8-2-113. Unlawful to intimidate worker — agreement not to compete.

Cross references:For the "Uniform Trade Secrets Act", see article 74 of title 7.

ANNOTATION

Law reviews.For article, "Noncompetition Covenants in Colorado: A Statutory Solution?", see 52 Den. L.J. 499 (1975). For article discussing remedies available in an employee's breach of a confidential relationship with an employer regarding trade secrets, see 48 U. Colo. L. Rev. 189 (1977). For article, "Protecting Technical Information: The Role of the General Practitioner", see 12 Colo. Law. 1215 (1983). For article, "Drafting Noncompete Covenants: Statutory and Common Law Constraints", see 13 Colo. Law. 757 (1984). For article, "Drafting a Noncompetition Clause for the Colorado Contract", see 20 Colo. Law. 703 (1991). For article, "Covenants Not to Compete in the Sale of a Business: Protecting Goodwill", see 26 Colo. Law. 31 (Dec. 1997). For article, "Non-compete by Non-disclosure: The Doctrine of Inevitable Disclosure", see 28 Colo. Law. 73 (September 1999). For article, "The Law of Trade Secrecy and Covenants Not to Compete in Colorado — Part I", see 30 Colo. Law. 7 (April 2001). For article, "The Law of Trade Secrecy and Covenants Not to Compete in Colorado — Part II", see 30 Colo. Law. 5 (May 2001).This section is directed at what may be termed unlawful picketing.People v. Harris,104 Colo. 386,91 P.2d 989(1939).This section is intended to protect employees from noncompetitionclausesexcept in carefully defined circumstances. Colo. Accounting Machs., Inc. v. Mergenthaler,44 Colo. App. 155,609 P.2d 1125(1980); Nat'l Graphics Co. v. Dilley,681 P.2d 546(Colo.App. 1984).Covenants not to compete are contrary to the public policy of Coloradoand are void,except for some narrow exceptions such as a covenant in a contract for the purchase and sale of a business. DBA Enter., Inc. v. Findlay,923 P.2d 298(Colo.App. 1996).A covenant that fails to meet one of the exceptions defined in thissection is facially void rather than voidable.Management Recruiters of Boulder v. Miller,762 P.2d 763(Colo.App. 1988); Harvey Barnett, Inc. v. Shidler,143 F. Supp.2d 1247(D.Colo. 2001); Phoenix Capital, Inc. v. Dowell,176 P.3d 835(Colo.App. 2007).Even if a noncompetition agreement is not void under this section,to be enforceable, the clause must satisfy an established rule of reasonableness as to both duration and geographic scope. Nat'l Graphics Co. v. Dilley,681 P.2d 546(Colo.App. 1984); Electrical Distribs., Inc. v. SFR, Inc.,166 F.3d 1074(10th Cir. 1999).And this established rule of reasonableness is recognized in thelegislative history of this section.Nat'l Graphics Co. v. Dilley,681 P.2d 546(Colo.App. 1984).Broad language of license agreement that would perpetually limitlicensee swimming instructors' ability to train other instructors in the widely-known skill of teaching swimming to infants and young children worldwide is an unenforceable covenant not to compete. Harvey Barnett, Inc. v. Shidler,143 F. Supp.2d 1247(D.Colo. 2001).Noncompetition agreement that is worldwide and perpetual is undulybroad, both as to time and geographic scope, and is thus void.Nutting v. RAM Southwest, Inc.,106 F. Supp.2d 1121(D.Colo. 2000).Noncompetition covenant in contract between dentist and professionalcorporation was void as against public policy,where the contract provided for the dentist's use of the corporation's facilities but stated that the dentist was not an agent or employee of the corporation for any purpose. Smith v. Sellers,747 P.2d 15(Colo.App. 1987).Noncompetition covenant not validated by trade secret provision.A trade secret provision in an employment agreement does not validate an unrelated restrictive covenant whose sole purpose is to prohibit all competition. Colo. Accounting Machs., Inc. v. Mergenthaler,44 Colo. App. 155,609 P.2d 1125(1980); Dresser Industries, Inc. v. Sandvick,732 F.2d 783(10th Cir. 1984).Employer must establish that a restrictive covenantnot to compete is not void under this section before a preliminary injunction will be granted. Porter Industries, Inc. v. Higgins,680 P.2d 1339(Colo.App. 1984).Nothing in the statute itself limits its applicability only tocovenants not to compete designed to protect buyers,therefore, given appropriate circumstances, a covenant running in favor of a franchiser is an enforceable covenant under the statute. Keller Corp. v. Kelley,187 P.3d 1133(Colo.App. 2008).Injunctive relief is the most common and generally preferred relief forbreach of a covenant not to compete;however, the conditional language of a bill of sale and covenant not to compete referenced in the promissory note is the equivalent of a liquidated damage provision, which amounts to a penalty and is therefore not enforceable. DBA Enter., Inc. v. Findlay,923 P.2d 298(Colo.App. 1996).Covenant not to compete extinguished when business