Non-Competes and Trade Secrets: Colorado’s (Potential) New Law

This month, the Colorado Legislature passed HB 22-1317.¹ If signed by the governor, the law will go into effect in August of 2022. The law severely limits “restrictive covenants.” A restrictive covenant is a contract: it’s an agreement by an employee not to compete against an employer for a specified period of time after separation. Colorado already had a law regarding these covenants, but HB 22-1317 is much more restrictive. It applies to both current employees and prospective employees, and would make most non-compete agreements void, unless the agreement is with a “highly compensated” employee and no broader than “reasonably necessary” to protect the employer’s legitimate interest in protecting trade secrets. Thankfully, the law does explain who counts as “highly compensated”—any worker who makes “the threshold amount for highly compensated employees as determined by the Division of Labor Standards and Statistics in the Department of Labor and Employment.” In 2022, that means employees making at least $107,432 annually.  In addition, the law affects employees who, at the time of termination of employment, primarily reside or worked in Colorado, meaning choice-of-law provision in an existing employment contract cannot be for another state.

As an example of how this works, let’s look at the case of Coffee Co. (“CC”). CC is a small business that just opened its first and only shop last year in Colorado Springs, Colorado. CC has invented a new method of coffee brewing that makes their coffee stronger and tastier than any other brew available in the area. However, the method is difficult to reproduce and so training their employees takes a big investment of time and money. CC is therefore very careful about its hiring process. After consulting with an employment attorney, CC drafts a boilerplate employment contract for its baristas that includes a section entitled “Covenant Not to Compete.” The section states that the employee agrees not to work as a barista in the Colorado Springs area for up to one year after terminating employment with CC. The provision states that this is to protect CC’s trade secrets and specifically their brewing method. Baristas are to be paid the minimum wage for tipped employees with typical opportunities for promotions and raises built in. Johnny, a long-time resident of Colorado Springs, signs that contract, learns the brewing method, and works for CC for several months. Recently, Johnny has grown tired of working for CC. As he’s walking down the road one day, he finds another coffee shop that’s just opened its doors about a mile from where CC’s original shop is located. As luck would have it, they’re hiring. If Johnny applies for this other shop and starts training their employees on CC’s brewing method, is there anything CC can do based on its non-compete provision?

The answer is, probably not. Employers who attempt to enforce a non-compete agreement against a Colorado worker who is not considered “highly compensated” may face a severe criminal penalty. Under the new law, employers are prohibited from entering into, presenting, or attempting to enforce any restrictive covenant that is void. Violators may be liable for actual damages and a $5,000 penalty per employee or prospective employee harmed by the conduct. Either the state attorney general or a harmed employee may pursue injunctive relief and the penalties allowed under the law. Thus, if CC attempted to enforce the agreement not to compete, CC may be liable for the penalties available under HB 22-1317. This is not to say that CC would not be able to pursue other remedies if Johnny taught their secret brewing method to other businesses; this law would only foreclose it from enforcing the non-compete agreement which otherwise may have been used to maintain that secret.

If your organization uses non-compete agreements or has used them in the past, it may want to have an employment attorney review those agreements for compliance with this new law, if it should pass. In addition, it will want to evaluate other ways to protect trade secrets.

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¹ Found here.

Featured Image by Rebecca Sidebotham.