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)

Physicians, Non-Competes and Liquidated Damages in Colorado

By Dan Warden on Posted in Physician Non-Competes, Uncategorized

In 2018, the rules changed for physician noncompetes in Colorado.

Since 1982, physician noncompetes have been governed by a rule unique to physicians. Colorado’s noncompete statute voids “any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians” that restricts the right of a physician to practice medicine. As a result of this statute, courts cannot enjoin physicians from practicing medicine – regardless of whether the physician agreed to the restriction. Colorado’s noncompete statue also provides, however, that other provisions in a physician agreement are enforceable, including provisions that require the payment of damages in an amount “reasonably related to the injury suffered”.

To discourage physicians from leaving and to protect themselves from competition, physician groups and hospitals in Colorado have included liquidated damage provisions in their shareholder and employment agreement with physicians. Pursuant to these provisions, a physician becomes liable to the group or hospital, often for a large amount, when the physician quits and practices medicine in the area around the group or hospital. Individual physicians are faced with difficult choices when they decide to leave a practice. They could, of course, honor any contractual obligation and refrain from practicing medicine in the area designated by the agreement. Or, they could breach their agreements and test whether the liquidated damage provision was enforceable under Colorado’s noncompete statute. It took a brave physician to challenge a liquidated damage provision, however, because they risked having a judgment entered against them and, to add insult to injury, employment agreements typically called for the group or hosptal to recover any attorney’s fees incurred from the departed physician.

Little case law existed to guide a physician on whether any liquidated damage provision was enforceable. There was a single decision from the Court of Appeals in 1997; a well-reasoned, unreported decision from the federal district court; and a number of unreported state court decisions. Not much, in other words, for a physician to make a calculated decision about what to do. Earlier this year, this uncertainty was diminished by legislation from the Colorado General Assembly and a new case from the Colorado Court of Appeals.

Under the new legislation, damages should not be recoverable from a physician who continues to treat a patient with a rare disorder after the physician terminates his relationship with one entity and joins another. More specifically, the new statute states:

Neither the physician nor the physician’s employer, if any, is liable to any party to the prior agreement for damages alleged to have resulted from the disclosure or from the physician’s treatment of the patient after termination of the prior agreement.

A “rare disorder” is  defined in accordance with criteria developed by the National Organization for Rare Disorders, Inc.

It is hard for us to predict the impact of this new legislation. Rare disorders may be numerous (the website states that over 1,200 diseases are listed) but they are rare, and so, presumably, may be the physicians that treat them. This amendment to the noncompete statute became effective last month, on April 2, 2018.

Only a small number of physicians may benefit from this new legislation, but a new decision from the Court of Appeals, Crocker v. Greater Colorado Anesthesia, should have a broader impact that favors individual physicians who elect to leave practice groups or hospitals.  Crocker is a complex decision with several rulings. This blog post will focus on the Court’s rulings that (1) the enforceability of any liquidated damage provision in a physician’s agreement must be determined upon the termination of the physician’s employment, rather than at the time the physician agreement is signed; and (2)  the damages set forth in any physician agreement must be reasonably related to the damages actually incurred as a result of the physician’s departure and competition.

In Crocker,  Crocker’s shareholder employment agreement stated that Crocker was liable to Greater Colorado Anesthesia for the following amounts if Crocker  engaged in the practice of anesthesia within fifteen miles of a hospital serviced by Greater Colorado Anesthesia (from Broomfield to Castle Rock) for two years following termination of the agreement: (1) the three-year annual average of the gross revenues produced by the doctor’s practice; (2) minus the three year annual average of the direct cost of the employee, including compensation and expenses paid for the physician; (3) multiplied by two; (4) plus $30,000 to cover the estimated internal and external administrative costs to terminate and replace the competing doctor. Based on this provision, the practice sought over $200,000 in damages from Crocker after he left the practice and practiced within fifteen miles of a hospital serviced by Greater Colorado Anesthesia.

At trial, however, the court found, however, that the practice had not incurred any actual damages – at all. There was no evidence of any work diverted from the practice, no evidence of any lost revenue or profit caused by the physician leaving and no evidence “other than conjecture’ to support the administrative costs portion of the formula. The absence of this evidence seems to be the result of a calculated decision made by Greater Colorado. It was irrelevant, according to Greater Colorado Anesthesia, that there was no evidence of any actual damages: the validity of the liquidated damage provision should be determined prospectively from the time that any physician agreement was signed.

