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)

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.

Colorado’s Annual Statistical Report

Posted in Increase in litigation

Mark Twain may have been right when he said that there were three kinds of lies: lies, damned lies and statistics. Nonetheless, it’s helpful to consider the statistics from the Annual Statistical Report on Colorado court filings when considering how a court approaches a noncompete or trade secret case. 

According to the 2013 annual statistical report for state courts in Colorado, about 45,000 civil cases were filed in district court in Colorado (excluding distraint warrants). Of the 45,000 cases, approximately 300  were characterized as cases seeking "injunctive relief". Approximately 3,000 were breach of contract cases. It’s hard to say how a noncompete case would be characterized, but it probably would fall within one of these categories.

By comparison, almost 3,000 civil cases were filed involving personal injuries arising out of motor vehicle accidents. Another 1,300 cases were filed involving other personal injury claims. Almost 4,000 cases were filed seeking to seal criminall records.

The District Courts were busy in 2013, however. About 37,000 criminal cases were filed in district court in Colorado in 2013, 34,000 divorce or domestic relations cases and 27,000 juvenile cases.

Most judges will have limited experience with noncompete cases. There just aren’t enough noncompete cases (much less trade secret cases) for judges to remember the law or develop much expertise.

It’s helpful to keep these statistics in mind when you consider the many articles on the internet that suggest that there has been an explosion in the number of noncompete cases nationwide. Many more noncompete cases may be filed but the total number of noncompete cases remains small compared to the other kinds of cases seen and heard by state district courts. 

(These statistics don’t represent all the noncompete or trade secret cases pursued in Colorado in 2013. Some employers have elected to use arbitration to resolve disputes with their former employees. Those arbitrations would not be included in the annual statistical report for the courts.)

 

A “Referral Source List” as Trade Secret

Posted in Trade Secrets

In a noteworthy, but dated, decision from July 2013, Judge Daniel on the federal district court bench ruled that an employer had failed to prove that a "referral source list" was a trade secret. Accordingly, in Continental Credit Corp v. Dragovich, Judge Daniel held that the employee’s noncompete was not enforceable and denied employer’s motion for preliminary injunction.

During his employment, the employee maintained a "referral source list" which contained the names and contact information of potential business contacts along with personal notes about recent contacts, telephone calls and meetings. The employer claimed that this list was a trade secret and sought to enjoin the employee from contacting and working with its customers and referral sources or for working for a direct competitor for one year pursuant to the employee’s noncompete agreement.

Judge Daniel found, however, that the "source list" contained little more than vague information about potential leads, telephone calls and meetings that may or may not occurred. He noted that a representative of employee’s new employer "credibly testifed" that the list could be recreated in a few days from information available to the public. As a result, Judge Daniel found that the employer had failed to meet its burden of proving that the list was a trade secret.

There is an important takeaway from the case. It’s easy for employers to claim that information is a trade secret. At a hearing, however, the employer has the burden of showing that the alleged trade secret is secret and has value. That burden can be difficult to sustain. Employers need to consider what evidence can be used to show the value and the secrecy of its trade secrets. Employees need to consider what evidence can be used to show that the alleged secrets really are publicly available. 

 

 

The Importance of Venue Selection and Choice of Law Provisions

Posted in Choice of Law, Forum selection

A recent case, H&R Block v. Taxes Latino Americanos LLC, demonstrates the importance of venue selection and choice of law provisions. 

Taxes Latino was a Colorado company that offered tax preparation services at five locations in Colorado, including an office on East Colfax in Aurora. In 2012, Taxes Latino sold the business to H&R Block. Pursuant to the purchase agreement, Taxes Latino and its principals agreed not to compete with H&R Block anywhere within a 50 mile radius of the five Colorado offices. In addition, the parties consented to personal jurisdiction in Missouri, agreed that Missouri would be the location of any lawsuit and agreed that Missouri law would govern any dispute.

H&R Block subsequently concluded that Taxes Latino had breached the noncompete and on February 5, 2014 it sent a cease and desist letter to Taxes Latino and its principals advising them that it intended to file a lawsuit if they remained in breach of their noncompete obligations. The lawsuit was filed in the federal district court for the western district of Missouri on February 10. A hearing was held on February 14 on H&R Block’s motion for preliminary injunction. On February 19, the court issued its order granting H&R Block’s motion for preliminary injunction.  

The court’s order is noteworthy for several reasons.

