Colorado Continues Its Crackdown on Restrictive Covenants

We wrote in January about a small change in Colorado law that could have large effects because it criminalized the enforcement of noncompete agreements that violate its general noncompete statute, C.R.S. § 8-2-113. Well, the Colorado General Assembly is at it again. Passed by the Colorado Senate on May 3, 2022, and now awaiting Governor Jared Polis’s signature, HB 22-1317 would further amend C.R.S. § 8-2-113 to substantially limit the enforceability of noncompetes and other restrictive covenants for any workers other than those who are “highly compensated,” as well as imposing new, stringent notice requirements and penalties for noncompliance. This has been a trend nationwide over the past several years with respect to noncompetes, but not other post-employment restrictive covenants. If signed (which Governor Jared Polis is expected to do), the law would go into effect this August, so employers must be ready. Here are the details:

• Post-employment restrictive covenants are presumptively void unless certain conditions are satisfied. Any noncompete or non-solicitation provision executed by a Colorado worker is presumptively void unless the agreement is (a) with a “highly compensated” worker; (b) is for the protection of trade secrets; and (c) is no broader than is reasonably necessary to protect the employer’s legitimate interest in protecting its trade secrets. This is a departure from the previous exception under Colorado law for “executive and management personnel” and their “professional staff”—which was vague and subject to much debate and litigation. Under HB 22‑1317, a “highly compensated” worker for purposes of a noncompete is someone earning at least $101,250 per year (which will be adjusted annually by the Division of Labor Standards and Statistics in the Colorado Department of Labor and Employment). For a customer non-solicitation provision, the worker must earn at least 60% of the “highly compensated” amount when the agreement is signed (so, in 2022, that would be 60% of $101,250, or $60,750), and must also be no broader than reasonably necessary to protect the employer’s legitimate interest in protecting trade secrets. There is no reference to employee non-solicits in HB 22-1317, and restrictive covenants entered in connection with the sale of a business are not subject to the new requirements.
• Confidentiality agreements remain valid, but are limited. The bill permits reasonable confidentiality provisions so long as they do not prohibit the disclosure of (a) information arising from the worker’s general training, knowledge, skill, or experience; (b) information that is readily ascertainable by the public; or (c) information that the worker otherwise has a legal right to disclose.
• Physician noncompetes remain prohibited, but with a new caveat. In its current form, C.R.S. § 8-2-113 deems void “[a]ny covenant not to compete provision of an employment, partnership, or corporate agreement between physicians that restricts the right of a physician to practice medicine,” although provisions requiring the payment of damages that are “reasonably related to the injury suffered by reason of termination of the agreement,” including damages “related to competition,” are enforceable. HB 22‑1317 now adds an exception to the damages rule that permits a physician to disclose his or her continuing practice of medicine and new professional contact information to any patient with a “rare disorder” without being subject to damages resulting from that disclosure or from the physician’s subsequent treatment of any such patient.
• Notice requirements. The bill also imposes new notice requirements. Specifically, for new or prospective workers, an employer must provide a copy of the restrictive covenants before he or she accepts an offer of employment; for existing workers, an employer must provide a copy at least 14 days before the effective date of the restrictions, or the effective date of any additional compensation or change in the terms or conditions of employment that provides consideration for the covenant. Moreover, the notice must be (a) contained in a separate written document; (b) written “in clear and conspicuous terms in the language in which the worker and employer communicate”; (c) signed by the worker (separate and apart from the signature required on the restrictive covenant agreement itself); (d) include the agreement containing the restrictive covenant; (e) identify the restrictive covenant agreement by name and state that it contains a covenant that could restrict the worker’s future employment options; and (f) direct the worker to the specific paragraphs of the agreement that contain the restrictive covenants. And workers may request an additional copy of the noncompete once each calendar year, which the employer is required to provide (but not more than once per calendar year).
• Penalties may be imposed for violations of the law. In the event an employer violates the law, it could be liable for actual damages, plus a $5,000 penalty per worker or prospective worker harmed thereby. However, there is a safe harbor provision for any employer that can show a good faith and reasonable basis for believing it was not in violation of the law, in which case a court may reduce or eliminate the penalty.
• Injunctive relief and attorneys’ fees are available to aggrieved workers. Either the state attorney general or a harmed worker or prospective worker may also pursue injunctive relief, and workers and prospective workers may also recover reasonable attorneys’ fees and costs, if they can demonstrate a violation of the law.
• Out-of-state choice-of-law and forum selection provisions are void. If a worker primarily resides or works in Colorado at the time their employment ends, the employer may not require the worker to adjudicate the enforceability of the covenant outside of Colorado. Moreover, notwithstanding any choice-of-law provision to the contrary, Colorado law will govern the enforceability of any noncompete for any worker who primarily resides or works in Colorado. While Colorado courts will no doubt enforce these requirements, it is unclear whether other states will cede their sovereignty to the Colorado General Assembly.

That is one situation where the penalties and injunctive relief provisions of the bill could come into play (in addition to other situations in which the law is violated). These provisions presumably would apply to the prohibition on out-of-state choice-of-law and forum selection requirements, meaning that, unlike some other states that have similar requirements but no enforcement mechanism (e.g., Massachusetts), if threatened with legal action (or if a legal action is filed outside of Colorado) Colorado workers could potentially file a declaratory judgment action in Colorado and ask the Court to declare the choice-of-law and forum selection provisions invalid, fine the employer, enjoin the employer from proceeding out of state, and award the worker his or her attorneys’ fees. This is akin to California’s Labor Code § 925.

Moreover, employers should note that the earlier amendment to C.R.S. § 8-2-113 that criminalized violations thereof would apply to these new amendments—including the choice-of-law and forum selection requirements—meaning that employers could be subject to criminal penalties for not complying with them.

We will continue to track the progress of this bill and others that are currently working their way through state legislatures and will report back with any important updates.