The Court of Appeals rejected Greater Colorado Anesthesia’s arguments as it affirmed the trial court’s ruling that liquidated damage provision in Crocker’s agreement was not enforceable. The court held that the physician noncompete statute requires “a damages term in a noncompete provision”, “whether a fixed sum or calculated pursuant to a formula”, to be reasonably related to the injury suffered “in the past tense”. The reasonableness of the relationship between any “damages term” or liquidated damages and any actual damages “must be demonstrated, and it cannot be analyzed prospectively; by definition, it can only be determined upon termination of employment.” Not surprisingly, the Court of Appeals found that the amount calculated under Crocker’s liquidated damages formula was not reasonably related to any suffered as a result of Crocker’s departure and competition. The two amounts were not reasonably related because there was no proof that Greater Colorado incurred any damages.

The Crocker decision should cause practice groups and hospitals to re-evaluate shareholder and employment agreements with physicians which contain provisions calling for damages if the physician leaves and competes with the group or hospital. Any effort to re-draft physician agreements will need to balance two conflicting goals. On the one hand, any practice group will want to set the liquidated damages as large as possible. Not only does the practice group want to recover more, rather than less, money upon breach, but also the group will want the damages to be large enough to discourage individual doctors from leaving. On the other hand, the larger the damages set forth in the agreement, the less likely it will be that the practice will be able to show that there is a reasonable relationship between any damages actually  incurred and the damages set forth in the agreement. To set the amount of any damages in any physician agreement, practice groups and hospitals also will need to consider how they would prove any damages that they might incur as a result of an individual physician’s departure from the practice. In a decision in 1997, the Court of Appeals noted that any damages awarded against a physician must not be based on speculation or conjecture.

Crocker may be appealed, and the Colorado Supreme Court may yet have the final word on the issues presented.

Leveling the playing field; tortious interference claims against a former employer

By Dan Warden on Posted in Tortious Interference, Uncategorized

A recent decision in Denver District Court, Business Network Consulting v. Perkins, demonstrates the risks taken by aggressive employers when they seek to impose restrictions on a former employee that aren’t set forth in any written agreement.

BNC, a computer consulting company, sprung into action when it learned that one of its customers had offered a job to its former employee, Perkins. BNC contacted its customer and threatened litigation even though the customer had never signed BNC’s form contract that barred customers from hiring BNC’s employees for a limited time after an employee left BNC. Reluctant to get involved in litigation, the customer conferred with Perkins about BNC’s threats and Perkins elected not to go to work for the customer. The customer then reached a settlement with BNC under which the customer disclosed its communications with the employee and agreed not to employ Perkins for several years.

BNC was not satisfied with the settlement, however. It filed suit against its former employee and alleged that he had breached his nondisclosure and nonsolicitation agreement by disclosing information to a competitor, performing work for a client, and failing to tell a prospective employer about his nondisclosure and nonsolictation obligations. Based on the language in the nondisclosure/nonsolicitation agreement, however, Judge Brody rejected BNC’s claims. Among other things, she found that the supposedly confidential information was not truly confidential. She also found that Perkins didn’t have a duty of disclosure because he had worked as an independent contractor rather than as an employee. Those findings are not surprising and appear to be amply supported by the facts.

What’s striking about the decision is that Perkins prevailed on his claim for tortious interference with prospective business advantage. Judge Brody found that BNC had caused Perkins to lose his new job with BNC’s customer by threatening unfounded litigation and by telling the new employer that the new job would be a breach of Perkins’ nondisclosure and nonsolicitation agreement as well as the client’s alleged agreement with BNC. These representations were false because BNC knew that it didn’t have a written agreement with the new employer that barred the new employer from hiring Perkins. BNC also knew that its agreement with Perkins did not bar Perkins from working for the new company. BNC knew that this representation was false because it had tried to get Perkins to sign a new noncompete agreement with more onerous restrictions but Perkins had declined to sign the new agreement. Under its agreement with Perkins, BNC at best had the right to recover liquidated damages to BNC if Perkins went to work for the new company. Tellingly, Judge Brody found that BNC’s conduct constituted a restraint of trade – that is, “Perkins’ ability to earn a living”. Perkins had the right to work for the new company and the new company had the right to hire him.

Perkins victory was not just symbolic. The Court awarded over $100,000 in economic damages to Perkins on the tortious interference claim, $10,000 for emotional distress and mental suffering and $30,000 in punitive damages. In awarding punitive damages, the Court found that the amount was a “figure that will deter BNC from ignoring its own agreements, engaging in bullying tactics without basis, and interfering with its employees’ right to earn a living.” Subsequently, the Court awarded over $90,000 in attorneys fees to Perkins.

