Colorado Increases Criminal Penalty for Violations of Noncompete Law

Colorado is one of the states where non-competes are difficult, but not impossible, to enforce.  However, a new Colorado law, effective March 1, 2022, will make violations of the state’s non-competition statute a Class 2 misdemeanor punishable by 120 days in jail, a fine up to $750, or both.

On its own, Colorado’s laws governing non-compete agreements between employers and employees can be complex—particularly those involving physicians. As currently drafted, C.R.S. Section 8-2-113 makes clear, any agreement that prevents a person “from engaging in any lawful occupation at any place he sees fit” is prohibited in Colorado. However, the law provides four exceptions to this prohibition:

1. Any contract for the purchase and sale of a business or the assets of a business;
2. Any contract for the protection of trade secrets;
3. Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; or
4. Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.

If a non-competition agreement does not meet one of those four exceptions, but still contains a covenant that violates Section 8-2-113, then it will void under state law.  Further, covenants not to compete that satisfy one or more of the statutory exceptions must also be reasonable in time, geographic scope, and scope of activities covered. Colorado courts have held that non-solicitation of customers’ provisions are also subject to C.R.S. § 8-2-113, but non-solicitation of employees’ provisions are not subject to the statute.

The statute also prohibits covenants not to compete in employment, partnership or corporate agreements that restrict the right of a physician to practice medicine, subject to certain exceptions.

Now, the new law, SB 21-271, adds a new section to C.R.S. § 8-2-113 that provides a violation of Colorado’s non-competition statute constitutes a Class 2 misdemeanor. SB 21-271 also adjusts the penalty for Class 2 misdemeanors to 120 days in jail, a fine up to $750, or both. SB 21-271 and its provisions take effect on March 1, 2022.

At this point, it is unclear how the new misdemeanor provision of Colorado’s noncompetition statute will be applied. For example, it remains uncertain whether an employer that has a good faith basis to require an existing employee to sign a covenant not to compete, send a cease-and-desist letter to a former employee, and/or file a lawsuit against a former employee will be deemed to have violated C.R.S. § 8-2-113 if the covenant not to compete is later adjudicated to be unenforceable. In light of this uncertainty, companies with Colorado-based employees or independent contractors should engage counsel to reevaluate their current and prospective non-competition agreements and exit procedures in accordance with the new law.