Colorado Cracks Down on Restrictive Covenant Agreements, Authorizing Potential Criminal Penalties

Colorado has enlisted the help of the criminal justice system to reinforce its strong public policy against restrictive covenants. Beginning on March 1, 2022, violations of Colorado’s restrictive covenants statute, C.R.S. § 8-2-113, may subject employers to criminal liability. Under Colorado Senate Bill 21-271, which is primarily geared toward reformation of sentencing guidelines for misdemeanors and petty offenses, any violation of C.R.S. § 8-2-113 will be a class 2 misdemeanor punishable by up to 120 days in jail, a fine of up to $750, or both.

C.R.S. § 8-2-113 voids certain restrictive covenants, such as noncompete and nonsolicitation-of-customers agreements, unless they concern one or more of the following exceptions: (1) the purchase or sale of a business or its assets; (2) the protection of trade secrets; (3) the recovery of education or training expenses associated with an employee who has been with an employer for less than two years; or (4) a restriction on executive or management personnel or staff. Employers commonly rely on the second and fourth provisions to enforce noncompete and nonsolicitation-of-customers agreements. In addition to these exceptions, Colorado’s restrictive covenant statute includes two other distinct provisions. First, it is “unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he [or she] sees fit.” While this language seems broad, Colorado courts have yet to provide guidance on the provision’s true breadth. Second, the statute voids any noncompete that restricts the right of a physician to practice medicine.

Previously, a restrictive covenant that did not fall into any of the enumerated exceptions resulted in an unenforceable agreement. Now an employer that attempts enforcement of such an unenforceable agreement may be subject to misdemeanor criminal liability.

It is currently unclear how Colorado courts will apply Senate Bill 21-271’s misdemeanor provision to noncompete and customer nonsolicitation agreements, or how often the provision will be used. Senate Bill 21-271 simply states that “a person who violates [C.R.S. § 8-2-113] commits a class 2 misdemeanor,” but there is no guidance as to what will constitute a violation. Requiring an employee to sign an unenforceable noncompete or nonsolicitation agreement, attempting to enforce an unenforceable noncompete or nonsolicitation agreement, and/or threatening to enforce an unenforceable noncompete or nonsolicitation agreement could raise the specter of criminal penalties.

In light of this heightened liability for violations of Colorado’s restrictive covenants statute, employers may want to revisit all of their noncompete and nonsolicitation agreements to ensure they fall squarely into one of the enumerated statutory exceptions. Failure to comply may subject employers to misdemeanor criminal liability.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor and report on developments with respect to Senate Bill 21-271’s implementation and will post updates on the Unfair Competition and Trade Secrets blog. Important information for employers is also available via the firm’s webinar and podcast programs.