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.