Employers should be aware of a new risk when attempting to enter a non-compete agreement with employees. Effective March 1, 2022, the Colorado Legislature amended the statute, and as it now reads, it could be a criminal misdemeanor to enter into a void non-compete. See C.R.S. § 8-2-113(4).
As many employers are already aware, under Colorado law, covenants not to compete (i.e. a “non-compete”) are presumptively void (i.e. unenforceable and effectively illegitimate) unless an exception applies. C.R.S. § 8-2-113(2) (the “second subsection”). There are some exceptions to this prohibition, for example, when the non-compete is limited to protecting trade secrets or used for an executive or management employee.
However, the new subsection (4) that was added states that “A person who violates this section commits a class 2 misdemeanor.” What exactly does this mean? Interestingly, a close read of the amended statute suggests the effect of the amendment is unknown. So, the question is, what is a “violation” of C.R.S. § 8-2-113?
The portion of the statute dealing with covenants not to compete simply says that any such agreement is “void.” C.R.S. § 8-2-113(2). Arguably, it does not actually prohibit a person (or employer) from entering into a void agreement. It does not say, for example, that it is illegal to enter a void agreement. Thus, it is unclear whether entering into a void covenant not to compete would be a “violation” of the statute that would subject either or both of the parties to criminal liability.
The criminal liability, then, could be understood only to apply to C.R.S. § 8-2-113(1), which states that “it shall be 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.” (“subsection one) The language of subsection two is substantially different from subsection one because subsection two does not say it is unlawful to attempt to enter a void non-compete, and it does not address what would happen if an employer unknowingly or in good faith entered a non-compete that was later held to be void. Since subsection one states that the conduct is “unlawful,” it can clearly be “violated” and would almost certainly lead to criminal liability under the amended statute. Whether this is true of subsection two (again, the non-compete part), is unclear.
No courts have yet had time to rule upon the meaning of this language.
Either way, for now, it would be wise for employers to take a close look at their covenants not to compete to ensure, as much as possible, that they comport with the non-compete part of the statute by falling within a valid exception (and are therefore not void). Though the law is unsettled and unclear, the most cautious course of action would be to ensure that these agreements are valid. There are several reasons to do this, for example, to avoid having the agreement declared void, but now, one of the more important ones is to avoid the possibility of criminal liability.
If you have questions about the validity of your business’s non-compete agreements, please contact a member of the Fortis Law Partners employment team.
Note: This blog post is now outdated due to legislative developments. See more recent posts for more information.