Colorado Non-Compete Law Blog : Denver Non-Compete Lawyer & Attorney : Dan Warden : Bond & Morris Law Firm : Adams County, Brighton, Aurora, Bow Mar, Lakeside

We pleased to let you know that the Colorado Non-Compete Law Blog was included on the Delaware Employment Law Blog's annual list of the hundred best employment law blogs.

We've included the Delaware Employment Law Blog on our Relevant Blogs section in the left hand margin. The list of the best employment law blogs was included in a November 4 entry -- we've been slow to acknowledge our inclusion. The Delaware Law Blog is a great resource for anyone interested in employment law issues. 

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As reflected in the Wyoming Supreme Court's recent decision in CBM Geosolutions v. Gas Sensing Technology Corp, Wyoming's law on non-competes differs substantially from Colorado's. 

Colorado has adopted a statute which voids any non-compete unless it falls within one of the four designated exceptions.  Every case, as a result, begins with an analysis of whether the non-compete falls within one of the exceptions. If the non-compete does not, the non-compete can not be enforced and there is no need to evaluate whether the non-compete's duration and area are reasonable.

In Wyoming, on the other hand, no such statute has been adopted. There is no discussion, as there is in Colorado cases, of whether a non-compete falls within the definition of statutory terms. There are no cases, for example, about whether a non-compete was entered by someone who falls within the definition of "executive and management personnel".

There are a few preliminary hurdles to consider in Wyoming, including whether consideration exists and whether the non-compete was in writing. If these hurdles are surmounted, as they are in most cases, the remaining analysis revolves around whether the non-compete is "reasonable". As in most if not all states, this reasonableness analysis requires consideration of the duration and geographic area of the non-compete.

Reasonableness in Wyoming, however, also requires consideration of a series of other factors. These factors include  the degree in inequality in bargaining power, the risk of the business losing customers, the good faith of the employee, knowledge related to the identity of customers, the employee's position with the business, the employee's training, education and the "needs of his family", the current conditions of employment and the need to protect the legitimate interests of the business. This part of the reasonableness analysis allows a court to consider virtually any factor that might be important under the individual facts presented by a case.  

In short, the two states have adopted different approaches to non-competes. Whether the different approaches result in different decisions may be addressed in future blog posts. For a party subject to a non-compete in either state, however, it is important to recognize that different approaches have been adopted and that the different approaches may mean that different strategies are required. 

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We recently wrote about the Tenth Circuit's September, 2009 decision in Southwest Stainless v. Sappington, but the decision is worth another look. An issue presented by Southwest Stainless was whether a price quote was a a trade secret. Southwest claimed that a price quote was and asserted a claim for misappropriation of trade secret.

The defendant, a former employee of Stainless, apparently set the price that Stainless quoted to Hughes Aircraft. After the employee left Stainless and went to work for a competitor, Hughes Aircraft placed an order with the new employer at a price slightly less than Stainless' quote. If Hughes Aircraft had selected Stainless' quote, Stainless would have earned $31,200 in profit.

The trial court held that the Hughes Aircraft quote was a trade secret. It emphasized all the measures that Stainless took generally to keep its pricing information confidential, including requiring confidentiality agreements, reminding employees of the confidential nature of company information and using passwords to restrict access to information. 

Despite these measures, the Tenth Circut held that the the price quote was not a trade secret for one reason. It wasn't a secret.

Some customers were allowed to know prices on certain items in advance. Furthermore, Stainless did not prevent its customers from disclosing pricing information to others. In other words, the pricing quote was known outside of Stainless (i.e. by Hughes, among others), Stainless took no measures to prevent Hughes from disseminating the information and the former employee could have obtained the price quote simply by calling Hughes.

In contrast, the Colorado Court of Appeals in 2001 affirmed a judgment which held that a contractor's bid for construction work was a trade secret. In that case, the contractor had submitted a bid for work. The former employee also submitted a bid and his bid was accepted. At trial, the jury found that the bid information was a trade secret and that the former employee had misappropriated the bid information. That judgment was affirmed on appeal despite the former employee's claim that the bid information was not a trade secret as a matter of law. 

