Colorado Noncompetition Covenants

One of the most valuable assets acquired in an acquisition often is a promise from the former owners and/or current employees of the business not to compete with the new owners. While “noncompetition covenants” generally are illegal as an unlawful restraint on trade, the Colorado legislature previously enacted a specific statutory exception for noncompetes executed in connection with the purchase or sale of a business. Set forth below are some of the issues that m&a attorneys typically address with respect to noncompetition covenants.

• Reasonableness of Restrictions. Colorado courts will not enforce an “unreasonable” noncompetition covenant. Accordingly, courts will examine the reasonableness of (i) the length of the time period of the noncompete, (ii) the geographic scope of the noncompete, and (iii) the definition of the business in which the restricted party cannot compete.
• Nonsolicitation Provisions. Depending on the business, it may be important for a purchaser to prohibit solicitation of former employees and/or customers of the business that has been acquired. While nonsolicitation covenants in Colorado also are subject to the reasonableness requirements described above, nonsolicits generally are viewed more favorably than noncompetes.

• Other Post-Acquisition Protection. During the due diligence process, a purchaser may determine that a company has not taken steps to adequately protect its intellectual property. There are a number of legal mechanisms that a purchaser can put into place with its employees and independent contractors to remedy these deficiencies, such as confidentiality and nondisclosure agreements, nonsolicitation covenants, or employee noncompetes. Subject to the reasonableness requirements detailed above, Colorado law permits a purchaser to obtain an enforceable noncompete -- even if the employee or consultant is not a former owner of the company -- in the following two limited sets of circumstances: (i) where the covenant is designed to protect trade secrets; or (ii) where the restricted party qualifies as executive or management level personnel.

Because each noncompetition covenant must be specifically tailored to fit the particular business and the restricted party, it is important to work with counsel familiar with the applicable Colorado statutory provisions and court decisions to best ensure that the provisions will be enforceable. In this regard, one of the biggest mistakes that inexperienced attorneys make is to draft a noncompetition covenant too broadly.

This article originally appeared in the June, 2002 edition of GHP Merger & Acquisition Update and is reprinted with permission.