Friday, March 4, 2011

Beware Drafting Trap Under Colorado's Non-Compete Statute (Saturn Systems v. Militaire)

Colorado usually produces some interesting opinions because it has a statute that is inconsistent with traditional non-compete law.

Non-competition and non-solicitation covenants are presumptively void in Colorado. But they can be valid if they meet one of four criteria:

(1) the covenant is made in connection with the sale of a business;

(2) the contract protects trade secrets;

(3) the contract recovers an employee's training or education costs; or

(4) the contract is for "executive and management personnel" or "officers and employees who constitute professional staff to executive and management personnel."

The last exception does not apply to independent contractors, and it appears the only way to bring a contractor under a covenant is to assert that the agreement protects a company's trade secrets.

If a company relies on the second exception, there are some tricks it has to be aware of. To fall under this trade secrets exception, the covenant must be specifically be for the protection of those trade secrets and narrowly tailored to protect that interest. The statute contains no savings provision for lesser protected "confidential information," so the employer must be prepared to identify and justify information as truly trade secret material. Otherwise, it cannot invoke this exception at all.

Another tricky area is in the drafting itself. Colorado lawyers will tell you that the non-solicitation or non-competition provision should be included within the confidentiality restriction. Why? Because it is much easier to demonstrate that the restriction is designed to trade secret information if the non-compete is directly tied to the confidentiality clause.

Contrast this scheme with that found in Wisconsin, where attorneys will tell you to do the exact opposite. Separate the covenants into different paragraphs. Avoid interlocking or co-dependent terms. The reason? Wisconsin's follows a very rigid application of the blue-pencil rule, which can trip up covenants that may be overbroad in some respect but not others.

All this goes to show that non-compete law is not uniform by any stretch. The dichotomy between Colorado and Wisconsin is a perfect example from a draftsmen's perspective.


Court: Court of Appeals of Colorado, Division Two
Opinion Date: 2/17/11
Cite: Saturn Systems, Inc. v. Militaire, 252 P.3d 516 (Colo. Ct. App. 2011)
Favors: Employer
Law: Colorado

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