First, the court didn’t hesitate in finding that Taxes Latino and its principals had waived any objection to personal jurisdiction in Misssouri. The opinion doesn’t describe any contact between Taxes Latino and Missouri and it’s possible that the only connection was the purchase contract for the business.

Second, the court didn’t hesitate to enforce the forum selection clause that called for the action to be filed in Missouri. Nor did the court hesitate in enforcing the Missouri choice of law provision. 

Third, the court wasn’t troubled by the fact that it was enjoining conduct in another state. The defendants were enjoined from engaging in competitive activity within 50 miles of the five Colorado locations. There may be times when there are issues about the geographic reach of an injunction but those issues were not considered. 

The case is yet another example of the importance of the venue selection and choice of law provisions often included in noncompete agreeements. Within a few days after the lawsuit was filed, defendants were compelled to travel to another state and defend claims that were to be decided under another’s state’s laws. 

New Forum Selection Ruling from the Supreme Court

Posted in Forum selection

Location, location and location. That’s true with noncompete cases just as it is with real estate. 

Employees typically want to stay in Colorado. They want a Colorado court to apply Colorado law to their noncompete. Employees want to avoid the stress and expense of hiring counsel in another state. Employees hope to have the court apply Colorado law which disfavors the enforcement of noncompete cases. And employees hope that Colorado judges will be sympathetic to a hard-working Colorado employee rather than a large, out of state company.

Many employers, on the other hand, seek to have any noncompete dispute heard in another state with less sympathetic rules about the enforcement of noncompetes. In addition, employers frequently have employees in many states. They want all noncompete cases involving their employees to be resolved in one place. That helps ensure a more uniform resolution of the cases.

To ensure that they control where any noncompete case is litigated, employers include forum selection clauses in the noncompete agreements. These clauses recite that a state other than Colorado will be the exclusive venue for any dispute arising out of the agreement. In response to these clauses, employees have filed declaratory judgment actions in Colorado in which they seek a ruling that their noncompete is not enforceable. By filing first, these employees seek to avoid the forum selection clause in their noncompete.

A recent Supreme Court decision may limit this tactic by employees. In a December 3, 2013 ruling, Atlantic Marine Construction Co..  v. United States District Court, the Supreme Court ruled that forum selection clauses should be enforced "in all but the most unusual cases." The choice by the party defying the forum selection clause should receive no weight. Arguments about the parties’ convenience should not be considered. 

In light of this decision, employees need to be careful when they agree to a noncompete agreement that sets venue in a location outside of Colorado. Employers need to consider whether they should include a forum selection clause in their noncompetes. 

 

Social Media’s Impact on Non-compete cases in Colorado – Part Two

Posted in Social Media

Non-solicitation clauses present a good example of the difficult issues raised by social media.   

Many employees, particularly salesmen, sign non-solicitation agreements. Those agreements often say nothing more than that the employee may not solicit the company’s customers for a designated period. (Other agreements bar the employee from performing any work for the company’s customers after the termination of the employee’s employment, but these more restrictive agreements aren’t the focus of this blog.) Absent additional facts or more specific language, these narrow non-solicitation agreements often are construed to prohibit only the initiation of contact with the company’s customers. 

Before the Internet and social media, these narrow non-solicits often meant that the employee couldn’t make a direct personal appeal (e.g.a phone call) to the company’s customers. An employee could, however, announce his association generally with his new employer. The company’s customers then could initiate contact with the former employee, and the former employee arguably could serve the customer without violating his narrow nonsolicit. 

Social media adds a new layer of complexity to these cases. Once an employee leaves a company, for example, he may post an announcement on his LinkedIn page that tells all his contacts about his new position. The employee’s contacts may include many of the customers that he served for his former employer. If the employee is clever, he may, before he leaves, expand his contacts to include all of the company’s customers that he knows. Even if the employee doesn’t intend to mask his intentions with social media, he may give notice to many customers when he changes the biographical information about his employment on LinkedIn.  

Upset employers have argued that former employees have violated their non-solicitation agreements by making announcement in LinkedIn that are directed, in part, to contacts who are the company’s customers. Employees, on the other hand, have insisted that an announcement on social media, like LinkedIn, really isn’t the same as a phone call.  

To our knowledge, there haven’t been any cases in Colorado about whether a LinkedIn posting or something similar would result in a violation of a simple non-solicit agreement. In other states, courts generally have been skeptical of employers’ arguments that these postings alone constitute a violation of non-solicit agreements. Of course, the resolution of all these cases depends on the language in the non-solicit and the employee’s conduct. But courts generally seemed to want more than a LinkedIn posting before they find that a violation of a simple non-solicitation agreement has occurred.

