Non-compete agreements with employees are invalid under Colorado law unless they fit into one of four limited statutory exceptions. The exceptions permit covenants not to compete for:
1. “Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel”;
2. Protection of trade secrets;
3. In connection with the sale of a business; and
4. To recover employee training costs.
A recent case demonstrates – once again – that these exceptions are narrowly construed. In Phoenix Capital v. Robert M. Dowell, Colorado Court of Appeals. No.: 05CA2712 (7/26/07), the Court ruled that a manager’s non-compete agreement was invalid because he did not fit within an exception at the time he signed the agreement. The employer argued that the agreement was valid because the employee was a manager when he left the company.
The Court ruled, however, that the applicability of the exception is determined when the agreement was actually signed.
In response to the employer’s argument that this leaves employers unprotected when job duties change, the Court put the burden on the employers to “enter into new employment agreements as its employees take on additional responsibilities.” The decision accordingly makes it clear that employers have an obligation to monitor and maintain the validity of non-compete agreements by entering into new agreements as job duties change. If the employer had renewed the non-compete agreement when it promoted the employee to manager, the agreement would have been valid.
The Court’s decision also addressed the scope of the “professional staff” component of the exception for mangers and executives. The Court ruled that the employee was not “professional staff” at the time he signed the agreement because, although he reported to managers and executives, “most of them doubled as sales persons and eighty to ninety percent of [the employee’s] work was performed in support of the sales staff, rather than in support of executive or management functions.” Slip Op. at 10.
Finally, the Court found an important difference between soliciting former employees and former customers. While employers have a legitimate interest in preventing former employees from soliciting current employees, any agreement preventing solicitation of customers will be judged by the harsher standards of non-compete agreements. Since the non-compete agreement was invalid, the employee was therefore free to solicit former customers. This case presents two significant problems for employers. First, non-compete agreements must be reviewed and renewed periodically as job duties change. Second – and perhaps more importantly – it is now clear that any non-solicitation provision that prevents contact with customers is the legal equivalent of a non-compete agreement. Prohibiting solicitation of customers therefore requires a valid non-compete agreement that falls within one of the four statutory exceptions