Only One Month Until Dramatic Changes in Colorado’s Restrictive Covenants Law

As we previously reported, the Colorado General Assembly passed a bill in May making substantial amendments to Colorado’s noncompete statute, C.R.S. § 8-2-113. Governor Jared Polis signed the bill on June 8, 2022, meaning the amendments will go into effect at 12:01 a.m. on August 10, 2022, which is only four weeks away. That may sound like a long time, but it will go by quickly.

As an initial matter, one thing Colorado employers should recall is that, despite the language in the amendments referring broadly to “covenants not to compete,” it also applies to customer non-solicitation covenants. As the preamble to the amendments expressly states:

The General Assembly intends to preserve existing state and federal case law in effect before the effective date of this Act that: (a) defines what counts as a covenant not to compete that is prohibited by this section; and (b) specifies the extent to which a covenant not to compete for the protection of trade secrets must be tailored in scope in order to be enforceable under this section.” (Emphasis added).

This is important because Colorado courts have applied the strictures of C.R.S. § 8-2-113 to customer non-solicitation covenants, as well as traditional noncompetes, “because an agreement not to solicit customers is a form of an agreement not to compete.” Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 844 (Col. App. Ct. 2007). In addition, the amendments also expressly apply not only to employees, but also to independent contractors (collectively referred to as “workers”).

Colorado employers should also note that, although the amendments are not retroactive—meaning that the notice (and other) provisions do not apply to existing agreements with workers—there is a risk that a Colorado court could nevertheless decide to use the amendments as a guidepost in ruling on the enforceability of existing agreements – in particular at the injunction stage when courts are making equitable determinations. But that is not a reason, in and of itself, to have existing workers sign new/updated agreements at this point in time, in our view, as the risk is small. Indeed, other states have rejected similar arguments where the statute in question was not retroactive. See, e.g., NuVasive, Inc. v. Day, 954 F.3d 439, 444 (1st Cir. 2020) (holding that the Massachusetts Noncompetition Agreement Act does not represent fundamental Massachusetts policy with respect to agreements entered into before effective date of the Act) (quoting Automile Holdings, LLC v. McGovern, 483 Mass. 797, 807 n.15 (2020) (“The legislation applies only to employee noncompetition agreements entered into on or after October 1, 2018.”)).

With all of this in mind, Colorado employers should take the following action between now and August 10, 2022, to ensure compliance with these amendments:

• Noncompete Compensation Thresholds: Ensure that noncompete agreements with new workers and new/updated noncompete agreements with existing workers comply with the minimum compensation threshold of $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). Workers making less than this amount cannot be subject to noncompete agreements in Colorado.
• Customer Non-Solicit Compensation Thresholds: Ensure that customer non-solicitation agreements with new workers and new/updated customer non-solicitation agreements with existing workers comply with the minimum compensation threshold of $60,750 per year (again, subject to annual adjustments). Workers making less than this amount cannot be subject to customer non-solicitation agreements in Colorado.
• Trade Secret Requirement: Update both noncompete and non-solicitation covenants, if necessary, to make clear that they are intended to protect trade secrets and ensure that the covenants are no broader than necessary to protect trade secrets.
• Confidentiality Limitations: Update confidentiality/nondisclosure provisions for new workers and/or existing workers who will be receiving new/updated confidentiality/ nondisclosure provisions to state clearly that the provisions do not prohibit the disclosure of (a) information arising from the worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise; (b) information that is readily ascertainable to the public; or (c) information that the worker otherwise has a right to disclose as legally protected conduct. At the very least, do not attempt to enforce confidentiality/nondisclosure provisions against workers who disclose the identified categories of information. (And keep in mind our recent post on the need to include language expressly carving out disclosures to the Securities and Exchange Commission.)
• Choice-of-Law and Forum Selection Clauses: Remove any non-Colorado choice-of-law and/or forum selection clauses from restrictive covenant agreements for new workers and/or existing workers who will be receiving new/updated agreements. Although other states may recognize provisions that identify their state’s law courts in spite of this law, a Colorado worker can file a declaratory judgment action in a Colorado court to invalidate the provision(s) and may be entitled to his or her attorneys’ fees and statutory penalties.
• Notice Requirements: Prepare notices for new workers and/or existing workers who will be receiving new/updated agreements. The notices 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.

Finally, Colorado employers should be aware that violations of the law can subject them to liability for actual damages, plus a $5,000 penalty per harmed worker or prospective worker. And they should recall that an earlier amendment to C.R.S. § 8-2-113 criminalized violations of the statute. As such, it is especially important that these new amendments are considered and implemented on or before August 10, 2022.

Please reach out to any member of EBG’s Trade Secret & Employee Mobility practice group or your EBG contact to discuss these important updates further.