The Basics of a Non Solicitation Agreement
Non-solicitation agreements are used to protect a company’s, or an individual’s, business interests. This is done by prohibiting the employee from either doing business with the former company’s former clients in competition, or from soliciting other company employees to join a different business. The method by which this is done is by agreeing that, for a certain period of time after leaving the employment, the individual "will not, directly or indirectly, solicit, divert, or attempt to solicit or divert, any business from any of the customers or potential customers of the Company with whom he or she had contact during the term of his or her employment or cause any customers of the Company to discontinue its relationship with the Company or transfer its business from the Company . . ."
A non-solicitation agreement is not designed to prevent the ex-employee from working for another company in the same business. The employee is free to do so so long as the employee does not attempt to take the former company’s customers and does not recruit the former company’s employees to leave the former company and go work for the new company .
The agreement is designed to prevent the former employee from operating a competing business, but it is also designed to be reasonable in nature, and not put the pursuing company out of business if the employee is free to use the business assistances that necessarily comes with working in a certain industry.
It is important to note, when it goes to court, courts are not going to review a non-solicitation agreement with a microscope to thoroughly dissect its every word. Instead, non-solicitation agreements are interpreted by courts as contracts, and by that standard, courts will enforce them as long as they are reasonable in nature. Why would a former employee be prohibited from walking through a door to a competitor and taking the old company’s list of contacts with him? In order to be enforced, the agreement must be reasonable in duration and geographic scope, and cannot be written in such a way that it prohibits the ex-employee from engaging in a reasonable competition with the former employer. That means that to be enforceable, the non-solicitation agreement must be clear as to which competitors the agreement applies, for how long, and to what extent the former employee may compete with the business.
The Legal Landscape in Colorado
As with other restrictive covenants in Colorado, non-solicitation agreements must be reasonable to be enforceable. None of the statutory law in Colorado provides a "safe harbor" for non-solicitation agreements, as none of the statutes applies to them. As such, non-solicitation provisions are subject to the common law "reasonableness" standard discussed above.
The only other consideration that is unique to Colorado is whether the non-solicitation agreement is an ancillary part of the sale of a company or good will. Colorado courts will enforce non-solicitation agreements where they are ancillary to the sale of a good will or of a business, provided that they are reasonable in scope and duration. Colorado courts will apply the same reasonableness standard under the common law, but provide slightly more protection to non-solicitation agreements if they are ancillary to the sale of a company or good will.
Essential Elements of a Legally Sound Agreement
For a non-solicitation agreement to be enforceable, Colorado courts generally hold that it must contain the following key components:
1. Courts in Colorado generally insist on specificity and clarity in all non-solicitation agreements. That is because such agreements are restrictive in nature and will hinder an individual’s ability to earn a living after he or she leaves an employer.
There is generally no strict length requirement for the provision stipulating a reasonable amount of time that an individual must not solicit a former employer’s clients. However, such provisions should be no shorter than six months and no longer than two years.
2. The provision must define what information constitutes a "client" for the purposes of the provision.
There should be a reasonable limitation as to time so the provisions will not put an unreasonable burden on the employee. There should be sufficient reasonable space within which to operate and the provision does not have to be limited to within the confines of a company’s network or office space. For instance, it is not too broad if a provision stipulates that an individual cannot solicit a former employer’s clients within a 100-mile radius of the company headquarters.
The Rights and Restrictions on Employees
While we’ve established the employer’s rights and obligations in our prior non solicitation agreement article, it’s important to understand the employees’ rights and limitations in terms of their ability to compete with a former employer who has effectively protected its business interests with a non-solicitation of employees agreement under Colorado law (or simply "non-solicitation agreement" for short). This section will help interpret and apply Colorado non-solicitation agreements while taking into account relevant prior case law, Colorado public policy, and Colorado statutory law.
Beyond the context of enforcement of a non-solicitation agreement, it is generally against Colorado public policy for an employer to prevent a former employee from earning a living by exercising a lawful trade or occupation, regardless of the specific circumstances and/or means used to prevent the former employee from working in the same industry. See, e.g., Loughlin v. Boyd, 982 P.2d 51, 54-55 (Colo. App. 1999) (under Colorado public policy, an employer may not prevent a former employee from working for itself or a competitor, even if the former employee gained knowledge of trade secrets and confidential information while employed, regardless of how direct the means were used to enforce the non-compete restriction), and see also Colorpro Impressions, Inc. v. Encore Marketing International, Inc., 58 P.3d 1130, 1135 (Colo. App. 2002) (because Colorado law disfavors restraint of a person’s ability to earn a living, a restrictive covenant, such as a non-solicitation agreement, that restricts a former employee from working in a certain industry generally is considered void and unenforceable; provided, however, any such restriction generally is enforceable to prevent the former employee from using confidential information and trade secret information).
With such an expansive public policy against restraint of trade, and based on the fact that non-compete agreements are invalid before the courts unless the employer meets certain requirements by showing reasons warranted for enforcing the subject non-compete agreement and proving the employer suffered a legitimate business interest from the non-compete, employers should carefully consider the need for the non-compete agreement in each situation and how best to draft the non-compete agreement properly. Any non-solicitation agreement should only be used when applicable and after appropriate consideration of the employer’s business needs in order to provide for the best chance of enforceability in state court. As such, employers should clearly define who the non-solicitation agreement applies to, the geographic area of the market where the former employee is restricted from soliciting employees and former customers, and what is prohibited by the non-solicitation agreement. However, even with these suggestions concerning the drafting of a non-compete agreement, it still cannot be guaranteed that the non-compete agreement will be enforced in state court.
