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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The prior post begs the question most frequently asked by clients: what is a reasonable restraint? That is, what kinds of geographic and temporal restraints will be enforced by Colorado courts -- assuming that the non-compete falls within one of the four exceptions set for in C.R.S. 8-2-113(2)? 

The best, but perhaps the most frustrating, answer is that it depends. As the tenth circuit noted in 1999, "The reasonableness of  restraint in a restrictive covenant is determined on a case-by-case basis, taking into account the particular facts and circumstances surrounding the case and the subject covenant." 

Because the particular facts of a case are so important, there is a great range in the restraints that have been enforced. On the one hand, for example, a Colorado federal district court has enforced a nation-wide restriction as being reasonable in geographic scope. Another decision even suggested that a world-wide restraint might be reasonable under the proper circumstances. On the other hand, Colorado courts have limited the geographic scope of other non-competes to a particular city or town in Colorado. 

It is true that Colorado courts have consistently applied some general rules about how broad restraints may be. The Colorado Court of Appeals as recently as 2006, for example, noted that covenants not to compete for terms up to five years and within distances of 100 miles are commonly upheld. 

Many of those decisions enforcing these broad restraints, however, arise from non-competes in agreements for the sale of businesses. Many decisions outside of Colorado have held that a non-compete ancillary to the sale of a business may be enforceable even when a covenant of similar breadth incident to employment would not be. (And Colorado courts have noted that trend). Accordingly, to the extent that other decisions provide guidance about the reasonableness of any restraint, it is important to consider a decision that relies on similar facts for the enforcement of the non-compete. Sale of business decisions don't necessarily provide guidance for cases in which a non-compete's enforcement relies upon the employee's status as a manager or executive.

It also may be wise to be skeptical about the guidance provided by older decisions because technological innovations have altered the way in which businesses operate. Many businesses now serve far broader areas. Those businesses now may be able to argue that the geographic reach of any non-compete should be broader. On the other hand, technological innovations may lead certain companies, particularly high tech companies, to change their business model much more quickly than before. These changes may lead courts to limit the duration of any non-compete tied to the companies. 

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As the previous entry suggested, an employer in Colorado may be able to enforce an assigned non-compete under the proper circumstances. 

In a recent case, however, an employee argued that the evidence was insufficient to find that his non-compete had actually been assigned. A transfer agreement had been signed which provided that the employee's former employer would sell , transfer and assign all of the property listed on "Schedule 1", but Schedule 1 apparently was left blank. Neither the employment agreements, nor anything else was listed.

Despite this problem, the trial court found that the parties had the "requisite intent" to effect an assignment of the employment agreements with the non-competes. At trial, there was testimony that the only reason that the transfer agreement was left blank was because the "lawyers and accountants in charge of completing the form failed to do so before closing". 

There is a practical lesson to be learned from this decision. Just because something can be done doesn't mean that it has been done. Any employer seeking to enforce an assigned non-compete must confirm that the non-compete has been assigned. Any employee resisting enforcement of an assigned non-compete must see and understand the assignment. 

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In an interesting development, Judge Daniel's decision in Xantrex Technologies v. Advanced Energy Industries has been appealed to the Tenth Circuit. One of the issues on appeal is whether Judge Daniel erred when he ruled that the employee defendant should be enjoined from working for a competitor for a full year from the date of his order. On appeal, the employee has argued that, in accordance with the language of his non-compete, the one year period should have commenced on the date of the termination of his employment.  

As one of my earlier posts suggested, there are several decisions from the Colorado Court of Appeals that support the employee's position. In a 2007 decision, for example, the Court of Appeals affirmed that a non-solicitation provision was enforceable only for the period set forth in the provision itself. That is, the non-compete period could not be extended beyond the period in the agreement.

In its appeal brief filed last month, Xantrex, the employer seeking to enforce the non-compete, has raised several intriguing arguments. Xantrex argues that Judge Daniel also found that the employee had misappropriated trade secrets and that there was a risk of future disclosure of trade secrets. Based on this misappropriation,  Xantrex argues that Judge Daniel merely used the employment agreement's one year non-compete period as "guidance in issuing the length of the injunction". It was reasonable, according to Xantrex, for the Court to use a one year period from the date of its order because the parties had agreed to a one year period for the protection of  Xantrex's trade secrets.  

