Colorado Criminalizes Violations of Statute on Noncompete Agreements

In last year’s legislative session, the Colorado legislature enacted Senate Bill 21-271, a sweeping act reforming sentencing provisions related to misdemeanors and petty offenses. Tucked away in the text of this 304-page bill is a five-line provision adding language to the Noncompete Act, C.R.S. § 8-2-113(4) (the Noncompete Act) that would criminalize violations of this Act. This provision, though short, has potentially enormous consequences for Colorado employers.

The Noncompete Act makes it “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.” Under Colorado law, contract provisions concerning nonsolicitation of customers and employees are also considered to be noncompete agreements and are covered by this Act. In addition, the Noncompete Act applies to independent contractors. Effective March 1, 2022, violations of the amended Noncompete Act will constitute “a class 2 misdemeanor.” In Colorado, a class 2 misdemeanor is punishable by up to 120 days imprisonment and/or a fine of $750.

This raises the stakes for employers seeking to enforce noncompetition agreements that are subject to Colorado law. It also has important implications for employees who are parties to such agreements, as well as other companies trying to hire such employees.

What restrictions does Colorado law place on noncompetition agreements?

Even before the amendment, noncompete agreements in Colorado were unenforceable under the Noncompete Act, unless such agreements fit within one of a few limited statutory exceptions: (1) contracts for the purchase and sale of a business, (2) contracts for the protection of trade secrets; (3) contracts for the recovery of training expenses for employees who have worked for their employer for less than two years, and (4) contracts with executive and management personnel and officers, or the personnel or staff of executives and management personnel.

What are the implications of the recent amendment?

Beginning March 1, 2022, businesses seeking to enforce restrictive covenants in Colorado must face not only the possibility that their covenants will be unenforceable if they fail to satisfy one or more of the Noncompete Act’s exceptions, but also the possibility of a criminal penalty.

Criminalizing the Noncompete Act makes at least one typical business tactic problematic. It is a fairly common practice for employers to send cease-and-desist letters to their former employees reminding them of their post-employment noncompetition and nonsolicitation agreements, even when they know that the basis for enforcing these agreements lacks factual and/or legal support. This practice often has the effect of deterring departing employees from pursuing work that may violate restrictive covenants entered with a prior employer. Under the prior version of the Noncompete Act, businesses threatening to enforce a noncompete clause that was likely unenforceable under Colorado law faced no material consequences. It remains to be seen how Colorado courts will regard cease-and-desist letters sent with respect to restrictive covenants that are later deemed unenforceable.

Similarly, it is also unclear how (or if) criminal prosecutions would be pursued against a party that has violated the Noncompete Act. For example, it is not clear whether (or under what circumstances) local law enforcement and prosecutors would be inclined to pursue charges under this law.

In light of these uncertainties, employers should be cautious when attempting to enforce (or threatening to enforce) noncompetition provisions in Colorado. Employers whose employment agreements are subject to Colorado law and include noncompetition or nonsolicitation provisions should ensure that their agreements conform with the requirements of the Noncompete Act. For example, employers should identify the specific statutory exemption permitting enforcement of the restrictive covenants in their employee agreements and tailor the language of those restrictive covenants to fit squarely within one of the statutory exceptions to the Noncompete Act’s prohibitions. Employers should also consider whether their attempt to enforce a noncompetition provision could be construed as being unlawful, if the noncompetition provision is likely unenforceable under the Noncompete Act.

Additionally, legal counsel for a former employee who is subject to a noncompetition or nonsolicitation clause should be cautious when responding to a cease-and-desist letter. Under Colorado Rule of Professional Conduct 4.5(a), a lawyer cannot threaten criminal charges to obtain an advantage in a civil matter. Thus, counsel for a former employee should refrain from making any such threat when responding to cease-and-desist letters. A party may contact law enforcement, or a court may refer a potential violation of the Noncompete Act to law enforcement, but an attorney should not threaten criminal prosecution in responding to a cease-and-desist letter.

Please contact Armstrong Teasdale LLP’s experienced team of attorneys for additional information or assistance on this update, training, or other litigation avoidance best practices.