Colorado Supreme Court Issues Employer-Friendly Decision in Important Non-Compete Case

On May 31, 2011, the Colorado Supreme Court (sitting en banc) answered an open question in Colorado – whether continued at-will employment is sufficient consideration for a noncompetition agreement entered into after hire. In Lucht’s Concrete Pumping, Inc. v. Horner, the Court reversed the Colorado Court of Appeals and held that continued at-will employment, alone, is sufficient. Because a Colorado employer has a legal right to terminate an at-will employee at any time, the Court held, an employer’s forbearance of termination of at-will employment is adequate consideration for a noncompetition agreement executed after employment has commenced. Lucht’s Concrete Pumping, Inc. v. Horner, No. 09SC627, Colorado Supreme Court (May 31, 2011).

Factual Background

In 2001, Tracy Horner began his employment with Lucht’s Concrete Pumping, Inc. as its Mountain Division Manager. On April 15, 2003, Horner was asked to sign an Employee Non-Disclosure and Confidentiality Agreement, which included a one year non-competition covenant. No additional consideration was given to Horner in exchange for his execution of the agreement. On March 12, 2004, he resigned from Lucht’s. Three days later, Horner began working for Everist Materials, LLC – a direct competitor of Lucht’s in the ready-mix concrete supply business. Lucht’s business in the mountain region tanked and the company eventually filed for Chapter 11 bankruptcy. Lucht’s later sued Horner and Everist for breach of contract, intentional interference with contract, breach of duty of loyalty, breach of fiduciary duty, and misappropriation of trade value.

Legal Background

The trial court granted summary judgment in favor of Horner and Everist on the breach of contract and intentional interference with contract claims, holding that Horner’s non-compete agreement was unenforceable due to lack of consideration. A bench trial was held on the remaining claims, all of which were resolved in favor of Horner and Everist. Lucht’s appealed.

On June 11, 2009, the Colorado Court of Appeals affirmed the trial court’s decision, noting that “Horner did not receive anything in return for his promise not to compete,” and reasoning that an employee who signs a noncompetition agreement after hire is in the same position as he or she was before the agreement. Lucht’s appealed this ruling to the Colorado Supreme Court.

On February 1, 2010, the Court granted certiorari to decide whether continued at-will employment is sufficient consideration to enforce a noncompetition agreement entered into after the employment relationship has commenced.

Legal Analysis

The Colorado Supreme Court held that the continued employment of an at-will employee is sufficient consideration for a noncompetition agreement. The Court found no distinction between a noncompetition agreement entered into at the time of hire and a noncompetition agreement entered into during the at-will employment relationship. The Court reasoned that an employer’s presentation of a noncompetition agreement to an employee after hire is akin to an offer to renegotiate the terms of at-will employment, which an employee accepts by continuing to work for the employer. Likewise, the Court held that an employer’s forbearance of terminating an at-will employee is sufficient consideration for such a noncompetition agreement.

The Court cautioned, however, that noncompetition agreements presented during the at-will employment relationship, like all noncompetition agreements in Colorado, must be reasonable. For example, if the employer intends to, or does, terminate the employee shortly after he or she signs the noncompetition agreement, there may not be legitimate consideration. The Court remanded the case to determine whether the noncompetition agreement that Horner signed was reasonable.

Practical Impact

“This is a significant decision in Colorado non-compete law,” states a Shareholder of Ogletree Deakins’ Denver office. “Because of the lower courts’ decisions, there was great concern that employers who had employees execute non-competes at any time other than hire would have to go back and re-negotiate those agreements and provide additional compensation or benefits as consideration. Now, however, employers can rest assured that non-competes with employees, regardless of when they are entered into, are supported by sufficient consideration with the continuation of at-will employment alone.”

Employers in Colorado also are reminded that Colorado has a strong public policy against noncompetition agreements generally, and that such agreements are enforceable only with respect to the four narrow exceptions set forth in § 8-2-113(2), Colorado Revised Statutes, and so long as the covenants are reasonable in scope, time and geography.