To Restrict or Not to Restrict … “Trade Secrets” Is the Question!

The decision to enter into an a non-compete agreement with an employee, generally speaking, is an easy one in Colorado – don’t do it because it is most likely unenforceable under statutory language and public policy.  However, there are four exceptions to the general rule of unenforceability set forth in the following statute:

(1) It shall be unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.

(2) Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void, but this subsection (2) shall not apply to:

(a) Any contract for the purchase and sale of a business or the assets of a business;

(b) Any contract for the protection of trade secrets;

(c) Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years;

(d) Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.

(3) Any covenant not to compete provision of an employment, partnership, or corporate agreement between physicians which restricts the right of a physician to practice medicine, as defined in section 12-36-106, C.R.S., upon termination of such agreement, shall be void; except that all other provisions of such an agreement enforceable at law, including provisions which require the payment of damages in an amount that is reasonably related to the injury suffered by reason of termination of the agreement, shall be enforceable. Provisions which require the payment of damages upon termination of the agreement may include, but not be limited to, damages related to competition.

C.R.S § 8-2-113.

    For the purpose of this discussion, we will focus on the second exception, “[a]ny contract for the protection of trade secrets.”  An employer in Colorado who wishes to protect its trade secrets may enter into an agreement with an employee to not compete after his or her employment terminates.  As simple as this sounds, in reality it is not.  Again, we look to statutory language to understand what is considered a trade secret under Colorado law.  The Colorado Uniform Trade Secrets Act defines a trade secret as:

[T]he whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.

C.R.S.§ 7–74–102(4).

    In addition to the broad definition of a trade secret, we know from the case law that Colorado courts consider several factors to make the factual determination of whether a trade secret exists under the statutory definition, and those factors include:

  • the extent to which the information is known outside the business;
  • the extent to which the information is known to those inside the business, such as the employees;
  • the precautions taken by the holder of the trade secret to guard the secrecy of the information;
  • the savings effected and the value to the holder in having the information as against competitors;
  • the amount of effort or money expended in obtaining and developing the information; and
  • the amount of time and expense it would take for others to acquire and duplicate the information.

Further, trade secrets can consist of a combination of individual elements which are generally available in the public domain.  The rationale follows that because of the steps taken by a company combine certain individual elements into something else, it is afforded trade secret status because of its “unified process, design and operation...in unique combination, [that] affords a competitive advantage” to the company. 

What does all this mean for you, the employer?  If you want the ability to restrict your employees from working in a competitive manner after they leave your company, and the purpose behind this restriction is to protect your trade secrets, then you must make sure you are in compliance with the criteria and factors that are required under Colorado law to prove that you, indeed, have trade secrets to protect.  Now is a good time to review whether you have the necessary systems, procedures, and protocols in place in order to enforce your right to restrict an employee’s competition with your company post-employment.  Also, Colorado law permits an employer to enter into a non-compete agreement with an employee anytime during the course of employment if there exists a need for such an agreement – protection of trade secrets being one of those reasons. 

For more information on this topic, please contact Eric Neeper at 303-376-6021 or by email at eneeper@mb-law.law