ceases to exist.If a covenant not to compete which was binding on the seller of the business were enforced by the buyer after the business had ceased to exist, the covenant would constitute a void and unenforceable restraint of trade. Gibson v. Eberle,762 P.2d 777(Colo.App. 1988).The reasonableness of covenants ancillary to the sale of a businessdepends on whether the restraint on competition provides fair protection tothe buyer's purchase of good will, while imposing restrictions no greaterthan necessary to protect the value of that good will.Reed Mill Lumber Co. v. Jensen,165 P.3d 733(Colo.App. 2006).A covenant not to compete ancillary to the sale of a business isunreasonable ifits restrictions are greater than necessary to protect legitimate business interests. Reed Mill Lumber Co. v. Jensen,165 P.3d 733(Colo.App. 2006).Evidence established "sale of business" under subsection (2)(a).Boulder Medical Center v. Moore,651 P.2d 464(Colo.App. 1982); King v. PA Consulting Group, Inc.,485 F.3d 577(10th Cir. 2007).Under "sale of business" exception, where plain language of covenantprohibited "working" for competitors,case was reversed and remanded to determine whether activities beyond merely loaning money or leasing property to a competitor materially breached the covenant. Nat'l Propane Corp. v. Miller,18 P.3d 782(Colo.App. 2000)."Sale of business" and "management personnel" exceptions applied tocovenant required as part of property disposition in dissolution ofmarriage.In re Fischer,834 P.2d 270(Colo.App. 1992).Test for determining whether a covenant fits within the "trade secrets"exception:(1) Is the restrictive covenant justified at all in light of the facts; and (2) are the specific terms reasonable? Management Recruiters of Boulder v. Miller,762 P.2d 763(Colo.App. 1988).For a covenant not to compete to fit within the trade secret exceptionof subsection (2),the purpose of the covenant must be the protection of trade secrets, and the covenant must be reasonably limited in scope to the protection of those trade secrets. Gold Messenger, Inc. v. McGuay,937 P.2d 907(Colo.App. 1997).Whether a particular group of employees qualifies under the exceptionof subsection (2)(d) is an issue of fact.Occusafe, Inc. v. EGG Rocky Flats, Inc.,54 F.3d 618(10th Cir. 1995).A person who conducts or supervises a business is "managementpersonnel".A person who supervises 50 employees in a division with a ten million dollar budget is "management personnel" and therefore falls under the management personnel exception, which is broader than covering merely a few key personnel. DISH Network Corp. v. Altomari,224 P.3d 362(Colo.App. 2009).Management exception to the statutory limit on noncompetition clausesdoes not applywhen an employee does not manage any other employees and there are three levels of management employees above the employee. Atmel Corp. v. Vitesse Semiconductor Corp.,30 P.3d 789(Colo.App. 2001).The "professional staff to executive and management personnel"exception is limitedto those persons who, while qualifying as "professionals" and reporting to managers and executives, primarily serve as key members of the manager's or executive's staff in the implementation of management and executive functions. Phoenix Capital, Inc. v. Dowell,176 P.3d 835(Colo.App. 2007).Invalidity of noncompetition agreement also renders invalid anagreement not to solicit customers of former employer.Agreement not to solicit customers is form of agreement not to compete that has effect of restricting former employee from working in same business for another employer. Phoenix Capital, Inc. v. Dowell,176 P.3d 835(Colo.App. 2007).Colorado has not recognized an employer's right to protect good willcreated by an employee's relationships with the employer's customers.Reed Mill Lumber Co. v. Jensen,165 P.3d 733(Colo.App. 2006).Whether industrial hygienists constitute "professional staff toexecutive and management personnel" is an issue of fact.Occusafe, Inc. v. EGG Rocky Flats Inc.,54 F.3d 618(10th Cir. 1995).Section applies to independent contractors as well as employees.Colo. Supply Co., Inc. v. Stewart,797 P.2d 1303(Colo.App. 1990).Noncompetition provision specifying the amount of damages and setting afee percentage as liquidated damages in a physician's employment contractviolated subsection (3).The contract requirement that the plaintiff pay defendant a percentage of his fees for two years provided for damages that were not "reasonably related to the injury suffered" by the defendant by reason of the termination of the contract with plaintiff. Also, the fee percentage set as liquidated damages in the noncompetition provision was disproportionate to any possible loss incurred by the defendant. Wojtowicz v. Greeley Anesthesia Servs.,961 P.2d 520(Colo.App. 1997).Appliedin Harrison v. Albright,40 Colo. App. 227,577 P.2d 302(1977).