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April 2022

Colorado Employers Now Face Criminal Penalties for Illegal Non-Competes

Colorado recently raised the stakes for employers by creating criminal liability for violations of Colorado’s restrictive covenant or “non-compete” laws.  Historically, overly broad non-compete agreements were commonly rejected by Colorado courts, however, as of March 1, 2022, violations of Colorado’s restrictive covenant statute C.R.S. §8-2-113 will be considered a class 2 misdemeanor, which carries a maximum sentence of 120 days in jail, $750 in fines, or both.  These penalties were added as a part of last year’s Senate Bill 21-271, a misdemeanor sentencing reform bill that reclassified the penalties for numerous low-level crimes.  Colorado is the first state to criminalize non-compete agreements, so limited guidance exists regarding how the statute will be applied.

In Colorado, non-compete agreements are illegal unless they are designed (1) to protect trade secrets, (2) to recover the expense of training a new employee, who has been with the company for less than two years, (3) to target executive or management personnel and their professional staff or (4) are made in connection with the purchase or sale of business.  If a non-compete agreement does not meet one of these exceptions, but contains a covenant that violates Section 8-2-113 of the Colorado Revised Code, then it will be void under Colorado law.  Even if an employee falls into one of the exceptions, courts will still evaluate the agreement to make sure it is reasonable in aspects such as duration, scope of activities, and geographic scope.  Additional rules apply for covenants not to compete that restrict the right of a physician to practice medicine. Changes to these exceptions have been proposed in the current legislative session that would further limit the use of non-compete agreements in Colorado. See Colorado House Bill 22-1317.  Restrictive Employment Agreements | Colorado General Assembly

Employers should also not overlook C.R.S. §8-2-113(1), which provides that it is “unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.”  This broad language could apply to any manner or threat – including threatening termination if an employee refuses to sign a non-compete that is void or unenforceable.

While it remains uncertain how aggressively these new criminal penalties will be prosecuted and who precisely will fall within the definition of “a person who violates this section,” employers should revisit their existing non-compete covenants to make sure they comply with the allowable exceptions under the statute.  Further, employers should engage in careful evaluation of existing covenants to assure they are compliant with current law.   Attorneys in Gordon Rees Scully Mansukhani’s employment group are ready to assist employers with any questions or concerns regarding non-compete agreements.

Employment Law

Andrew K. Lavin
Anna M. Reinert

Employment Law