The Enforceable Elements of Non-Competition Agreements
By: Craig T. Watrous
Non-competition agreements, also known as covenants not to compete or simply “non-competes”, are becoming increasingly popular and important in today’s competitive, technical business environment. Employers rely on such agreements to prevent key employees, who may have acquired knowledge of confidential or sensitive business information during their employment, from leaving the company and setting up shop across the street or going to work for the competition.
Ultimately, a non-competition agreement is worth very little if it’s not enforceable. This blog post explores the general terms that should be considered in non-competition agreements and how they will be reviewed by the Colorado courts. Non-competes are interpreted under state law. Generally speaking, non-competition agreements are void in Colorado. Courts are sensitive to an employee’s need to earn a living and the effects non-competes can have on business expansion and state commerce. They are only allowed under certain narrow exceptions. These specific exceptions will be explored in future blog posts. Please contact us if you have questions.
Some of the key elements of well drafted non-competition agreements are the following:
1) Consideration; like all contracts, non-competes must be supported by adequate mutual consideration.
2) Access to Vital Information; what vital information of the business does/did the employee actually have access too? Examples: customer and client lists, intellectual property, business strategies, etc.
3) Enforceability; will the agreement still be enforceable if the employee is laid off? Leaves on good terms? Fired for cause?
4) Nature and Scope; what activities should actually be prohibited? These prohibitions should be carefully delineated. The protection the employer wants must be weighed against the burden of proving the reasonableness of such prohibitions.
5) Time Period; how long is really necessary and how long is actually reasonable?
6) Geographic limitations; how broad an area will still be considered reasonable? Courts uniformly hold that the geographic scope must be reasonable under the circumstances.
7) Remedies; what remedies does the company actually have against the employee for a breach of the non-compete?
8) Injunctive Relief; this is the right to restrain/prevent the employee from doing certain activities.
9) Costs, if the employee breaches; do you want them to be responsible for reimbursing you for the payment of your attorney fees?
10) Non-disclosure provision; this is a key provision that is often forgotten. Not only do you not want your employee going to work for the competition, you also don’t want he/she to disclose any of your company’s proprietary or confidential information to third parties. The more explicit this provision is drafted, the more likelihood your information will be protected.
In this day and age, it increasingly rare for key employees to remain with one company for their entire careers. Non-competes, especially in the technology sector are becoming a necessity for businesses to survive. Nearly every provision of a non-compete will be analyzed for its reasonableness. The agreement’s terms must be carefully considered and drafted. The more general the terms, the more difficult the burden will be on the employer to prove that such terms are actually reasonable. Each of these elements should be carefully considered on a case by case basis. Form agreements are a recipe for disaster. Care must be taken to make sure that the agreement will be enforceable. If the agreement is ultimately found not to be enforceable, the business may lose more than money, it may lose its ability to effectively compete in its market place.
(Mallon & Lonnquist, LLC, is a business, employment, real estate, and litigation law firm. Craig T. Watrous is a Colorado business attorney who regularly represents clients on both sides of covenants not to compete.)