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This Colorado Human Resources Manual is offered to you for free. Find state specific laws and regulations below.

Restrictive covenants and trade secrets — Colorado

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:

  • immediately go to work for a competitor
  • solicit their former employer’s customers and employees
  • disclose confidential information that does not rise to the level of a trade secret. 

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.

Restrictive covenants vs. contracts

In many ways, restrictive covenants are subject to the same basic requirements of other contracts in that they must:

  • be written
  • be supported by consideration
  • include sufficient certainty with respect to the terms of the agreement. 

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.

Limitations on restrictive covenants

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:

  • covenants associated with the sale of a business
  • noncompetition agreements entered into by a highly compensated worker, which is defined in 2022 as someone who earns at least $101,250 per year - such agreements may not be broader than reasonably necessary to protect trade secrets
  • customer nonsolicitations agreed to by workers that earn at least 60% as much as a highly compensated worker and that aren't broader than reasonably necessary to protect trade secrets.

Even if an agreement meets the narrow exceptions above, employers still must provide an additional statutory notice to workers to enforce them, specifically:

  • For prospective hires, notice must be made before the job offer is given. For current workers, notice must be given at least 14 days before the earlier of the effective date of the covenant or additional consideration (something of value) to be provided to the employee.
  • The notice must be in writing and signed by the worker, accompanying, but also in a separate document from the agreement.
  • The notice must use clear and conspicuous language, identify the agreement by name, direct the employee to the specific paragraphs with the restrictive covenants, and explain the covenant(s) could restrict the worker’s subsequent employment options upon separation from the employer.

Penalties and enforcement

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 of confidential information

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.

Protecting confidential information

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. 

Trade secrets

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

  1. provides independent economic value, actual or potential from not being generally known or ascertainable
  1. is maintained as a secret by the employer.

As such, Colorado courts tend to focus on:

  • whether the information derives independent economic value, meaning information kept secret that would likely be useful to a competitor and require cost, time and effort to duplicate
  • the efforts to maintain secrecy that are reasonable under the circumstances. 

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 extent to which the information is known outside the business
  • the extent to which it is known by employees and other involved in the business
  • the extent of measures taken to guard the secrecy of the information
  • the value of the information to the business and its competitors
  • the amount of effort or money expended in developing the information
  • the ease or difficulty with which the information could be properly acquired or duplicated by others. 

Misappropriation of trade secrets

The Colorado Uniform Trade Secrets Act and the DTSA define misappropriation as:

  • acquisition of a trade secret by a person who knows that the trade secret was acquired by improper means
  • disclosure or use of a trade secret by a person who uses improper means to acquire the trade secret
  • disclosure or use of a trade secret by a person who, at the time of disclosure or use, knows that the trade secret is derived from or acquired through a person who:
    • had utilized improper means to acquire the trade secret
    • owes a duty to maintain the trade secret’s secrecy or limit its use.
    • disclosure or use of a trade secret by a person who, before a material change in the person’s position, knows that the information is a trade secret and has been acquired by accident or mistake. 

Available relief

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:

  1. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in confidence to a Federal, State or local government official, either directly or indirectly or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; or  is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
  1. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal; and does not disclose the trade secret, except pursuant to court order.

Shop rights

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.