In Colorado, contracts that prohibit a former employee from soliciting the former employer's clients or customers are deemed "non-compete" covenants. These covenants are only legally enforceable, however, when they are geographically and temporally reasonable, and when they fit in one of the four exceptions to the Colorado statute that generally prohibits non-compete contracts, Colo. Rev. Stat. § 8-2-113(2).
One of the four statutory exceptions relates to contracts "for the protection of trade secrets." Colo. Rev. Stat. § 8-2-113(2)(b). Many employers have argued, unsuccessfully, that the trade secret exception should support the enforcement of non-compete covenants against ex-employees who hold trade secrets. See, e.g., Colorado Accounting Machines, Inc. v. Mergenthaler, 44 Colo. App. 155, 609 P.2d 1125 (1980). These cases have led to the conclusion that the trade secret exception supports the enforcement of trade secret (or non-disclosure) contracts, but not non-solicitation or other non-compete agreements. The Colorado Court of Appeals, in a surprising decision, recently relied on the trade secret exception, to enforce a non-solicitation covenant. Saturn Systems, Inc. v. Militare, No. 07CA2453 (Colo. App. Feb. 17, 2011).
In Saturn Systems, a debt collection agency developed a proprietary website to provide clients with access to its database of client and debtor information, permitting clients to view real-time information on the status of their accounts and actions being taken on their accounts. Confidential information on debtors - such as addresses, bank accounts, and employment histories - was also available to clients on the encrypted website. Usernames and passwords required to access the website were only available to the client and, if needed, to the sales agent assigned to that client's account.
Militare was a sales agent for Saturn for two years. (Although he was an independent contractor, this did not affect the Court's analysis of the parties' rights, as the Colorado statute on non-compete covenants is applicable to both employees and independent contractors.) When hired, he signed an agreement containing the following provision:
(12) Confidentiality: Agent agrees that any client lists, sales materials and proprietary information will be considered confidential and not revealed to outside persons with the exception of clients and prospective clients during the sales or service of Company's services and that he will not solicit Company clients on behalf of his/her self or any other entity. This provision is to last for the duration of this agreement and for 1 year following the termination of this agreement.
Although the confidentiality provision did not contain a geographic region, the parties agreed that its scope was limited to Colorado.
While working with Saturn, Militare was given access to and used the confidential database on the Saturn website. As a result, he knew, among other things, that a particular credit union ("Premier") was a Saturn client that had pre-purchased debtor collection services. Less than a month before terminating his relationship with Saturn, Militare reviewed two Premier status reports on the Saturn system. Those reports contained confidential information indicating when Premier would be vulnerable for solicitation. After leaving Saturn, Militare was hired by a competitor. About three months later, he contacted Premier to solicit its business.
Saturn's website information was found to be trade secrets - confidential, not known outside Saturn and of great value to competitors, who could usurp sales opportunities as a result. The information was available only through a client's username and password . Internal access to the database was strictly on a "need to know" basis. Saturn had taken reasonable efforts to maintain the secrecy of the information in the database.
Expert testimony established that Militare made unauthorized access to the password-protected areas of Saturn's website many times after he no longer worked for Saturn. Although there was no evidence of the specific trade secret information he accessed on those occasions, the Court ruled that such a showing was not required, in part due to the dynamic nature of the information in the database. Militare's mere unauthorized invasions into the database constituted "misappropriation."
An injunction was properly entered against Militare's misappropriations of trade secrets in breach of the "Confidentiality" provision of the Saturn agreement - and Saturn was awarded a whopping $525 in damages, the cost of the expert hired to detect Militare's unauthorized entries into the website - but the major issue was whether Militare should be enjoined from soliciting Saturn's clients in Colorado for one year following his departure. The former sales agent argued that the non-solicitation clause in his agreement was an unenforceable non-compete covenant under Colo. Rev. Stat. § 8-2-113, and could not be saved by the trade secret exception, § 8-2-113(2)(b).
The Court of Appeals ruled that the non-solicitation clause was reasonable and enforceable under the trade secret exception, adding that Saturn's non-disclosure and non-solicitation clauses in its agreement were both designed to protect the confidentiality of its trade secrets. The Court attempted to distinguish the non-compete covenants that were not enforced in cases such as Mergenthaler, where an employment contract had both a trade secrets clause and "a separate and general restrictive covenant prohibiting all forms of competition." In Saturn Systems, the Court reasoned, the agreement did not contain a general non-compete covenant. Instead, the non-solicitation covenant was "a narrowly tailored provision restricting [Militare] only from soliciting Saturn's clients as a way of protecting Saturn's trade secrets and confidential information."
The distinction offered by the Court of Appeals is shaky. Although the non-solicitation covenant was not "a general restrictive covenant prohibiting all forms of competition," courts have refused to enforce non-solicitation covenants, as they are one specie of non-compete agreements. Moreover, while the protection of trade secrets may have been the purpose of Saturn's non-solicitation clause, the clause certainly was not limited to those contacts with customers directly as a result of the use of trade secrets.
Nevertheless, Saturn Systems may provide a great opportunity for employers to expand the available remedies when their employees are given access to trade secrets. Confidentiality agreements such as the one in Saturn Systems will allow for the enforcement of a non-solicitation covenant, as well as a non-disclosure covenant, all in the name of protecting proprietary business information.