both states sought to encourage physicians to remain in the state and to continue to practice medicine, particularly in rural areas.

There are significant and revealing differences, however, in the legislation adopted by the two states.

Colorado’s ban on physician noncompetes is broader than New Mexico’s in two ways. First, Colorado’s ban covers a wide range of agreements that could include a noncompete. It covers employment, partnership and corporate agreements. (The statute requires that these agreements, however, be “between physicians”. That limitation raises questions in Colorado, because hospitals, among others, are permitted to employ physicians, and the ban on noncompetes with physicians may not apply to those contracts.) New Mexico’s new law, on the other hand, focuses on noncompetes in employment agreements. The New Mexico statute does not apply to health care practitioners who are shareholders, owners, partners or directors of a health care practice.

Second, New Mexico law allows for the enforcement of nonsolicitation agreements against physicians for a year after the last date of employment. A physician in New Mexico presumably could quit his job and open a new practice but couldn’t actually solicit the patients that he or she had treated while employed. Colorado’s statute doesn’t speak to nonsolicitation agreements for physicians. But nonsolicits in Colorado are analyzed as a form of noncompetition agreements, and it is unlikely that a nonsolicitation agreement could be enforced. A physician in Colorado might be able to solicit his former patients so long as the solicitation was done after his employment terminated and so long as the physician didn’t use confidential or proprietary information to make the solicitation.

While both states bar enforcement of noncompetes against physicians, the New Mexico law covers other professionals. In this sense, the new Mexico statute is broader than Colorado’s. New Mexico bars the enforcement of noncompetes not only against physicians but also against dentists, osteopathic physicians, podiatrists and certified registered nurse anesthetists. Colorado’s prohibition, on the other hand, only bars the enforcement of agreements that restrict the right of a physician to “practice medicine”.  The “practice of medicine” is defined under the Colorado Medical Practices Act, and generally isn’t considered to include the work performed by:

  • Dentists
  • Podiatrists
  • Optometrists
  • Chiropractors
  • Professional nurses
  • Acupuncturists

New Mexico’s law also appears to be broader than Colorado’s because it covers any “written contract to which a health care practitioner is a party”. Colorado’s statute, on the other hand, only bars the enforcement of agreements that restrict the right of a physician to practice medicine. A physician might be employed in Colorado in a role that did not involve the practice of medicine. A noncompete in those agreements would not be barred under Colorado’s statute.

Both states allow for the recovery of certain damages when a physician’s employment is terminated. So long as the health care practitioner has worked for less than three years, an agreement under New Mexico law can provide for the recovery of relocation expenses, signing bonuses and training or education expenses. In addition, New Mexico allows for the recovery of liquidated damages, but forbids “fixing unreasonably large liquidated damages” which are deemed void “as a penalty”. Colorado took a similar approach. Colorado law allows for the enforcement of “all other provisions … enforceable at law, including provisions which require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement.” To the extent, however, that any damage provision calls for damages not “reasonably related” to the termination of an agreement, those damages would not be recoverable.

As a practical matter, it has proved difficult to recover damages from a physician under the Colorado statute. In the leading case in Colorado, an anesthesiologist entered into a an employment agreement that called for the payment of liquidated damages if the anesthesiologist terminated his employment and continued to practice within a 25-mile radius. The liquidated damages to be paid were $10,000 for the loss of goodwill, forfeiture of the physician’s last three months salary and a payment of 50% of the physician’s future fees from his competing practice. As a practical matter, those damages, if recoverable, would discourage most physicians from opening a competing practice. The Court of Appeals ruled that the liquidated damages under the contract were so disproportionate to any actual damages that they were unenforceable penalty. Health care employers in New Mexico also may be unsuccessful in their efforts to recover damages from health care practitioners, particularly in light of the statutory language that forbids the unreasonably large liquidated damages.

These statutes are complex and difficult to apply. Physicians in Colorado, and health care practitioners in New Mexico, are well advised to seek counsel when they are faced with an agreement with noncompete provisions.