In this Court of Appeals case, there was no suggestion that the bid could have been obtained by the former employee if he had contacted the party to whom the bid had been submitted. That distinction may help explain the differning results in the two cases.

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A recent New Jersey decision, Stengart v. Loving Care Agency, raises questions about the limits of the attorney client privilege when an employer performs a forensic examination of the computers used by a former employee. Because it is typical for employers to conduct a forensic examination of a former employee's computers when the employee is bound by a non-compete, these privilege issues should be anticipated in any non-compete case.  

In Stengart, the employer provided the employee with a laptop and a work email address. Prior to her resignation, the employee communicated with her lawyer by email about a possible lawsuit against the employer. These communications were sent on a personal, web-based Yahoo account. After the employee resigned, the employer conducted a forensic examination of the hard drive on the laptop and was able to review the emails sent on the personal account. Once the employee discovered that the employer had reviewed these confidential communications, she demanded that they be returned. The employer refused and the employee was forced to seek relief from the trial court, which denied the motion to require the employer to return copies of the emails sent by the employee to her lawyer.

On appeal, the New Jersey Appellate Court held that the communications were privileged and directed that the emails should be returned. It also directed employer's counsel to delete any such emails from the hard drive where they were stored. The case was remanded for a hearing to determine whether employer's lawyers should be disqualified from representing the employer.

Employees should not assume that this result was inevitable. The law on this issue is still being developed and the New Jersey court struggled to make its decision. The employer argued that it had adopted a policy that all emails sent on company computers were consider company property. This argument led the court to balance the employer's interest in enforcing its regulations against the employee's interest in the confidentiality of her communications with her lawyer.   

In 2007, a New York court reached a different conclusion than Stengart when it held that emails sent by plaintiff to his lawyer were not entitled to the attorney client privilege protection when the plaintiff had used the employer's email system. 

Lessons can be learned from these cases by both employees and employers.

Employees need to recognize that a forensic examination of a work computer's hard drive may allow an employer to review not only the emails sent on the employer's email system, but also the emails sent by the employee using a personal email account. Employees should communicate with counsel through their own personal computers, not through any computer at work.

On the other hand, employers need to recognize the importance of instituting a plain, clearly-stated policy about email communications through computers furnished by the employer. Any such policy may be enough to overcome any assertion of the attorney client privilege. 

Colorado has not considered these issues that test the limits of the attorney client privilege. But it is important to note that Colorado has adopted a different version of the rule of professional conduct that influenced the appellate court in Stengart. 

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Damages may be awarded for breach of a non-compete agreement even if the agreement is  modified after the breach occurs, according to the recent First Circuit decision in Astro-Med v. Nihon Kohden. 

In Astro-Med, the trial court modified the scope and range of the prohibited conduct set forth in the non-compete when it issued a preliminary injunction. Instead of North America and Europe, the trial court limited the prohibited conduct to a specific state and a limited subset of customers.  Such limitation was consistent with Rhode Island law which disfavors non-compete agreements -- as Colorado law does. Later, at trial, damages were awarded for breach of the modified non-compete. The opinion isn't clear, but presumably the breach and resulting damages occurred prior to the preliminary injunction.  

On appeal, defendants sought to have the damage award vacated as they argued that the non-compete was not enforceable until it had been modified by the district court.  In the words of the First Circuit, defendants were seeking the application of the "one free breach" rule, which would bar damages for breach of a non-compete if the non-compete was subsequently modified by a court. At first blush, this argument seems plausible. As the First Circuit noted: "We have no quarrel with the defendant's general contention that under the partial enforcement rule, an overly broad noncompetition provision cannot be enforced until it is modified, a proposition that seems self-evident". 

The First Circuit rejected defendants' argument, however, as it reasoned that the one free breach rule "would eviscerate all but the most narrowly tailored non-competition agreements, since a modification of any term of the provision would justify a breach of all its terms".   