This public policy against restraint of trade is the reason the courts have held that non-compete agreements that are either too broad concerning the customer base type(s) or geographical area(s) are unenforceable even if the courts otherwise would hold such an agreement as valid and enforceable. See, e.g., Loughlin, 982 P.2d 51, supra.
Generally speaking, Colorado law favors the use of injunctive relief (e.g., restraining order) against a former employee under a non-compete agreement, where the former employee either directly or indirectly uses the former employer’s trade secrets and confidential information gained when employed by the former employer. However, in order to obtain an injunction, the former employer must show harm to the business and good cause exists as to why an injunction should be issued.
As stated earlier, since Colorado does not have a statute that specifically allows for non-compete agreements, non-compete agreements in Colorado are governed by Colorado common law, which was established long before there was a need for a Colorado statute regarding non-compete agreements.
Enforcement and Challenges to Non-Solicitation Agreements
Non solicitation agreements are enforceable to the extent that "no greater restraint [is placed] on the employee than is reasonably necessary to the employer to protect its legitimate interest." Edwards, 356 P.3d at 1108. Colorado courts will generally enforce a non solicitation agreement so long as it protects the employer’s trade secrets, confidential information or goodwill.
Colorado courts will not enforce a non solicitation agreement where the employer has made no prior investment in the employee’s training or education, or has not provided other employment benefits to the employee beyond what is legally required . See Am. Federation of Musicians of U.S. and Canada v. Capitol Records, Inc., 827 P.2d 1279, 1284 (Colo. 1992). Colorado courts are also unlikely to enforce a non solicitation agreement where the employee was simply handed over an owner’s contact list, but had no prior relationship with the clients.
Common defenses or challenges raised by an employee seeking to invalidate a non solicitation agreement include: (1) the agreement was not supported by consideration; (2) the agreement is overly broad and/or ambiguous; and, (3) the agreement was unconscionable when entered into by the parties.
Recent Cases and Business Trends
Colorado has a number of court decisions interpreting non-solicitation, non-compete, and other restrictive covenants. In March 2018 the Colorado Court of Appeals upheld a permanent injunction. The trial court had stopped an Executive who left the company from trying to hire away her former colleagues. The trial court ordered that she cease and desist "directly and indirectly . . . making any offers of employment, whether direct, indirect or through a third party" (Lavaca Landing v. Thielbusch). These phrases were in the decision. Two executives (including the individual Defendant) were required to return any documents (they had copies, they also were not alerted that they were infringement company property).
In March 2018, the Colorado Court of Appeals issued a decision emphasizing that the law applies to all the provisions of a contract. After the Plaintiff terminated an Executive, the Executive began working for a competitor. The individual had signed two agreements: a Non-Solicitation Agreement that stopped him from soliciting the former employer’s – at the former employer’s customers and employees. The second agreement was a Confidentiality Agreement. The Confidentiality Agreement was twofold: an acknowledgement that he understood his confidentiality obligations and a record of his confidentiality training with the former Employer.
Typically, a non-solicitation of employees covenant is more difficult to enforce than is a non-solicitation of customers covenant. Courts also recognize that in an intellectual property case, the misappropriation of confidential information – will often be sufficient to enjoin the legal act in question – without more.
In this case, the trial court granted relief on both non-solicitation components; however, when the individual appealed, the Court of Appeals upheld the non-solicitation of customers – but set aside the relief on the individuals restriction (of co-workers). The Court of Appeals found: "The material question is simply this: Did the customer restriction accomplish the employer’s goals? The customer restriction did not simply prohibit the employees from being employed by its customers, but actually prohibited any contact with them. This restriction was narrowly tailored to protect the employer’s business interests. In contrast, the employees restriction was not necessarily tied to protecting the employer’s business interests. The non-solicitation of employees restriction, like the customer restriction, did not allow the former employee to contact co-workers. Thus, while the customer restriction was narrowly tailored, the employees restriction was overly broad."
Nor has the Colorado legislature permitted the use of "blue pencil" answers. Colorado law generally prohibits a remedy of "reformation" to add narrow restrictions.
How Employers Should Draft Non Solicitation Agreements
Employers must take care when drafting non solicitation agreements in Colorado. Courts will not enforce a contract if an employer is responsible for creating a restriction that is broader than what is necessary to protect the employer’s legitimate business interests. The following best practices will help an employer maximize its protections.
Define the Nature of the Business
It is essential to very clearly define and then restrict the goods, products and services offered. For example, if the employer is offering products for the lawn and garden, instead of restricting all products for the landscaping industry, restrict only the goods and services for the lawn and garden.
Focus on Customers, Not Competitors
Avoid restrictions on customers without any meaningful distinction between existing customers, prospective customers, and former customers. If the restriction applies to customers, the agreement should explain the term "customer" as narrowly as possible.
Limit the Time Limit on Competition
Three years is a maximum that courts will find reasonable for a noncompetition agreement. If the agreement is for a noncompetition agreement, limit it to two years or less.
Be specific in the Scope of the Restriction
In addition to narrowing the applicable customers, products and services, the geographic area should be narrowly tailored to the area in which the employee worked. This means the employer should include the name of the counties, cities and towns where the employee worked. Blanket geographic prohibitions in Denver are rarely enforced as a reasonable restriction in Colorado, as the Denver market is served broadly by two state wide lines of distribution.
Seeking Professional Counsel
In cases involving non solicitations, a key first step to understanding your rights is to consult with a qualified lawyer. Too often, individuals and businesses enter into agreements without seeking legal advice, and later find out that their rights were violated . By consulting with a skilled attorney, you will be able to learn about the recent court rulings that are relevant to your case. With the federal, state and local laws regarding non-competes in a state of flux, obtaining legal advice should be your first step.