Customer lists aren’t always trade secrets

Posted in Colorado's Non-Compete Statute, Trade Secrets

In Colorado, employers often claim that noncompetes signed by salemen are enforceable because the company has customer lists and other proprietary information which are trade secrets. Employers resort to the “trade secret” exception in Colorado’s noncompete statute, because many salesman don’t have management responsibilities and the statutory exception for executive and management personnel can’t be invoked. It is true that the trade secret exception can be used by employers against salesmen or non-managers. And Colorado courts repeatedly have held that sales histories, buying patterns and customer preferences can, under the right circumstances, be trade secrets even if the names and addresses of the company’s customers are publicly available.

A recent decision once again demonstrated, however, that not all customer lists are trade secrets. In Lifetouch Church Directories v. Colleen Ingalsbe, Lifetouch purchased the church directory and photography business of Olan Mills. Ingalsbe was an employee of Olan Mills, who signed an employment agreement when she joined Lifetouch Church Directories. That agreement had nondisclosure and nonsolicitation provisions. When Ingalsbe quit and joined a competitor, Lifetouch was quick to file an action against her in which it claimed that Ingalsbe had breached the nonsolicitation agreement and misappropriated trade secrets involving Lifetouch’s client and prospective client list, pricing data and other relevant data.

At trial, however, the jury found for Ingalsbe on all the claims that were asserted. Evidence appears to have been admitted that Olan Mills did not treat the customer information as a trade secret. Customer information was kept on index cards. There was no indicia of confidentiality on the customer information. The computer system did not have any special protections for the customer information. Employees weren’t told that the information was confidential or a secret. Lifetouch did not recover the information from employees when they quit.

This case does not create any new law in Colorado. The Court of Appeals decision in 2014 was not published, and the Supreme Court merely declined to hear the employer’s appeal. Nonetheless, the case demonstrates why employers should confirm that they actually have trade secrets before they launch their company on a lawsuit against a former employee who elects to join a competitor. It’s easy for employers to claim that their customer lists are trade secrets. It can be easy to include a provision in an employment agreement that states that the company has various trade secrets. It can be a hard, long slog, however, to prove that information really is confidential and has been treated as a trade secret.

The practical lesson from the case may be that a company that buys a business faces significant practical problems when it attempts to prove that the purchased business had trade secrets. To make that showing, the buyer may need to rely on testimony from employees who are no longer with the company. Relying on former employees is problematic because those employees may have resented how they were treated and may not be sympathetic to the company.

First things first; the need to identify the trade secret

Posted in Trade Secrets

Ready, fire, aim. That’s how one commentator describes the mistake often made by many companies when they commence a trade secret lawsuit.

What he means is that companies rush to file a lawsuit for trade secret misappropriation when an employee quits and takes a prominent position with a competitor. Immediate action seems necessary to protect the company’s trade secrets and to prevent the former employee from using and exploiting the trade secrets. In their rush to file the lawsuit, however, companies often fail to analyze whether they truly have trade secrets and, if so, what their trade secrets are. This failure results in the company claiming that information is a “trade secret” when it really isn’t — typically because the information isn’t secret, either because it is known to the competition or because it is readily ascertainable by the competition. Because the company can’t identify a trade secret, the lawsuit fails, often after a signficant expense for fees and costs to prosecute the lawsuit. In effect, the company fires before it has taken aim.

There are many reported decisions demonstrating this mistake. Eric Ostroff of the Trade Secret Law blog,, used the phrase “Ready, fire, aim” to describe how companies file lawsuits before they consider the precise trade secret at issue. To illustrate this problem, Eric referenced a recent decision from the Sixth Circuit Court of Appeals, Dice Corp. v. Bold Tech, 2014 WL 260094 in which the Sixth Circuit found that the plaintiff had failed to explain how the allegedly misappropriated information was a trade secret.

Colorado courts have also witnessed this mistake. In an older case, Colorado Supply Company v. Stewart, for example, a company alleged that its customer lists, price lists and product formulas were trade trades. The Court of Appeals held, however, that the customer lists were not  trade secrets because, among other things, the information had been developed by independent contractors and because the names could be obtained fairly easily from telephone directories and the like. The price lists were not trade secrets because they were “published” to customers, emaployees and contractors and because there were no fixed prices at which products were sold. In another case, Porter Industries v. Higgins, the Court of Appeals held that a company’s “pricing and bidding structure” was not a trade secret as it noted that there was no evidence to suggest that the information was a trade secret.