This case raises some perplexing issues. The First Circuit may be right that employees should not be able to enjoy the benefits associated with the "one free breach" rule. On the other hand, there may be situations where it would be unfair to ask employees to anticipate whether and how an unreasonable restraint will be construed. And, in those situations, a court may not be inclined to award damages against a former employee when the employee guesses wrong about how the restrictions in a non-compete should be enforced. 

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Profits lost on specific orders are recoverable for breach of a non-compete agreement, according to the recent Tenth Circuit decision in Southwest Stainless v. Sappington.

Oklahoma law was applied to determine that the non-compete was enforceable. As a result, the trial court's reasoning about why the non-compete was enforceable has limited value for a case governed by Colorado law. Oklahoma's non-compete statute differs from Colorado's. Nonetheless, the Tenth Circuit's damages analysis may provide guidance in Colorado cases. 

In Sappington, the trial court rejected the plaintiff's claim for "general lost profits"; that is, plaintiff's claim for lost profits on all the business done by its former employees' new employer. Other jurisdictions have similarly concluded that damages should not be measured by the benefit to the party in breach. The trial court awarded damages, however, on two contracts where there was evidence that the former employees' breach of their non-compete had caused damages.

On appeal, the defendants challenged the ruling that lost profit damages were recoverable on the two contracts at issue. The former employees argued that any breach of their non-competes had not caused damages to their former employer because the plaintiff had not shown exactly what the defendants had done or how the damages had resulted. The Tenth Circuit rejected this evidentiary argument with little difficulty, as it noted that Oklahoma law provided that a causal connection could be proved by circumstantial evidence.  

While the decision is not surprising, it does include lessons for both employees and employers. Employees subject to non-competes should recognize that there are times when damages have been awarded for the breach of a non-compete. Employers should recognize, on the other hand, that their case for damages may depend on showing how the employee's conduct caused it to incur damages. It is often not enough for a former employer to show that the new employer of its former employee has been successful.

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In the last several years, several states have adopted statutes governing the enforcement of non-competes, including Oregon, Connecticut and Idaho. In other states, legislation has been proposed but not adopted. None of the statutes in other states are identical to Colorado's although similarities exist. 

In the midst of these changes in other states, it is worthwhile to reconsider the history of Colorado's non-compete statute.   

Colorado's statute, Colo.Rev.Stat. 8-2-113(2), was adopted in 1973. Only one change has been made since the statute was adopted: subsection (3) was adopted in 1982. That subsection generally voids physician non-competes. To our knowledge, there has been little if any discussion of changes to the Colorado statute. 

Prior to the adoption of the statute, Colorado followed the common law under which a covenant not to compete was valid and enforceable if the covenant was reasonable in duration and geographic scope. That rule was first adopted in a 1909 decision in which the Colorado Supreme Court considered various English and American cases and ruled that "Reasonable restrictive covenants are consistent with public convenience, individual interest, and the general welfare". 

In these pre-statute cases, an employee had the burden to show that any restriction was unreasonable. That burden was difficult to meet. Throughout these decisions runs a theme of moral disapproval of anyone who would seek to breach his contractual obligation. The Colorado Supreme Court noted on more than one occasion that the employee's conduct was "wrong" because he was "deliberately doing what he plainly agreed not to do". Non-competes were sustained for terms up to five years and with distances of 100 miles.

After the Colorado statute was adopted, courts recognized that the burden had been flipped to the employer who now had the burden of showing that any non-compete fell within one of the exceptions to the general rule voiding non-competes in Colorado. If the non-compete fell within an exception, the employee still could challenge the restrictions on duration and geographic area as unreasonable. 

Colorado's non-compete statute is an important part of any analysis of whether a non-compete is enforceable under Colorado law. It is important to recognize that this statute is different than the statutes adopted in other states. It is also important to recognize that the statute does not answer all the questions raised in non-compete cases. Those answers may come from the common law in Colorado or from the law in other states.

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Once an employer becomes suspicious that former employees are acting wrongfully, employers often consider seeking injunctive relief ex parte or prior to providing notice to the employee. Significant hurdles must be overcome, however, before a party can obtain a temporary restraining order ex parte. Under the Colorado and federal rules, a court may issue a temporary restraining order only if the applicant can show that immediate and irreparable injury will result to the applicant before the adverse party can be heard in opposition. In addition, the applicant must certify any effort made to give notice to the adverse party and the reasons why notice should not be required.

