Trends in the Enforcement of Non-Competition Agreements
By: Craig Watrous
As we’ve discussed in past blog posts, the enforcement of covenants not to compete in Colorado (also called non-competition agreements or “noncompetes”) is an evolving area of law (http://www.mallon-lonnquist.com/blog/colorado-non-competition-agreements/). A covenant not to compete is an agreement that prohibits an entity or a person from competing with another person or entity for a set period of time within a certain geographical area. Noncompetes are common for business’ employment agreements and in transactions involving the sale of businesses. Enforcement of noncompetes is based on a number of factors including reasonableness, duration, geographical limitations, scope and state law.
The Wall Street Journal recently wrote an article discussing a national increase in the number of lawsuits related to non-competition agreements and the effect such litigation is having on state economies and job creation. (“When a New Job Leads to a Lawsuit”, Wall Street Journal, August 15, 2013). According to the Wall Street Journal, in the past decade there has been a 60% increase in the number of published court opinions related to noncompetion litigation. However, it is likely that this percentage is low. As the Journal points out, “Since most cases are settled out of court and most opinions aren’t reported, that tally is likely low.” These statistics would not capture the portion of claims that are settled before litigation is commenced.
For Colorado businesses, having a well-drafted and enforceable noncompete agreement is an important method of limiting the damages from the loss of a key employee to a competing business. From an employee’s perspective, a noncompete can become a significant barrier to leaving a job, starting a business or advancing a career. Often a business’ threat of litigation is enough to dissuade an ex-employee from violating their non-competition agreement. New employers are also cautious of hiring individuals who are subject to non-competition restrictions.
As an evolving body of law, state noncompete laws, including Colorado’s noncompete statute, have tried to balance the enforcement of covenants not to compete with the rights of businesses and interests of individuals. Colorado businesses have the right to protect their confidential information, customer relationships and trade secrets. Individuals have the right to seek employment, start new businesses, and compete in an open economy. As the article points out, critics of noncompetes argue that they there is little evidence noncompetes provide any social or economic advantages. They argue that noncompetes stifle innovation, result in fewer startups, fewer patents, and have the unintended consequence of hindering entrepreneurship. In response to these concerns, some states have banned non-competition agreements outright.
In July 2012, New Hampshire passed a new law that voids noncompetes that are not provided to employees before or when a job offer is made, or when a current employee’s position changes. New Jersey and Minnesota have also recently enacted laws limiting the scope of enforceable noncompetes. Under the California law, most noncompetes are considered void. However, as the article points out, “Even in states that don’t enforce noncompete agreements, employees can face lawsuits alleging that they have misappropriated trade secrets.” Id.
In Colorado covenants not to compete are void, except in limited circumstances. Under these limited circumstances, noncompetes in Colorado are enforceable. These circumstances need to be reviewed on a case by case basis and depend on a number of factors including the type of transaction/contract and/or the type of employee who is subject to the covenant not to compete. When drafting, entering into or enforcing noncompetes, there are a number of critical factors that must be considered. What is clear from the article is that regardless of the societal utility of noncompetes their use is on the rise and the increase in litigation is likely to continue. Stay tuned.
For the full Wall Street Journal Article please see the link below:
(Mallon & Lonnquist, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business attorney with Mallon & Lonnquist, based in Denver, Colorado. Craig regularly represents clients on both sides of covenants not to compete. Craig can be reached at email@example.com.)