Non-compete agreements are usually entered into by higher level executives or required as a condition of partnership or the sale of a business. The purpose is to keep a former employee or business owner from hurting the business they just left. Generally, a member of an LLC, or shareholder of a closely held corporation, will be prohibited from competing with their current company even absent a non-compete because of the requirement of loyalty and a fiduciary duty to the company.
While there has been a national trend to make non-compete agreements apply to lower level employees, Colorado only allows a non-compete to apply in certain circumstances. C.R.S.§8-2-113 makes non-compete agreements illegal in Colorado unless the non-compete:
- Is in connection with the sale of a business;
- Is included in a contract for protection of trade secrets;
- Requires the employee to reimburse the employer for education and training when the employee worked for less than 2-years;
- Applies to executive and management personnel.
Even if a non-compete is valid, it still must be reasonable in duration and geographic scope. For instance, a worldwide perpetual non-complete agreement will almost always be unreasonable. A local non-compete for 2-years will probably satisfy the test of reasonableness. The test is if the non-compete is justified by a legitimate business interest.
Sometimes a salesperson may be bound to a non-solicitation agreement by their former employer. While the salesperson may not be among the category of persons covered under the non-compete statute, the customer lists of the employer may be a trade secret and therefore enforceable against the former employee.
Damages for Violation of Non-Compete Agreements
The damages for violation of a non-compete agreement can include an injunction prohibiting continued violation of the agreement. In addition, disgorgement of profits and potentially liquidated damages and attorney’s fees are recoverable depending on the agreement.