Employees subject to noncompetes should take note of these decisions. Employers sometimes have trade secrets and sometimes they don’t. Employers in Colorado sometimes claim they have trade secrets even though they are really seeking to discourage employees who aren’t managers or executives from leaving the company to take positions with competitors. These employers recognize that typically there are only two ways to enforce a noncompete against an employee: by showing that the employee is a manager or executive or by showing that the company had trade secrets that were disclosed to the employee. If the employee isn’t a manager, the employer must prove that it has trade secrets.

Bankruptcy and noncompetes in Colorado

Posted in Choice of Law

A recent decision from the Bankruptcy Court in Denver examines (and struggles with) some of the many issues that arise when a person subject to a noncompete files for bankruptcy.

In In re Hruby, 2014 WL 2071997, Debtor had been employed by Midwest Motors, but quit and apparently took another job with a competitor and made sales to customers that he serviced when he was employed with Midwest. There was evidence that the debtor had accessed Midwest’s computer files containing confidential customer information and that debtor had utilized Midwest’s confidential customer information to solicit Midwest’s customers. The debtor had signed a noncompete agreement when he was employed by Midwest. The noncompete included a noncompete provision (two years from the time any violation ceased) and a non-solicit provision that barred solicitation or service of any customers  contacted, serviced or supervised by the employee. The noncompete agreement called for the application of Ohio law and stated that any enforcement action “must” be filed in Ohio.

Once the debtor filed for bankruptcy in Colorado, Midwest sought relief from the automatic stay for the sole purpose of obtaining injunctive relief to enforce the noncompete. Judge Tallman first was asked to decide whether the company’s claim, including the claim for injunctive relief to enforce the noncompete, was a dischargeable debt. That is, Tallman had to decide whether the debtor had been relieved of his noncompete obligations by filing for bankruptcy. In keeping with decisions from other jurisdictions, Tallman decided that the clain for injunctive relief did not constitute a dishargeable debt.

To move forward with his noncompete analysis, Judge Tallman then had to decide which state’s laws should be applied to determine the enforceability of the noncompete. This analysis was the key to the decision according to Tallman because the application of Ohio law would mean that the noncompete was enforceable. Leave would then be given to enforce the noncompete. On the other hand, application of Colorado law would mean that the noncompete was not enforceable and leave would not be granted.

Tallman found that, despite the parties’ choice of Ohio law, the Ohio state court would find that Colorado law should apply.  The Ohio state court, according to Tallman, would apply Colorado law because Colorado law would apply if the parties had not chosen Ohio law and because the law of Ohio was contrary to to a fundamental policy of Colorado.  Tallman’s decision to apply Colorado law is questionable because the general rule is that courts will apply the law chosen by the parties. Ohio had a connection to the contract because that’s where Midwest was located. Nonetheless, it’s not surprising that Tallman chose to apply Colorado law. The debtor’s sales territory was in Colorado and Wyoming. Debtor was domiciled in Colorado. These factors make it seem “unfair” to apply Ohio law. Applying Colorado law, Tallman concluded that the noncompete provision in the agreement was not enforceable. Tallman implicitly found that none of the exceptions under Colorado’s noncompete statute were applicable.

Tallman went on to hold that, even under Colorado law, the nonsolicitation provision in the noncompete was enforceable. Tallman reasoned that Midwest’s offer of proof sufficiently connected the “Debtor’s use of trade secrets with the solicitation of [Midwest’s] customers in violation of the No Solicitation or Service provision”. Based on this finding, Tallman granted leave to Midwest to enforce the nonsolicit provision in Ohio state courts.

There are a number of take-aways from this decision. First, the obvious ones. Employees sometimes file for bankruptcy, and the bankruptcy may discharge any claim for damages against the employee. Companies seeking to enforce noncompetes need to carefully consider the risk that any judgment for damages may not be recoverable. Another take-away is that employees subject to a noncompete shouldn’t assume that bankruptcy will discharge the noncompete. Their former employer may still be able to pursue a claim for injunctive relief.

