Colorado's Non-Compete Statute

Posted on August 28, 2009 by Dan Warden

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.

Tags: ,

TRO Issued to Preserve Evidence

Posted on August 19, 2009 by Dan Warden

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.

Tags: ,

"Management" Exception Construed

Posted on August 11, 2009 by Dan Warden

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. 

Tags: , , ,