Company Relocating? Watch Noncompetition Agreements

By: Scott Baker and Kate Repko
HAYNES AND BOONE

It is no secret that business is booming in Colorado. For two years running, Denver has topped Forbes’ list of “The Best Places for Business and Careers.” Companies of various types — conventional and renewable energy, outdoors and recreation, software and technology, and investment management and fi nancial services — are moving their headquarters or significant portions of their workforce to the Centennial State. A company moving to Colorado has many tasks on its checklist. Among them should be a review and revision, if necessary, of its covenants not to compete to ensure that they will be effective in Colorado.

Generally, a covenant not to compete — also known as a noncompete or noncompetition agreement — is an agreement through which an employee promises not to compete against the employer after termination of employment. These agreements can be critical to a business. For example, a company may use a noncompete to bolster its protection against misuse of its trade secrets by a former employee.

While valid noncompetes are enforceable in Colorado, the general rule in Colorado is that noncompetes are void unless they fall within one of four statutory exceptions. Those exceptions, very generally, apply to the purchase and sale of a business; the protection of trade secrets; the recovery of education or training expenses for an employee who was employed for less than two years; or agreements with executive, management, and related personnel. The Colorado rules regarding the enforceability of noncompetition clauses are complex. Three important aspects of Colorado law regarding noncompetes should inform a relocating company when considering whether its agreements need to be revised.

First, for a company to enforce a noncompete under the “executive personnel” exception, it is necessary for the former employee to have been an executive at the time that he or she signed the noncompete. A noncompete would not be enforceable against an executive if she were not in such a position when she signed the agreement even if she had been promoted as of the time the company seeks to enforce the agreement.

To read this story and other complete articles featured in the June 26, 2017 print edition of Law Week Colorado, copies are available for purchase online.