What is a noncompete agreement?
A noncompete agreement formally restricts an employee, contractor, or company from engaging in certain competitive activities. For instance, the seller of a business can be restricted from competing with the buyer for a period of time. Or an employee with intimate knowledge of the business, such as a manager, can be restricted from divulging that knowledge to competitors.
How restrictive can a noncompete agreement be?
A noncompete agreement cannot be overly restrictive. Businesses are allowed to protect themselves from unfair competition, but not from all competition. Competition is a necessary and valued part of free trade in the United States. Additionally, people need to have the ability to remain active members of society through gainful employment, and noncompete agreements restrict a person’s ability to do this.
What about noncompete agreements in Colorado?
As a general rule, noncompete agreements are not allowed in Colorado, unless the agreement falls specifically under an exception:
- Sale of a Business
- Trade Secrets
- Management or Management Personnel
If an agreement does not fall under one of these exceptions, it is generally not enforceable in Colorado. However, once an employer shows that the agreement falls into one of those exceptions, it will likely be honored so long as it is reasonable and not overly restrictive.
What are the exceptions to noncompete agreements in Colorado?
Sale of a business
Using a noncompete agreement when buying a business can help protect the value of the purchased business. Thus Colorado lawmakers have explicitly allowed noncompete agreements related to the sale of businesses.
When buying a business, the buyer will likely have the intention of succeeding with that business. Additionally, when buying an established business, the buyer could hope to benefit from the goodwill and relationships related to that established business. This benefit is a part of the value of an established business. As such, the buyer does not want the value of that business undermined by the seller directly competing with the buyer. The seller has intimate knowledge of the business and has the ability to undermine the success of the buyer. This type of competitive advantage is extremely unfair to the buyer, who has not had a chance to establish and solidify relationships, and can be reasonably restricted.
Noncompete agreements are allowed in Colorado if the agreement protects against the distribution of trade secrets. However, not all information that an employer wants to keep secret constitutes a trade secret, even if the employer calls it a trade secret.
Rather, a secret must meet specified criteria in order to qualify under the trade secret exception. The criteria to qualify as a trade secret are:
- The company has taken measures to obtain or develop the information.
- The company has an interest in keeping the information from a competitor.
- The information relates to the business.
- The information has value to the business.
- The owner has taken measures to maintain the secrecy of the information.
If the information does not sufficiently meet these criteria, it is not a trade secret and the employer cannot enforce a noncompete agreement based on the information.
Management or management personnel
A business can also enter a noncompete agreement with a member of management or management personnel. These individuals often have intimate knowledge of a business and access to highly confidential information. If this knowledge and information is leaked to a competitor, it could give a serious advantage to that competitor.
For instance, a marketing manager has intimate knowledge about a company’s marketing plan that the company would not want a competitor to know — specific details of a campaign, specific information on the long-term marketing plan of a company, etc. If that marketing manager then goes to work for a competitor, they could take that knowledge and information with them and unfairly advantage the competitor. To protect against this unfair advantage, the company should ensure that the manager signs a noncompete agreement to prevent him or her from going to work for the competition.
If a noncompete agreement falls under an exception, is it then completely enforceable?
In Colorado, once a business shows that a noncompete agreement is allowed, the business must then show that the agreement is reasonable. Noncompete agreements must specify limitations restricting the extent of the agreement. If the limitations are unreasonable, the noncompete agreement runs the risk of not being enforced.
What makes a noncompete agreement reasonable?
When determining whether a noncompete agreement is reasonable, courts look at three criteria:
- Duration of the restriction
- Geographic scope of the restriction
- Whether overly restrictive
Duration of the restriction
Noncompete agreements cannot last indefinitely; they must have a specific duration. Additionally, that duration can only be as long as necessary to protect the business from unfair competition.
Colorado does not have a specific time frame that is considered reasonable. Courts in Colorado have enforced up to five years. However, for a lot of agreements, five years will be far too long. On the other hand, an agreement lasting longer than five years could be reasonable under certain circumstances.
Reasonableness of the duration is determined based on the facts surrounding a specific noncompete agreement. For instance, if a company makes financial plans two years in advance, it would likely be reasonable to restrict a financial manager from competing with the company for up to two years. After two years, the financial manager would not have any information that would present an unfair competitive advantage if taken to another company.
Geographic scope of the restriction
Noncompete agreements must also specify the geographic scope of where a person or company cannot compete. Similar to the duration restriction, there is no specific rule as to how much area the geographic limitation can encompass. Rather, the reasonableness of geographic scope depends on the specific circumstances surrounding the noncompete agreement.
A company that operates nationally could restrict an employee from competing anywhere in the nation. However, a restriction that prohibits an employee from working outside of where the company operates would likely be unreasonable. Additionally, if an employee only works in a specific area, it is unreasonable to restrict him or her from working in a different area. For instance, if a company only operates in Colorado and an employee decides to take a position at a similar company in Connecticut, a noncompete agreement restricting that employee from taking a position in Connecticut would likely be unreasonable.
Whether overly restrictive
Businesses cannot stop a person or company from participating in all competitive activities. Rather, businesses can only stop certain competitive activities. A business can only restrict a person, employee, contractor, or company from participating in activities that threaten to give an unfair competitive advantage to another company.
For example, a financial manager whose work centers on the finances of a company will have an intimate knowledge of that company’s finances and financial plans. That financial manager will probably not have intimate knowledge about the marketing operations or other plans of the company. A noncompete agreement could reasonably restrict the financial manager from working in the financial department of another company. However, a noncompete agreement could probably not reasonably restrict the financial manager from accepting a position in another company’s marketing department; the financial manager does not have intimate knowledge of that employer’s marketing plans or activities of the employer’s business that would create an unfair advantage if presented to the competing company.
Contact a Denver business lawyer
If you need help with your noncompete agreements or if you have any other legal issues related to your business, contact our experienced business lawyers at 303-688-0944. We are here to ensure you receive the representation and compensation you deserve.