Together, these requirements often doom any application for a temporary restraining order.  In the Gustafson case which we discussed last February, for example, Judge Krieger found that the plaintiff had failed to show that it would incur irreparable injury absent the injunction. As a result, she denied the employer’s application for a temporary restraining order.

In the July 17, 2009 decision in Statera v. Henrickson, Judge Blackburn on the federal district court in Colorado granted an employer’s application for a temporary restraining order against former employees even though the employer did not certify its efforts to give notice to the former employees.  The order did not, however, compel the former employees to comply with their contractual or statutory duties to their former employer. Instead, the order “enjoined and restrained” the former employees from (1) deleting or destroying any of the employer’s trade secrets, confidential information and the like in their possession”; (2) taking any action to delete any information related to the former employer in their hard drive  or other computer storage media; (3) making any copies of the employer’s confidential information; (4) making any use of the computers in their possession; and (5) deleting any email messages in certain accounts.

In the documents filed in support of the temporary restraining order, the employer presented evidence that the former employees had been employed as Vice Presidents and had had access to confidential information and trade secrets. The employees had signed agreements which barred them from using the employer’s trade secrets. After the employees left, the employer discovered that they were engaged in competitive activities. The employer hired a forensic computer expert who was able to determine that the employees had downloaded confidential files and had used the computers to organize their competitive enterprise. In addition, the expert discovered that the employees had attempted to use an “anti-forensics software shredder” program to disguise their activity on the computers.

Based on this record, Judge Blackburn declined to compel the employer to give notice of the temporary restraining order to the former employees. Judge Blackburn reasoned that notice should not be required because of the risk that the employees would, after receiving notice, again take action to alter, erase, or destroy evidence in their possession.   

There are a number of lessons in the case for employees. Employees need to recognize that employers often will spend the time and money necessary to enforce confidentiality and non-compete agreements. Employers will examine a former employee’s computer to find out whether the employee has engaged in wrongful or suspicious behavior prior to leaving the company. Employers will find out if the employee has attempted to run an erasure program on his computer prior to leaving. The decision also provides yet more evidence that courts may be eager to grant relief, ex parte or otherwise, to employers when the employer is able to show that a former employee has engaged in intentional conduct to disguise potentially wrongful conduct.

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Under the Colorado non-compete statute, non-competes are void unless they fall within one of the designated exceptions. One of those exceptions is for "executive and management personnel".  

Another decision recently was entered on this "management" exception when the Colorado Court of Appeals issued its June 2009 decision in Dish Network v. Altomari.  In Dish Network, the trial court, Judge Habas of the Denver District Court, had denied Dish Network's motion for preliminary injunction in part. Judge Habas had found that the employee was not "management personnel" under the non-compete statute. The Court of Appeals reversed as it found that Judge Habas had misconstrued what was meant by the "management" exception. This exception, according to the Court of Appeals, was not limited to "key personnel at the heart of the business".

In ruling that the exception applied, the Court of Appeals noted, at different points in the opinion, that the employee was a director of Dish Network, that the employee was "at the top of the compensation scheme", that the employee "directly" supervised fifty out of Dish's 22,000 employees, that the employee's division had a ten million dollar budget, and that the employee "was employed in a decision-making capacity, and had a certain level of autonomy".   

In reaching its ruling, the Court of Appeals acknowledged that the Colorado Supreme Court had not considered  this exception and "other courts that have considered the exception have not provided a clear definition for who qualifies as 'executive and management personnel'". It is worth questioning whether this decision contributes substantially to the definition of this exception.  Most cases, after all, won't involve employees who "directly supervise" fifty employees and who manage a ten million dollar budget. 

The decision underscores how difficult it can be for a court to determine whether an employee falls within the "management" exception. By underscoring this difficulty, the decision demonstrates how important equitable considerations can be in determining the scope of any exception to the general rule that non-competes are not enforceable. 

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