What’s Old Is New Again: Misdemeanor Enforcement of Colorado’s Non-Compete Statute
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What’s Old Is New Again: Misdemeanor Enforcement of Colorado’s Non-Compete Statute

Brownstein Client Alert, Jan. 27, 2022

Colorado’s laws governing non-compete agreements between employers and employees can be complex—particularly those involving physicians. In SB 21-271, the Colorado General Assembly added another layer of potential complexity to this area of the law when it amended the non-compete statute, C.R.S. section 8-2-113, to explicitly include criminal penalties in its language Effective March 1, 2022, violation of any provision of C.R.S. section 8-2-113 by any person will be a class 2 misdemeanor, punishable by up to 120 days imprisonment, a fine of up to $750 or both.

However, while the misdemeanor penalty enacted as part of SB 21-271 is newly included in the language of C.R.S. section 8-2-113 itself, criminal penalties for violation of that statute are actually not new to Colorado law. Another often overlooked statute, C.R.S. section 8-2-115, has long provided that a violation of the non-compete statute is criminally punishable as a misdemeanor. Indeed, the existence of this criminal penalty in C.R.S. section 8-2-115 formed part of the basis for a Colorado federal court’s declining to find an implied private right of action for violations of C.R.S. section 8-2-113 in OmniMax International, Inc. v. Anlin Industries, Inc., 18-CV-01830-DDD-MEH, 2019 WL 2516121 (D. Colo. June 17, 2019). SB 21-271 repeals C.R.S. section 8-2-115 and instead provides for the criminal penalty directly in the non-compete statute, C.R.S. § 8-2-113.

SB 21-271 was enacted to comprehensively reform the misdemeanor and petty offense laws in Colorado. The more than 300-page bill was referred to the General Assembly by the Colorado Commission on Criminal and Juvenile Justice (the “Commission”). The Commission had, in 2020, been charged by Gov. Jared Polis with studying and recommending changes to the state’s criminal laws. In its work leading to SB 21-271, the Commission’s Sentencing Reform Task Force (“Task Force”) reviewed more than 1,000 criminal offenses. In its report, the Task Force observed that misdemeanor offenses found in statutes outside of Colorado’s criminal code (such as C.R.S. section 8-2-115) are rarely prosecuted in criminal court. Indeed, there are no known instances in which violation of the non-compete statute has been prosecuted. Nevertheless, the Task Force generally did not recommend deleting those offenses from the statutes. Presumably, the Task Force believed that the potential for misdemeanor enforcement of the non-compete statute serves a purpose, even if historically it has not typically been utilized.

The amendment to C.R.S. section 8-2-113 to include the misdemeanor penalty directly in that statute could be read as a signal that the General Assembly continues to discourage non-compete agreements. Indeed, restrictive covenant agreements, such as non-competition and non-solicitation provisions, are disfavored under Colorado law. Under C.R.S. section 8-2-113, agreements restricting former employees from competing with a former employer are generally void, except when entered into in connection with (a) the purchase and sale of a business or the assets of a business, (b) protecting trade secrets, (c) recovering expenses for educating and training an employee who works for the employer for less than two years, and (d) executive and management personnel or employees who serve as professional staff to executive and management personnel. In the special case of physicians, an agreement that restricts the right of a physician to practice medicine is void; however, “provisions that require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement,” including damages related to competition, are enforceable under the statute. And, even where a non-compete agreement comes within the exceptions to C.R.S. section 8-2-113, to be enforceable, an employer cannot have used force, threats or intimidation in reaching the agreement, and such agreement must be reasonably limited in temporal and geographic scope.

It is difficult to say how, if at all, SB 21-271 will affect prosecution of misdemeanor violations of the non-compete statute. Regardless, employers should be aware of the potential for criminal liability and continue to carefully craft restrictive covenant agreements, including non-competes and non-solicitation of business opportunities, to enhance enforceability under C.R.S. section 8-2-113.

The need for careful drafting of restrictive covenants is especially acute in the realm of physician non-compete agreements. As Colorado physicians and physician employers are doubtless aware, the law surrounding the type of damages provisions that are enforceable under the non-compete statute has been unsettled since the Colorado Court of Appeals decision in Crocker v. Greater Colorado Anesthesia, P.C., 463 P.3d 860, 2018 COA 33, (Colo. App. 2018). Under Crocker, in order to succeed in collecting damages, the physician’s former employer must demonstrate a reasonable relationship between the amount of damages contemplated by the employment agreement and the injury suffered as a result of the physician’s departure. That is, the damages will be analyzed retrospectively post-termination, not prospectively at the time of contract formation; this can make it difficult to accurately estimate and provide for damages in the contract at the time of formation. The specter of potential criminal liability may serve to further complicate what can already be a tricky process.

Experienced legal counsel can assist in crafting compliant restrictive covenants that strike a balance between protecting the employer’s legitimate business interests and the statutory limitations on restricting employee mobility.

This document is intended to provide you with general information regarding changes to Colorado statutes governing non-compete agreements. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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