Yet another take-away is that companies can’t always assume that their choice of law clause in an employment agreement will be enforced. Tallman struggled to avoid applying Ohio law and ultimately applied Colorado law.

A final take away from the decision is that a bankruptcy judge like Tallman may distinguish between the a noncompete clause and a nonsolicit clause. Equitable considerations may lead a court to enforce a nonsolicit clause because it is less onerous.

More attention focused on noncompetes

Posted in Economic Growth

Recent efforts to bar noncompetes in Massachusetts have triggered a series of general interest articles about noncompetes.

Earlier this month, the New York Times ran a story about how “Noncompete Clauses Increasingly Pop Up in Array of Jobs” ( That article suggested that more employees were being asked to sign noncompetes and that noncompetes were being used in unexpected fields. The article began, for example, with an account of a camp counselor who was asked to sign a noncompete and included a story about a hairstylist who was unemployed for a year because he lost a court battle with his former employer over a noncompete.

The New York Times followed up with a a discussion, When Companies Close Doors to the Future, in which four lawyers (but no economists) voiced their opinions about whether businessess should be allowed to compel employees to sign noncompetes:  Not to be left out, the New York Times editorial page ran a piece which assumed the worst about noncompetes and  condemned the expanded use of noncompetes:  Clauses That Hurt Workers (

An avalanche of articles have been published in the newspapers in Boston about the legislative efforts to bar noncompetes in Massachusetts. Many of the commentators  oppose the use of noncompetes because of the burden placed on employees. Here’s an example:

Colorado readers, or at those with agreements governed by Colorado law, should be skeptical of these articles.  Every state has its own rules about noncompetes. These rules vary widely. States like California and North Dakota generally bar the enforcement of noncompetes in employment agreements and states like Florida generally enforce noncompetes. (Different rules apply in connection with the sale of a business or dissolution of a partnership.) The articles in the New York Times all appear to report stories  from states on the East Coast which favor the enforcement of noncompetes. In Colorado, noncompetes are disfavored and enforced only if the noncompete falls within one of the exceptions in the noncompete statute. Absent extraordinary circumstances, for example, it’s hard to see how a noncompete could be enforced against a camp counselor if Colorado law were to be applied.

It is true that some Colorado employers have pushed to expand the number of employees who are asked to sign noncompetes.  In addition, some Colorado employers have pushed noncompetes in different fields or with non-mangerial employees. Nonetheless, the standard by which noncompetes are judged in Colorado is different than those reported in these articles. Employers have a higher burden and, if they have enough information and a plan, many employees are successful in avoiding the limitations imposed by noncompetes.

Consent Order entered banning no hire agreements

Posted in No hire clauses

Two recent FTC actions have confirmed once again that companies should not enter agreements to refrain from hiring each other’s employees.

In 1992, Tecnica and Volkl began collaborating in the marketing and distribution of complementary ski equipment: Volkl skis and Tecnica ski boots. The companies initially were not competitive. Tecnica at that time didn’t sell skis and Volkl didn’t sell ski boots. Both companies marketed their products by securing endorsements from ski athletes, like World Cup and Olympics skiers. These endorsement agreements typically are short and subject to renewal. The ski athlete authorizes the company to use his name and likeness in promotions and advertisements, agrees to use and promote the company’s equpment on an exclusive basis and agrees to display the equipment when he receives media exposure (e.g. on on the medal stand). In exchange, the company pays the ski athlete, supports him at competitions, and gives him free or discounted equipment. Ski companies compete with one another to secure the endorsements of Olympians or World Cup skiers. The skiers derive much of their income from endorsements.

In In re Tecnica and In re Marker Volkl, the Federal Trade Commission alleged that in 2004 Tecnica and Volkl agreed not to compete with one another to to secure the endorsement of athletes. Several years later, the two companies supposedly reaffirmed that the companies would not compete withone another for the endorsement deals. They also supposedly agreed not to compete for the services of each other’s employees.  The FTC alleged that these agreements violated Section  5 of the Federal Trade Commission Act.