There is a lot to learn from this case. Even though noncompetes are disfavored in Colorado, employers have the upper hand when it comes to noncompetes. Employers draft the agreements and employees sign the agreements without thought when they are first hired.When it comes time to enforce an agreement, employers typically have a lawyer and the money to pursue their claims. These advantages can make employers overconfident, however, and cause them to make unreasonable demands that seek relief not provided in any written agreement. When that happens, this case demonstrates that there are remedies available to the former employee.

This case is on appeal. Briefs have not yet been filed, and it will be months before the Court of Appeals enters its decision. Among other things, the Court of Appeals may need to decide when an employer’s prosecution of an unenforceable noncompete goes too far and becomes the basis for a claim for tortious interference with contract.

Computer crime in Colorado; the risk of criminal prosecution for deleting documents

By Dan Warden on Posted in Colorado Computer Crime statute

 

Red Button delete

Red Button delete

Once the decision is made to quit and join a competitor, employees sometimes will delete information on the company laptop issued to them.  Various explanations are offered by employees for the deletions. Employees will claim that the deletions were personal photos or information. Or, that the deletions were done only after hard copies of the documents were placed in the company files. Or, that there wasn’t any information on the computer when the computer was issued and that they were only returning the computer in the same condition as when they received it. Employers, on the other hand, immediately become concerned that the employee deleted information in an effort to gain a competitive advantage. Or, that the information was deleted by the employee in an effort to punish the employer. If the employer concludes that valuable information was deleted, it may retain a computer forensic expert to recreate the information. On a more subtle level, employers often try use the deletions to diminish sympathy for the employee and show that the employee was a “bad” person. We’ve been involved in several civil cases where these kind of allegations have been made, and the allegations have played a major role in how the cases were resolved.

A recent Colorado Supreme Court case, People v. Stotz, demonstrates how an employee can be exposed to criminal  liability if he elects to delete information from his employer’s computer system. In Stotz, the defendants were all former employees of an electrical testing company who had resigned and accepted jobs with a competitor. Once the employees left, the electrical testing company discovered that information was missing from laptops used by the former employees. A computer forensics expert was retained and determined that thousands of documents had been copied and then deleted from the laptops.

When the electrical testing company filed a civil suit against the former employees, it had limited success. After the preliminary injunction hearing, the district court concluded that the employees’ noncompete agreements probably were unenforceable. Among other things, the court found that the former employees had not been managers or executives under the noncompete statute. The district court granted a preliminary injunction but it only barred the former employees from using information related to bids that they had been working on and from submitting bids for their new employer on projects they worked on for the electrical testing company. Once the employees received the Order on the preliminary injunction hearing, they must have felt relief. They must have thought that they had won and that there was little chance that they would be exposed to substantial liability to their former employer.

The electrical testing company was not, however, ready to let the case drop. It submitted a formal complaint to the Denver DA’s office and the former employees were charged with several crimes. A jury eventually convicted the former employees of felony computer crime and awarded $104,920 to the company in restitution. The employees were convicted of the section of the Colorado Computer Crime statute that states:

A person commits computer crime if the person knowingly: …(e) Without authorization or in excess of authorized access alters, damages, interrupts or causes the interruption or impairment of the proper functioning of, or causes any damage to, any computer, computer network, computer system, computer software, program, application, documentation, or data contained in such computer, computer network, or computer system or any part thereof.

After the conviction, the employees appealed and contested the constitutionality of the Colorado Computer Crime statute. They had reason to be optimistic about their appeal. In two other states, courts have found state computer crime statutes were unconstitutional. Nonetheless, the Colorado Supreme Court ruled that the computer statute was constitutional as it applied to employees who had deleted thousands of documents from their computer issued laptops, knowing that they acted without authorization or in excess of their authorization in doing so.

For employees thinking of leaving a company, the lesson is pretty clear. Don’t delete documents from your laptop right before you quit. Don’t delete documents even if you have an innocent explanation for why the documents should be deleted. In Stotz, for example, the employees had testified, among other things, that they had primarily deleted information on their computers from prior employment that they had loaded on the computer. And that they thought that, after their resignations, the IT Department would erase any files before issuing the laptop to another employee. Moreover, the employees testified that they had never received, nor believed they had needed to receive, prior authorization before downloading or deleting documents. They thought that they had full autonomy in adding  or deleting material from their laptops.

