Sometimes an employer’s greatest legal concerns do not arise until after an employee has left the company. Unfortunately, it may be too late at that point for the employer to adequately protect its interests. In the absence of a restrictive covenant in an employment agreement, a company’s former employees are generally free to:
This relative freedom can result in great harm to the previous employer, especially in instances where the former employee had particularly strong relationships with customers, vendors or other employees or where the former employee had access to significant and potentially damaging business information such as a trade secret. In short, unless a company requires that its employees execute legally enforceable restrictive covenants which are often referred to generically as “noncompete agreements,” there may be no way to prevent former employees from taking the training and knowledge provided and using them for the benefit of a direct competitor.
In many ways, restrictive covenants are subject to the same basic requirements of other contracts in that they must:
When drafting a restrictive covenant, it is important for an employer to consider exactly what interests it wishes to protect and how narrowly it can tailor a restrictive covenant to accomplish its goals.
Recent legislative changes in Colorado will make most noncompete agreements in the state void as of August 1, 2022, with only a few limited exceptions. Those exceptions include:
Even if an agreement meets the narrow exceptions above, employers still must provide an additional statutory notice to workers to enforce them, specifically:
Colorado courts have discretion to issue civil penalties against employers of up to $5,000 per worker for attempting to procure agreements in violation of this new legislation. Additionally, violations could lead to criminal penalties of 120-days’ imprisonment, a $750,00 fine per violation, or both.
Nondisclosure covenants limit the former employee’s ability to disclose information he or she may have about the former employer’s customers, suppliers, pricing or other business information. It is important to note that, although many nondisclosure covenants include the term “trade secret,” Not all types of information actually rise to the level of a trade secret under the law and a nondisclosure covenant therefore protects the disclosure of valuable confidential information even if it does not legally constitute a trade secret.
Like the vast majority of states, Colorado has adopted a version of the Uniform Trade Secrets Act and protects information that amounts to a trade secret even in the absence of any written agreement. Additionally, in May 2016, the federal Defend Trade Secrets Act (DTSA) became effective. The DTSA created a federal cause of action for misappropriation of trade secrets.
Whether or not information qualifies as a trade secret under the Colorado Uniform Trade Secrets Act and the DTSA (whose scope is the same as the Colorado Act), depends on several factors, which are discussed below.
The Colorado Uniform Trade Secrets Act and the DTSA define a trade secret as information, including but not limited to a:
formula
pattern
compilation
program
device
method
technique
process
that both:
As such, Colorado courts tend to focus on:
Colorado courts have held that the factors to be considered in determining whether information is subject to protection under the Colorado Uniform Trade Secrets Act include:
The Colorado Uniform Trade Secrets Act and the DTSA define misappropriation as:
The Colorado Uniform Trade Secrets Act provides for injunctive relief to prohibit either actual or threatened misappropriation of a trade secret. In addition, an owner of a trade secret may seek monetary damages, which may include the actual loss caused by the misappropriation and the unjust benefit caused by the misappropriation. If a person commits a willful or malicious misappropriation the court is permitted to award exemplary damages in an amount not to exceed twice the damages awarded, as indicated above.
The DTSA also provides for punitive damages and attorney fees. However, in order to take advantage of these remedies, a company must advise its employees (which the DTSA defines to include employees and independent contractors) of the DTSA’s whistleblower immunity provisions. The whistleblower immunity provisions are as follows:
Generally, the inventions of an employee belong to that employee. However, an employer can gain entitlement to all or part of these inventions through agreement or contract with the employee. Even without an agreement, though, an employer may be entitled to free, non-exclusive “shop rights” for use of the invention if it was conceived using employer time and resources or the employee was hired to invent. The resources utilized by the employee must be substantial and not “trivial.” The ownership of the patent remains with the employee and he or she retains ownership even if he or she leaves his or her employment. If the employer has a shop right, then it may continue to exercise that right after the employee has left.
These “shop rights” are based on fairness. An employer spends money to assist in the invention and it is equitable and fair to allow it to reap the rewards of this expenditure. However, the employer has a non-exclusive license, so the employee can also benefit from his or her work. In a situation where the employer has not contributed, it would be contrary to fairness to allow the employer to benefit from the outside work of the employee simply because the employee worked for the company at the time of the invention.