Both companies have now entered into Consent Orders with the FTC. Under the Consent Orders, the companies will be barred from entering into any agreement under which they wouild forbear from soliciting, cold calling or recruiting any ski athlete for endorsements. Similarly, they would be barred from entering any agreement under which they would refrain from soliciting each other’s employees, or any other company’s employees.

These consent orders should not come as a surprise. They follow the highly publicized enforcement actions in Silicon Valley that were pursued by the Department of Justice. In all of these cases, the allegation has been that companies seek to suppress the wages paid to employees by agreeing not to solicit or hire each other’s employees.

We can only speculate whethere these FTC enforcement actions will prompt civil suits by the affected employees or “endorsers”. After the DOJ pursued its enforcement action in Silicon Valley case, civil suits were promptly filed, which resulted in an agreement to pay the affected class of affected employees over $300 million. That settlement did not come, however, without a fight. According to one commentator, the Silicon Valley settlement was prefaced by extensive fact discovery, including 107 depositions, the review of millions of pages of documents and analysis of over 50 gigabytes of data consisting of approximately 80,000 different files. The litigation had two rounds of class certification briefing and argument including the exchange of eight expert reports by four economists. It’s hard to say whether the FTC settlements will prompt that kind of effort.


Health insurance and job termination

Posted in Health insurance

Clients have thought long and hard before they visit us and have detailed questions about non-compete agreements. Or trade secrets. Or the Computer Fraud and Abuse Act. These questions are important but the first goal of any employee anticipating termination should be to maintain continuous health care coverage.

Typically, an employee has two options for obtaining health care coverage after his employment terminates. He can elect health care coverage under COBRA. Or, he can purchase coverage under the Affordable Care Act (the ACA or Obamacare).

If the employer has 20 or more employees, the employee is generally able to continue coverage under COBRA. (The employee must have been enrolled in the employer’s health plan, and the health plan must continue to be in effect for active employees.) Notice of this option is sent to the employee, usually after his employment has terminated. If the employee properly exercises this option, coverage is retroactive to the date of the loss of coverage. Typically,  however, coverage under COBRA is expensive. It’s often more expensive than the amount that active employees are required to pay because the employer may pay part of the cost of coverage for active employeese and all of that cost can be charged to the individual receiving continuation coverage. Continuation coverage under COBRA typically costs more than insurance available through the ACA market. Continuation coverage under COBRA normally is available for 18 months.

Alternatively, insurance can be purchased in the ACA market. In Colorado, this marketplace is through Connect for Health Colorado. ACA’s coverage typically is prospective. We’ve seen reports from other states that it takes three or four days after your application for your coverage to be effective. Any response from Connect for Health may depend on the number of applications being submitted by others. Any delay in processing the application can create a gap in coverage after the employee leaves his job and before he gets a new job with new insurance coverage. The ACA market is only available during open enrollment periods and the special enrollment periods designated by the ACA. If the employee fails to act during the open enrollment period or a special enrollment period, he may be compelled to wait until the next open enrollment date.

Many problems can arise. An employee could decide because of the expense, for example, not to obtain COBRA coverage and instead pursue coverage through the ACA market. There is a risk, however, that the employee could incur medical expenses before the ACA insurance is effective. Signficant medical expenses could be incurred even if there is a small gap in coverage.

A problem also can arise if an employee initially elects to obtain coverage through COBRA and then decides to drop COBRA coverage in order to obtain cheaper coverage through the ACA. When the employee drops coverage under COBRA, enrollment may not be available under the ACA.

There are many difficult issues that can arise in connection with health care coverage, and this post does not purport to provide a comprehensive look at all those issues. Rather, this is a warning to all employees to educate yourselves about the health care options available if your employment is terminated.


No Hire Agreements in Colorado

Posted in No hire clauses

No hire agreements, or agreements between companies not to hire each other’s employees, have received a lot of attention in California during the last several years.