Despite this testimony, the Supreme Court found that the prosecution succeeded in showing that the employees knew that they were not authorized to engage in the wholesale deletions committed. The Colorado Supreme Court was unsympathetic to the employees’ arguments that the amount of restitution should be reduced. It found that the amount of restitution was amply supported by evidence that showed how much the electrical testing employees spent as a result of the deletion of the files.

Even if an employee doesn’t risk criminal charges, he should think twice about deleting information from a company computer shortly before quitting. Any deletions may prompt the employer to become more suspicious and provoke a forensic examination of the employee’s computer.

Employers take note; courts will favor employees when they interpret noncompetes

By Dan Warden on Posted in contract interpretation

Photo Dictionary and glassesNoncompetes are contracts, and any analysis of a noncompete starts with the language in the noncompete. Once a dispute arises, companies often learn that the language in their noncompete agreements fails to impose the obligations that they had intended. If a company then tries to enforce the agreement that it intended, rather than the agreement that was drafted and signed, courts are unsympathetic.

A recent federal court case in Colorado decided by Magistrate Wang, Continental Credit Corporation v. Garcia, demonstrates the risks to a company when it fails to use exact language to define the obligation owed by an employee under a noncompete.

Continental Credit, National Credit Care and Home Loans Assist Corporation were related companies that shared the same owners, officers, management and employees. All three companies were located in the same office on West 121st  Avenue in Westminster, Colorado and provided credit repair services. The three companies operated separately to take advantage of different marketing and pricing opportunities. Any new employee was required to sign a noncompete agreement with National Credit Care. After the employee was hired, he or she was assigned to one of the three companies. Sometimes, employees were transferred from one company to another depending on the work available for the companies.

Mr. Garcia signed a noncompete agreement when he was hired in October 2014 and that agreement, like the other employee agreements, was with National Credit Care. As soon as Mr. Garcia was hired however, he began working for Continental Credit. Mr. Garcia continued to work for Continental Credit until he quit and joined a competitive company.

Continental Credit filed a lawsuit against Mr. Garcia and sought to enforce the noncompete that Mr. Garcia had signed with Continental Credit’s affiliated company, National Credit. Garcia argued, however, that he had never entered into a noncompete with Continental Credit and that the one year clock on his noncompete with National Credit Care had expired because his employment with National Credit had terminated on his first day of employment when he was directed to work for Continental Credit.

Continental Credit argued that Mr. Garcia’s literal construction of his noncompete should be rejected because it would lead to the “absurd result” that Mr. Garcia’s employment was terminated on his first day of employment when he was directed to work for an affiliated company. In effect, Continental Credit argued that Mr. Garcia’s noncompete really didn’t mean what it said. That is, that the contract should be construed to state that Mr. Garcia was barred from competing with not only National Credit, but also Continental Credit.

Magistrate Wang rejected these arguments and granted Mr. Garcia’s motion to dismiss. She reasoned that it is “axiomatic” that unambiguous contracts must be enforced according to the plain and ordinary meaning of their terms. More tellingly, Magistrate Wang said this axiom was “particularly true” when enforcing covenants not to compete. Accordingly, Magistrate Wang declined to consider the extraneous evidence submitted by Continental Credit, including an affidavit submitted to show that the parties’ intended that Mr. Garcia would be bound by a noncompete owed not only to National Credit but also to its affiliated companies.

Even though Magistrate Wang does state why the axiom is “particularly true” under the circumstances, it’s apparent that she was suggesting that National Credit and Continental Credit were stuck with the language that they had elected to use in the noncompete agreement. Because noncompetes are disfavored in Colorado, there was no reason for Magistrate Wang to find an ambiguity in the agreement and alter the agreement in a manner that would allow for its enforcement.

New Mexico adopts new noncompete law for health care practitioners

By Dan Warden on 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

By Dan Warden on 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

By Dan Warden on 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, https://tradesecretslaw.wordpress.com/, 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

By Dan Warden on 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

By Dan Warden on 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” (http://www.nytimes.com/2014/06/09/business/noncompete-clauses-increasingly-pop-up-in-array-of-jobs.html?_r=0). 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: http://www.nytimes.com/roomfordebate/2014/06/10/should-companies-be-allowed-to-make-workers-sign-noncompete-agreements.  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 (http://www.nytimes.com/2014/06/11/opinion/clauses-that-hurt-workers.html?partner=rssnyt&emc=rss&_r=0).

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: http://www.bostonglobe.com/business/2014/04/19/time-get-rid-noncompete-agreements/VcIjVuaAcOopLZOvwqSMtK/story.html

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

By Dan Warden on 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.