Among the lesser-known changes to Colorado law for 2022 is Colorado Senate Bill 21-271. Effective Jan. 1, SB 21-271 amended numerous statutes, including an 11-word amendment to Colorado’s noncompete law to make violations of the law a criminal offense, specifically a class 2 misdemeanor.  

Class 2 misdemeanors in Colorado are punishable by three to 12 months in county jail and/or $250 to $1,000 in fines. Both corporations and individuals are subject to Colorado criminal law. Corporations found guilty of a misdemeanor are subject to fines.

It’s important for Colorado employers to understand noncompete agreements. By law, any agreement that restricts the right of a person to receive compensation from any employer for the performance of skilled or unskilled labor is a noncompete agreement.  Most noncompete agreements seek to do one of three things:

Prevent departing employees from competing with their former employers.

Prevent departing employees from soliciting their former employer’s clients, customers or employees.

Prevent departing employees from disclosing or using trade secrets to compete with former employers.

Regardless of the purpose, noncompete agreements that don’t comply with Colorado law are void and unenforceable from the start — as well as a potential violation of Colorado criminal law. Colorado imposes one of the strictest noncompete laws in the country. Under Colorado law, noncompete agreements are unenforceable unless one of four exceptions is met. Only the following noncompete agreements are lawful:

Any contract for the purchase and sale of a business or assets of a business.

Any contract for the protection of trade secrets.

Any contractual provision providing for recovery of the expense of educating and training an employee who’s served an employer for less than two years.

Contracts with executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.

Special rules also apply to noncompete agreements between physicians.  

Of course, noncompete agreements make sense when a business is sold. It would be untenable for a person to sell “John Doe’s Widgets” if the purchaser couldn’t prevent John from opening “John D’s Widgets and Stuff” across the street. And no business can tolerate an employee taking information that has value to the employer and is important for the business to keep secret from its competitors. Nor would it make sense for an employer to invest money in training a new employee only to have the employee immediately leave for a better opportunity at the company’s expense. 

Probably the least understood exception to the Colorado noncompete law is the exception for “executive and management personnel” and their “professional staff.”   

Not every supervisor or manager comprises an employer’s executive and management personnel. But executives and management personnel are two distinct groups under Colorado law, and this exception isn’t limited to those managers so highly placed as to be “key personnel at the heart of a business,” as Colorado law held until just over a decade ago. In Dish Network Corp. v. Altomari, the court held a “mid-level manager” who “had managerial responsibilities” could be management personnel.  But a low-level manager or supervisor who’s not a policymaker or plays a decision-making role in implementing policy is probably not “management” for purposes of the Colorado noncompete law.

“Professional staff” normally requires some professional or technical training. While a nurse might be professional staff to a medical practice, employees who engage in purely administrative functions wouldn’t qualify for this exception. 

The final call on who meets this exception is the trial court in an action alleging an employer violated the noncompete law. Every situation must be evaluated on the specific facts of that situation.

Courts are more deferential to agreements to protect trade secrets. But not every agreement that attempts to do so is legal.  The exception for agreements to protect trade secrets doesn’t apply to all information that’s proprietary. A trade secret is information that cost the organization time and money to develop and the organization strives to keep from public access. 

The most highly contested areas of trade secret law revolve around customer lists. A simple list of customers and phone numbers that could be culled from public sources isn’t a trade secret. But customer lists containing such information as non-public email addresses or phone numbers, customer preferences or proprietary customer information could be trade secrets. 

Any agreement that prohibits employees from disclosing trade secrets or using those trade secrets for a subsequent employer are usually legal. But an agreement that limits an employee from seeking other employment solely because the employee has access to trade secrets isn’t permissible. Again, this determination is highly fact-specific.   

Finally, some rules apply to all agreements not to compete.  The courts will only enforce agreements that are reasonable in scope and limited as to time and geography. An agreement with a company that does business only in Western Colorado but prohibits departing employees from seeking employment from similar industries anywhere in the United States probably isn’t enforceable. Nor is an agreement that prevents a departing manager from ever seeking employment with a competitor. While an agreement preventing departing employees from using or disclosing trade secrets is probably enforceable as long as the protected information remains a trade secret, Colorado courts normally limit other noncompete and nonsolicitation agreements to a year or two.  

But again, every agreement must be examined on its own facts and merits. 

I strongly recommend any employer planning to implement a noncompete agreement first consult legal counsel. Moreover, employers should carefully examine any noncompete agreement binding its prospective or new employees to avoid becoming a party to a legal action for inducing a breach of contract or interfering with a contract.