Colorado Criminalizes the Use of Illegal Non-Competes

The nationwide scrutiny of non-compete agreements continues in 2022. An increasing number of states are severely limiting, or absolutely prohibiting, the use of restrictive covenants. While for many years Colorado has prohibited the use of non-competes (with certain exceptions), it recently became the first state to criminalize the use of non-competes exceeding the permissible scope of state law.

A new Colorado law raises the stakes for employers using restrictive covenants. Existing Colorado law prohibits the use of non-competes and non-solicits unless they meet one of four exceptions:

• A contract for the purchase and sale of a business;
• A contract for the protection of trade secrets;
• A contract for the recovery of the expense of educating and training an employee who has worked for an employer for fewer than two years; or
• The employee qualifies as an executive, officer, or management personnel, or their professional staff.

As of March 1, 2022, revisions to Colorado’s sentencing law will create criminal liability for knowingly using non-competes that violate Colorado non-compete law. These criminal penalties will apply to both unlawful non-competes and unlawful non-solicitation agreements. The revisions do not change underlying Colorado non-compete law, so if employers are following existing law, there is no cause for concern.

Colorado employers may be tempted to shoehorn certain employees or situations into one of these exceptions in order to try to enforce a non-compete/non-solicit. But, recent revisions to Colorado sentencing law make violations of Colorado law on non-competes/non-solicits a Class 2 misdemeanor. Violations are punishable by up to 120 days in jail, a fine of up to $750, or both.

Employers also should be cognizant of another section of Colorado non-compete law related to “intimidation.” That section broadly states that “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 sees fit.” CR.S. § 8-2-113(1).

It is unclear whether these new criminal penalties could apply to an employer that threatens an employee with termination of employment if he or she refuses to sign an unlawful non-compete. Nonetheless, Colorado employers should carefully review their non-compete agreements and consider which employees are required to sign them.

Employers should act quickly to re-examine their Colorado non-compete agreements to ensure their legality, as there now is an increased risk to employers implementing these agreements. Attorneys in Ballard Spahr’s Labor and Employment Group stand ready to assist employers with drafting, enforcing, and litigating non-compete agreements.

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