To be sure, employers will be motivated to draft new language that clarifies the nature of the restrictions imposed by a non-solicit on an employee’s use of social media. Any new language would, however, need to comply with Colorado’s Facebook Law and the underlying purpose of the noncompete statute.  

Social Media’s Impact on Noncompete Cases in Colorado — Part One

Posted in Social Media

Only a few published decisions have addressed the impact of social media on noncompetes and those decisions have come from states other than Colorado. There is little doubt, however, that social media will play a role in many noncompete disputes in the future. 

The existence of trade secrets is a key to many noncompete cases, because companies often rely on the existence of trade secrets to enforce noncompetes. Social media may play a role in these cases, because social media may show that information isn’t really secret.

Companies often claim, for example, that their customer list is a "trade secret". As information generally has become more readily available, however, it has become more difficult for employers to prove that any list of customers truly is a secret. The internet and electronic compilations of companies make it easier to determine the customers or potential customers for many companies. At a minimum, social media should make it more difficult for employers to prove that any list is a secret.

Postings on social media also may cause a company’s customer list to lose its status as a trade secret. Many employees, particularly sales employees, now use Linked In and make "connections" with customers they serve. Linked In has various privacy settings, which allow a user to control whether his connections can "see" all of the users’ other connections. If employees join Linked In, link to all of their customers and allow their connections to see their other connections, the company may struggle to show that the identity of its customers really is a trade secret. 

Colorado’s new Facebook Law may complicate an employer’s efforts to monitor an employee’s social media activity. Under the new law, an employer can’t compel an employee to disclose his passwords to social media accounts. Nor may an employer compel an employee to add someone to an employee’s list of contacts. As a result, an employer may not know whether an employee has disclosed the identity of its customers to his other friends or connections. 

On Linked In, users also have the option of creating and updating their profile on the site. Not surprisingly, employees are eager to describe themselves in the best light possible. In doing so, employees may include information in their profile which the company considers a trade secret. One the profile is published, the disclosed information may lose its status as a trade secret, because it is no longer secret. 

 

Protecting Social Media Passwords in Colorado

Posted in Social Media

Hello. I’ve been busy for many months and have not made any new blog entries. Recently, however, there have been several signficant developments in the non-compete world. To begin the discussion again, I want to take a step back and look at some of the developments during the past year.

Last Spring, Colorado joined an increasing number of states and adopted legislation limiting access to employees’ social media passwords. Effective May 11, 2013, employers "may not suggest, request, or require" an employee or job applicant to disclose any password for social media accounts. Nor may employers compel an employee or applicant to add  anyone to the employee’s list of contacts associated with the account. This is Colorado’s "Facebook Law".

For the time being, "social media accounts" probably was intended to mean Facebook or Linked-In. Linked-In particularly is used by many employees, who create a network of the contacts developed during their career. For a salesman, the relationship with these "contacts" is invaluable.

Colorado’s new law does not prevent an employer from conducting an investigation to ensure compliance with securities laws. Nor does the new law prevent an employer from investigating an employee’s electronic communications if the employer has information that there has been "unauthorized downloading" of an "employer’s proprietary information". 

An employee’s remedy for any violation of the new law is limited. When the law was proposed, it included a private right of action that allowed an employee to sue for any violation of the law. The court had the discretion to grant injunctive relief and award compensatory damages and attorneys fees. These remedies were lost during the legislative process. Under the law as adopted, an employee may only file a complaint with the Colorado Department of Labor and Employment. The Department is charged with investigating the complaint and may impose a penalty of $1,000 for a first offense and not more than $5,000 for subsequent offenses. Such a penalty would be small consolation for an employee who was a victim of an overzealous employer.

Since the adoption of the new law, the Department of Labor has initiated a ruling proceeding to adopt regulations. It has also published a website (www.colorado.gov/cdle/socialmedia) where you can find a "Fact Sheet" and a form for making a complaint to the Department. The Department has said that its approach to the law may evolve as new developments occur. 

The Department’s draft regulations provide additional guidance for employees and employers. These regulations clarify that an employer may not discharge or discipline an employee for refusing to disclose passwords for social media accounts. Or for refusing to add the employer to the list of an employee’s contacts. Under these regulations, anonymous complaints may not be filed with the Department. 

Social media accounts have the potential to play an increasingly important role in non-compete or non-solicit cases. With a social media account, a former employee has the opportunity to tell all of his contacts about his new job by pushing a button and changing his profile. Additional posts will examine these issues.