While intriguing, Xantrex's arguments raise a number of questions. Judge Daniel's Order, for example, doesn't really say that the employment agreement's one year period was being used merely as "guidance". In fact, Judge Daniel never explains why he decided that the one year period should commence on the date of his order.  Xantrex also doesn't explain why any trade secrets couldn't be preserved by an order barring their disclosure or dissemination, rather than an extension of the non-compete.

There are practical reasons for Judge Daniel's decision that are never discussed in the appeal briefs. The employee terminated his employment with Xantrex in July 2007. Xantrex filed its action in January 2008, a hearing on Xantrex's motion was held in January 2008 and Judge Daniel issued his decision in May 2008. If the "clock" had begun to run on the non-compete when the employee terminated his position, any injunction issued by Judge Daniel would have expired within a few months after his order, or in July 2008. After finding that the employee acted wrongfully, Judge Daniel may have been concerned that this abbreviated injunction would not provide Xanrex with the relief that was equitable. 

In its appeal brief,  Xantrex also argues that many courts in other jurisdictions have extended non-compete periods beyond the period set forth in any employment agreement. Ample precedent has been provided of instances in which courts have not felt constrained by the agreement of the parties. 

No guidance has been provided by the Tenth Circuit about when it might issue a ruling on the appeal. The employee has asked for expedited consideration but there hasn't been a ruling on his request. 

Once the Tenth Circuit issues its ruling, it may provide some clarity on this key question of when the clock begins to run on an employee's non-compete obligation. There is a chance, however, that the Tenth Circuit will not need to face this issue. The employee has also argued on appeal that Judge Daniel erred in holding that the non-compete was enforceable. If the Tenth Circuit accepts this argument, it may not reach the timing issue. 

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In many non-compete cases, an issue arises about when the validity of a non-compete should be determined. Under Colorado's non-compete statute, a non-compete won't be enforce unless it falls within one of the four exceptions set forth in the statute. One  of those exceptions is for 'executive and management personnel". 

Many employees sign non-competes, however, when they are first hired by a company, or before they become an executive or manager with the company. Later, they are promoted and become executives and managers. When they leave the company, employers argue that the exception for executives and managers applies and that the non-compete is enforceable, even if the employee was not an executive or manager when they were hired. And when they signed the non-compete

In Phoenix Capital,  the Court of Appeals rejected this argument when it ruled that the applicability of the exceptions set forth in the non-compete statute should be determined at the time the non-compete is signed, rather than the time when the employee terminates his employment. The Court of Appeals rejected the employer's argument that this ruling would leave employers unprotected from employees who weren't executives or managers when they joined a company but who later were promoted to executive or management positions. As the Court of Appeals noted, an employer may always enter into new agreements with employees as they take on additional responsibilities. 

Ample precedent exists for the Court of Appeals' ruling. In Management Recruiters v. Miller, a decision from 1988, the employee signed a non-compete when he was hired as an "account executive" or "information gatherer". Later, the employee was promoted to office manager, but a new agreement was not executed when he was promoted. Based on these facts, the Court of Appeal declined to enforce the non-compete. 

An interesting factual wrinkle was presented by another case that was decided prior to Phoenix Capital.  In Doubleclick  v. Paiken, a federal district court decision issued in 2005, the employee entered into a separation agreement with her employer when she left the company. The separation agreement included a non-compete. Several months later, the employer learned that the employee was working for a direct competitor and filed suit against the employee. 

Employee argued, however, that the non-compete was not enforceable because she had signed it after she had resigned and "was not, ipso facto, management personnel". In effect, employee had anticipated the rule announced in Phoenix Capital that the enforceability of a non-compete should be determined at the time the agreement is signed. If she wasn't a manager when she signed the non-compete, employee argued, then the non-compete couldn't be enforced even if the non-compete was part of her separation agreement. 

