Enforcing non-competes against former employees in Colorado.

The recent court battle between Microsoft and Google over Google's hiring of a former Microsoft executive has brought the issue of employee non-compete agreements to the forefront. Microsoft's suit alleges that if its non-compete agreement with the executive is not enforced, its top technology

These days, software giants aren't the only ones trying to keep their trade secrets secret. Businesses in many different industries are more frequently using employee non-compete, non-disclosure, and non-solicitation agreements to protect their proprietary inventions, business plans, and customer lists. Colorado law, however, places some restrictions on the enforceability of these agreements. Employers need to comply with the law if they hope to prevent a departing employee from carrying off their "crown jewels" to competitors.

COLORADO'S NON-COMPETE RESTRICTIONS

A Colorado statute invalidates non-compete agreements except in these limited circumstances: (1) contracts for the purchase and sale of a business or the assets of a business; (2) agreements with executives, management personnel, and their professional staff; (3) contracts for the protection of trade secrets; or (4) contracts for recovery of expenses for educating and training an employee who has been employed for less than two years.

The Colorado statute applies not only to non-compete agreements, but also to agreements not to solicit customers or employees and agreements not to disclose trade secrets and other confidential information. Generally, most companies attempt to enforce their non-compete agreements under either the exception for executives or managers or the exception to protect trade secrets.

THE EXECUTIVE OR MANAGEMENT EXCEPTION

To qualify as an executive or manager under the non-competition statute, the employee must generally be in charge of the business and act in an unsupervised manner. If an employee has never supervised any other employees and has himself been supervised by other levels of management, a Colorado court will likely find that the agreement does not fit the exception.

Giving a non-management employee a managerial "sounding" title does not necessarily place the employee within the exception. A court will scrutinize the actual duties performed by the employee and may find that a job title is meaningless. For example, a sales professional who holds the job title of "account executive" or "account manager" may actually be supervised by higher levels of management and have no supervisory duties. In such a situation, a Colorado court is likely to find that the executive or management exception does not apply.

Also, an employee must be a true employee for the executive exception to apply. Non-compete agreements with independent contractors are generally unenforceable under this exception.

THE TRADE-SECRETS EXCEPTION

Because the executive exception only prevents a narrow class of high-ranking employees from competing, many employers require non-management employees and independent contractors to enter into agreements to protect trade secrets. These agreements might prohibit the disclosure of confidential business information or might prohibit the solicitation of customers or prospective customers for a specified period of time.

For these agreements to be enforceable, the information that the company wants to protect must be a bona fide trade secret. Colorado defines a trade secret as any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. In deciding whether something is a trade secret, courts consider: (1) whether the information is known outside the business; (2) whether the information is known to those inside the business; (3) the efforts by the company to keep the information secret; (4) the value to the company in keeping the information from competitors; (5) the cost to obtain and develop the information; and (6) the amount of time and expense it would take others to acquire and duplicate the information.

Often, the most precious trade secret a company has is its customer lists. A customer list cannot be a trade secret, however, if a company has failed to guard against its disclosure to others. A company should take care to advise employees about keeping their customer lists and other trade secrets confidential, limit access to employees on a need-to-know basis, and control access to the information by those both inside and outside the company. If the information is generally accessible to the public, such as by reading through the business section of a phone book or by asking prospective customers where they purchase certain products, the list is not a trade secret.

DURATION AND GEOGRAPHIC RESTRICTIONS

Even if a company's non-compete agreement falls within a statutory exception, it will not be enforceable if the agreement is unreasonable in terms of its duration or geographic scope. What is "reasonable" often depends upon the type of trade secret involved and the company's industry. Courts will likely invalidate any agreement that restricts a former employee from working for another competitor anywhere in the world if the company does business only in the United States or just Colorado. A well-drafted agreement should restrict an employee from working for a competitor only in the region where the company competes for business.

Courts will also invalidate non-compete agreements if they restrict an employee for too long of a period of time. In a variety of different cases, courts have enforced agreements that prevent employees from working for competitors, ranging from one to five years depending on the employment position at issue.

If a non-compete agreement doesn't contain a duration period or the period is unreasonably long, or if the geographic restriction is too broad, a court has the discretion to reform the agreement so that it is reasonable. But a court is not required to rewrite agreements by supplying new terms and instead may simply invalidate the entire agreement altogether.

CONSIDERATION REQUIREMENT

A non-compete agreement can be invalidated if it lacks consideration, that is, if the employee did not receive a benefit in return for signing the agreement. As a general rule, offering an applicant a job is adequate consideration to support a non-compete or other restrictive covenant. Offering an existing employee a promotion, salary raise, grant of stock options, or other pecuniary benefit also suffices.

But what about giving an existing employee the benefit of remaining employed? Is "continued employment" sufficient consideration? Colorado appellate courts have not yet addressed this issue, but a prudent employer should offer some type of financial inducement (a raise, bonus, stock options, etc.) if it wishes to bind an existing employee under a new non-compete agreement.

POTENTIAL LIABILITY

A former employee who breaches a valid non-compete agreement with a former employer can face liability for breach of contract and possibly an injunction restraining further competition. But what about the employee's new employer? Does it too face liability? It depends.

It's common for a past employer to accuse the new employer of illegally interfering with an existing contract, i.e., the non-compete agreement or other restrictive covenant between the employee and the past employer. This claim can be defeated if the new employer can prove it never knew about the employee's agreement with her previous employer. Such an argument can lack credibility, however, depending on the company's line of business. In industries involving technology development and sales, the use of non-compete, non-disclosure, and non-solicitation agreements are standard practice.

A company should obviously forego hiring a prospective employee if his hiring would constitute a breach of an enforceable non-compete agreement. If the only agreement at issue is a customer non-solicitation or non-disclosure clause, the new company may hire the applicant but should advise the employee, preferably with a written memo, to comply with the terms of his agreement. If the old employer sues, the new employer can offer the memo as evidence that it did not interfere with any enforceable contract.

SAFEGUARD YOUR SECRETS

While non-competes and other restrictive covenants are enforceable in only limited and narrow circumstances in Colorado, properly drafted agreements can go a long way in safeguarding a company's good will and competitive edge in the marketplace. The key is making sure that Colorado's non-competition statute is satisfied and that the geographic scope and time requirements stated in the agreement are reasonable for the employment position at hand.

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BAKER & HOSTETLER LLP

STEVE MOORE

Steven W. Moore is Of Counsel to Baker & Hostetler LLP's Denver office, where his practice is devoted exclusively to the representation of companies, both domestic and international, in a wide range of labor and employment disputes, including non-compete, discrimination, wrongful discharge, breach of contract, and wage and hour cases. Mr. Moore received his law degree in 1993 from the University of Denver and his B.A. in 1989 from Old Dominion University. E-mail: smoore@bakerlaw.com