Can Non-Compete And Non-Solicitation Agreements Be Enforced?

Competition for employees in Colorado's tight labor market has caused many employers to rely on non-compete agreements and non-solicitation agreements to protect the investment in their employees and to protect the loss of proprietary information. Colorado law permits such agreements only in certain circumstances and care needs to be taken in the preparation of these agreements in order to maximize their enforceability.

In 1979, the Colorado legislature adopted C.R.S. 8-2-113(2), which provides that non-compete agreements are void. However, the statute provides for the following four exceptions to this general rule:

Contracts for the Purchase or Sale of a Business or the Assets of a Business. A buyer who purchases an ongoing business, including customers and good will, can protect those assets by insisting that the seller agree to a covenant not to compete.

Contracts for Protection of Trade Secrets. This exception permits the employer to enforce a non-compete agreement in circumstances where such an agreement is required to avoid the disclosure of trade secrets. The court will first examine the factual situation to determine whether a trade secret is involved, and then examine the specific terms of the non-competition clause to determine the reasonableness of the limitation, that is, whether the clause is really designed to prevent the disclosure of trade secrets.

Colorado courts have defined a trade secret as follows:

A trade secret may consist of any formula, pattern, devise or compilation of information of which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. (See Management Recruiters of Boulder, Inc., 762 P.2d 763, 765 (Colo. Appeals 1988).)

The factors relied upon by Colorado courts in determining whether a trade secret fits within the above definition are as follows: (1) the extent to which the information is known to those outside the business; (2) the extent to which it is known to those inside the business, i.e., by the employees; (3) the precautions taken by the holder of the trade secret to guard the secrecy of the information; (4) the savings effected and the value to the holder in having the information as against competitors; (5) the amount of effort or money expended in obtaining and developing the information; and (6) the amount of time and expense it would take others to acquire and duplicate the information.

An employer who desires to rely...