Judge Miller, on the federal bench, was not swayed, however, by this argument as he ruled against the employee. Miller seemed to be convinced that the non-compete was enforceable because it was predicated on the position that the employee had held immediately prior to the execution of the separation agreement. Notably, Judge Miller states in his opinion  "The timing of the agreement does not preclude its enforceability". Following Phoenix Capital, that statement is subject to question because a non-compete may be deemed unenforceable if it is signed prior to an employee's promotion to an executive or management position. 

The ruling in Phoenix Capital is a lesson for both employers and employees. Each time an employee is promoted to an executive or manager position, employees must consider whether to require the employee to sign a new employment agreement with a non-compete. Employees asked to sign a non-compete in connection with a promotion, on the other hand, must recognize that their promotion comes at a cost. The promotion may mean that future employment prospects will be limited by a non-compete.  

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In the latest decision involving a non-compete in a franchise agreement, the Colorado Court of Appeals ruled on May 15, 2008 that a franchisor may enforce a non-compete when the non-compete arises from the purchase of an existing franchise.

In Keller Corp. v. Kelley, the defendant Kelley had purchased an existing franchise and entered into a new franchise agreement with the franchisor. The new franchise agreement included a covenant not to compete. When the franchise agreement terminated, Kelley began operating a competing business. In response, the franchisor filed an action seeking injunctive relief to enforce the non-compete. The trial court denied the motion for preliminary injunction and the franchisor appealed.

The court held that the non-compete fell within the ‘sale of business’ exception to the general rule that precludes the enforcement of non-competes. The court acknowledged that non-competes typically are included in contracts for the sale of a business in order to protect the buyer. Nonetheless, it concluded that there was nothing in the statute that limited its application to the protection of buyers.

Importantly, the court noted that it had not reached the issue of whether an agreement establishing a franchise in a territory for the first time would constitute the sale of a “business” within the meaning of the Colorado statute on non-competes. The court wasn’t required to reach that issue because the franchise agreement between Kelley and the franchisor was entered into as part of the transaction in which Kelley had acquired a “going business” from the previous franchisees.

The Court of Appeals also refrained from ruling on whether the geographic reach of the non-compete was reasonable. The trial court had noted that the restriction on competition was “enormous” because precluded competition within a fifty mile radius of any of franchisor’s existing territories, which included franchises in Colorado Springs, Vail, Aspen, Fort Collins, Grand Junction and Thornton. The Court of Appeals merely observed that the reach of the injunction could be limited by the trial court to an area considered by it to be reasonable.

The Court of Appeals previously has addressed non-competes in franchise agreements. In an earlier decision, the Court of Appeals had ruled that a non-compete arising from the sale of an existing franchise could be enforced by the purchaser of the franchise.
 

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In a brief, direct decision, Judge Miller, a federal district judge in Colorado, recently granted a franchisor’s motion for preliminary injunction in Dry Cleaning To Your Door, Inc. v. Waltham Ltd. Defendants had signed a franchise license agreement with a non-compete which prohibited them from being engaged in a residential dry cleaning pick-up and delivery business for two years after the expiration of the franchise agreement. Defendants declined to renew the franchise but continued to operate a residential dry clearing pick-up and delivery business. Franchisor responded and sought an injunction precluding defendants from operating the business.

With little apparent hesitation, Judge Miller issued the injunction. He found that, in the franchise industry, non-competition provisions and “territorial integrity” are critical factors to protect the value of the “franchise systems”.

Importantly, Judge Miller elected to apply Florida law to evaluate the enforceability of the non-compete. He reasoned that Florida had ample contacts with the transaction and that applying Florida law is not contrary to the public policy of Colorado.

Applying Florida law, Judge Miller concluded that the geographic scope of the non-compete was unreasonably broad. The non-compete barred competition within the defendants’ territory or the territory of another franchise, together with a 25 mile radius around such territories. Judge Miller ruled that the non-compete should be to an area five miles around defendant’s territory.
 

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