In 2010, the Antitrust Division of the Department of Justice reached settlements with several high tech companies – Adobe, Apple, Google, Intel, Intuit, Lucasfilm and Pixar – that prevented them from entering into no solicitation agreements for one another’s employees. According to the DOJ’s Complaint, the companies had entered into agreements that restrained competition between them for highly skilled employees (e.g. software engineers). The DOJ asserted that these agreements were “facially anti-competitive” agreements that “eliminated a significant form of competition … to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.”   

The tech company defendants did not admit to any wrongdoing but agreed to be enjoined “from attempting to enter into, maintaining or enforcing any agreement with any other person or in any way refrain from, requesting that any person in any way refrain from, or pressuring any person in any way to refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.” United States of America v. Adobe Systems et al (D.D.C. 2011).

Civil suits followed in 2011 in which groups of current and former employees of the high tech companies sought $9 billion in damages under the Sherman Act, California’s Cartwright Act, Cal. Bus. & Prof. Code §16600 and California’s Unfair Competition Law. In re High-Tech Employee Antitrust Litigation, 11cv2509 (N.D.Cal.)(Judge Koh). According to the employees, the companies, among other things, agreed not to cold call potential hires from competitors. They also supposedly agreed to cap salary packages to avoid bidding wars over employees. Judge Koh certified a nationwide class of roughly 64,000 employees and denied the tech companies’ summary judgment motions in April 2013.

There was strong evidence that upper level executives at the companies had taken steps to discourage each other from soliciting employees. Apple’s Steve Jobs supposedly told Google’s Sergey Brin that “If you hire a single one of these people that means war.” Google’s Eric Schmidt noted that he didn’t want to create a paper trail over which he could be sued later. Judge Koh quoted Steve Jobs as saying that “We must do whatever we can” to stop cold calling each other’s employees and other competitive recruiting efforts between the companies.

Three of the defendants – Intuit, Lucas Films and Pixar – reached settlements quickly and paid $20 million to exit the litigation. Earlier this year, the remaining defendants – Adobe, Apple, Google and Intel – reached a settlement under which they have agreed to pay the plaintiffs $324,500,000. A hearing is set for June 19 on whether the Court should grant preliminary approval to the settlement. Most commentators seem to think that the settlement will be approved although one of the class representatives has asked the Court to reject the deal.

The amount of the settlement is staggering. Other companies will take note of the settlement and refrain from colluding to suppress wages. Nonetheless, it is important to keep the settlement in perspective. There were over 60,000 class members  — an extraordinary number. One commentator suggested that the class members would only receive about $4,000 apiece. The class representatives would receive more for their efforts on behalf of the class. Paying the settlement won’t be hard for the defendants. Apple and Google supposedly hold over $200 billion in their bank accounts. The settlement amount is far less than the $3 billion that had been sought. 

As dramatic as these developments are, it would be a mistake to assume that all such no-hire agreements among employers are wrongful. So long as companies have a valid protectable interest, they may be able to enter agreements that prevent them from soliciting each other’s’ employees. Determining when there is a protectable interest, however, may not be easy. Based on the DOJ settlement, it appears as if no hire agreements would be appropriate when necessary for mergers or acquisitions. Or when necessary for “contracts with consultants or recipients of consulting services.” In addition, the consent judgment did not bar the high tech defendants from unilaterally adopting a policy not to cold call employees of another company so long as there wasn’t any pressure for the other company to reciprocate.

There is no reason that similar civil actions couldn’t be filed in Colorado if companies conspired to refrain from recruiting each other’s’ employees.  The Front Range is not Silicon Valley and there isn’t the concentration of high paying tech jobs that there is in Silicon Valley, but the civil actions in California were not driven by any unique aspect of California law. Rather, the actions were premised on federal antitrust law. (Plaintiffs dismissed their claim under California’s noncompete statute, and the other claims based on California law do not appear to have prompted the settlements.) Executives at any number of industries in Colorado, from energy companies to health care companies to tech companies, could decide that they could reduce costs if the companies all agreed not to solicit or hire each other’s employees.  

One key to any case would be the evidence showing that the companies had conspired to refrain from soliciting employees. In the High Tech Employee case, there was remarkable evidence that there had been efforts to suppress wages. Finding that evidence and presenting it would be a challenge. Another key would be the effort to prove the damages associated with any no solicitation agreement. Proving the damages for any targeted class would require sophisticated testimony.

