Colorado Enacts Legislation Authorizing Potential Criminal Liability for Employers that Violate State Noncompetition Statute
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Key Takeaways
- A new Colorado law, effective March 1, 2022, will make violations of the state’s noncompetition statute a Class 2 misdemeanor punishable by 120 days in jail, a fine up to $750, or both.
- Colorado’s noncompetition statute, C.R.S. § 8-2-113, prohibits the use of “force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.
A new Colorado law, effective March 1, 2022, will make violations of the state's noncompetition statute a Class 2 misdemeanor punishable by 120 days in jail, a fine up to $750, or both.
Colorado's noncompetition statute, C.R.S. § 8-2-113, prohibits the use of "force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit." Covenants not to compete restricting the right of any person to receive compensation for performance of skilled or unskilled labor for any employer are void under the statute unless they satisfy any one or more of the following exceptions:
- Any contract for the purchase and sale of a business or the assets of a business;
- Any contract for the protection of trade secrets;
- 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
- Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
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 nonsolicitation of customers' provisions are also subject to C.R.S. § 8-2-113, but nonsolicitation 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.
The new law, SB 21-271, adds a new section to C.R.S. § 8-2-113 providing that a violation of Colorado's noncompetition 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 noncompetition agreements and exit procedures.
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