By: Tim Brynteson – Published in the BizWest Thought Leaders column in February 2019
Whether you are an executive, top salesperson, professional employee, or business owner; it is likely you have been confronted with a covenant not to compete. These are common agreements which are used in the sale of a business and when hiring top executives, salespeople and professionals such as physicians. A lot of our clients are surprised to discover the truth about these agreements in Colorado. With some exceptions, covenants not to compete are NOT enforceable in Colorado unless they fit into one of four specified categories; and even then, they must be “reasonable in time and geographic scope.” Colorado statute favors the idea that all people should be free to work and any “restraint of trade” is presumptively invalid. However, there are four categories provided by statute in which such covenant will be enforceable in court. They will be enforced when the covenant applies to: 1) the sale of a business; 2) the protection of trade secrets; 3) recovery of expenses for training when the employee has been employed for less than two years; and 4) executive and management personnel. Covenants are also applicable to physicians when the agreement fits certain criteria.
Applying these covenants to the sale of business makes sense in that part of what most buyers of a business are purchasing is the ability to operate the business without having to compete with a former owner. This seems “fair” in that a former owner should not be allowed to compete with the new owner who just paid for the business. Agreements to protect trade secrets are enforceable, but only if the business is protecting “real” trade secrets and not just preventing competition in the name of protecting trade secrets. These kinds of agreements are frequently used and often litigated. Whether you are an employee or a business owner, get some advice before using or agreeing to a covenant not to compete.