Colorado Franchise Agreements and Noncompetes

Posted in Franchise Agreements

Early last fall, a franchise dispute prompted a decision from the Colorado federal district court that has lessons for both franchisors and franchisees in Colorado.

In Steak ‘N Shake v. Globex Company, the Steak ‘N Shake franchisor terminated the local franchisee’s franchises for restaurants on S. Quebec Street in Centennial and River Point Parkway in Sheridan. The franchisor claimed that the franchisee was in default because it had failed to offer the required "$4 menu", had altered marketing materials, and charged prices higher than the published menu prices. After the termination, the franchisee continued to operate its business out of the same location and continued to use the Steak ‘N Shake trademarks and other material. After the franchisee declined franchisor’s offer to cure the defaults, the franchisor filed a lawsuit.

In his decision, Judge Moore granted Steak ‘N Shake’s motion for preliminary injunction and barred the local franchisee from continuing to operate its restaurants as Steak ‘N Shake restaurants. The franchisee was compelled to "de-identify" the restaurants as Steak ‘N Shake restaurants and was barred from using any confidential or proprietary information from the franchisor. The franchisee was also compelled to relinquish its Steak ‘N Shake phone numbers, web addresses and designs.

These rulings are not surprising. Courts generally have not been sympathetic to franchisees who disregard their post-termination obligations, including covenants not to compete. Colorado courts have analogized the purchase of a franchise to the purchase of a business and enforced noncompetes under the purchase-and-sale exception under the Colorado noncompete statute.

This case is noteworthy because the dispute was covered closely by the Denver Post, including the court’s decision to shut down or close the franchised restaurants,as the reporter put it. Prior to the commencement of any litigation, franchisors in the future may try to use this case to discourage franchisees from competing with them after the franchises are terminated.  

Judge Moore generally was not sympathetic to the franchisee’s arguments in Steak ‘N Shake as he rejected the franchisee’s arguments that the franchise agreements had not been properly terminated. But there was one part of the decision that was favorable for the franchisee. Judge Moore denied the franchisor’s request for a preliminary injunction to bar the franchisee from continuing to operate a competing business at the same location where the franchises were operated. Judge Moore reasoned that there weren’t any other Steak ‘N Shake franchises in the Denver metropolitan area and weren’t any plans to expand into Denver, at least before the trial on the merits. As a result, the court held that the franchisor had failed to make the showing of irreparable harm required for that aspect of the requested injunction. There was a Steak ‘N Shake restaurant in Colorado Springs, however, and Judge Moore barred the franchisee from operating within five miles of it. 

Court Dismisses Employee’s Claim for Letter Sent to New Employer

Posted in Tortious Interference

What should a company do if a former employee joins a competitor?

If the company has trade secrets, it may be concerned that the employee will share those secrets with the new employer. Faced with this situation, the company may opt to send a letter to the new employer. This option does not come, however, without risk.

In a recent case from the federal district court in Michigan, Bonds v. Philips Ellectronics, a company sent a letter to a former employee who had joined a competitor. A copy of the letter was forwarded to the employee’s new employer. In the letter, the company warned the former employee about the employee’s obligations to maintain the confidentiality of information.The employee’s new employer fired the employee a few days later. Unemployed, the employee then sued his former employer for sending the letter which he claimed was the cause of his termination.

Thecourt rejected the employee’s claim, but only after carefully considering the contents of the letter. The court held that the letter contained "strong, assertive language" but did not call for the employee’s termination. Rather, the letter raised concerns about the employee’s obligations under his confidentiality agreements and the potential disclosure of confidential information. Accordingly, the court concluded that the letter was motivated by the legitimate business reason of preventing the improper use of confidential business information. 

The opinion strongly suggests that the court would have reached a a different conclusion (or at least wouild have had a more difficult decision) if the letter had explicitly requested the termination of the employee. There is a risk, therefore, for employers when they send a letter to a former employee’s new employer. Unless the letter is properly drafted, an employee may have a claim against his former employer for interfering with his contract with his new employer if he loses his job or suffers any other adverse consequence.