Covenants Not to Compete in Colorado Employment Contracts (83217-1

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Covenants Not to Compete in Colorado Employment Contracts (83217-1 Powered By Docstoc
					NON-COMPETITION PROVISIONS IN EMPLOYMENT CONTRACTS


                                    Paul D. Godec, Esq.

                     RUEGSEGGER SIMONS SMITH & STERN, LLC
                           511 Sixteenth Street, Suite 400
                              Denver, Colorado 80202
                                 Ph: 303.623.1131
                                 Fx: 303.623.1141
                                www.rs3legal.com

                                          (c) 2007




Paul D. Godec provides a broad range of legal services necessary for the successful resolution
of disputes through both litigation and alternative dispute resolution. The Colorado Attorney
General appointed Mr. Godec as Special Assistant Attorney General to represent the Regents
of the University of Colorado in the enforcement of agreements not to compete against former
faculty members of the University of Colorado School of Medicine. Mr. Godec counsels
clients on general business and corporate law, employment law, employment contracting,
professional licensure and credentialing, and professional review. Mr. Godec also represents
clients in complex civil litigation including contract, health care, employment, and
construction issues.




These materials are intended to provide general information on selected legal topics and
are not intended to provide legal advice on any specific transaction or situation, or to
serve as a substitute for consulting with legal counsel.




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I.       OVERVIEW

        In many of today‟s highly competitive industries, information and knowledge truly
represent power in the marketplace. Of course, to unleash the power and profitability of the
information, employers often must impart proprietary information and knowledge to their
employees. In order to insulate proprietary information from business competitors, employers
frequently attempt to protect their competitive business advantages by requiring their employees
to sign employment contracts containing covenants not to compete, non-disclosure provisions,
and non-solicitation provisions.

        In general, a covenant not to compete or non-compete agreement may exist either as a
separate contract or as a provision in a more comprehensive employment contract. Non-compete
agreements typically seek to prohibit employees from working in related and competing
businesses for a certain length of time after leaving their employer. Non-competition agreements
may also seek to prevent past employees from using or disclosing the employer‟s confidential
information, or from soliciting other employees who possess confidential knowledge to work at
competing businesses. Courts have not looked favorably upon non-compete agreements because
they may severely restrict an individual‟s choices for alternate employment and ability to earn a
living. In fact, Colorado law renders non-compete agreements void unless those provisions fit
into one of the narrowly construed statutory exceptions.1

        Non-compete clauses in employment contracts have emerged as a sensitive area likely to
trigger contentious litigation.2 For example, managed health care has forced physician groups to
protect their alliances by adding non-compete clauses in physician employment contracts. Thus,
non-compete clauses can help medical groups “protect themselves generally against the threat of
a physician employee departing with a host of patients that he or she acquired only through the
group‟s own visibility.”3 Because Colorado courts and private arbitrators have often invalidated
non-compete clauses, however, employers must draft those provisions narrowly in order to get
voluntary compliance from past employees or effective enforcement in the event of breaches.

II.      THE STATUTORY FRAMEWORK IN COLORADO

        In general, Colorado statutes provide that “[a]ny covenant not to compete which restricts
the right of any person to receive compensation for performance of skilled or unskilled labor for
any employer shall be void,” except in very limited circumstances.4 Therefore, covenants not to
compete in contracts controlling employment relationships are unenforceable except for:

                  (a)   Any contract for the purchase and sale of a business or the assets
                        of a business;

                  (b)   Any contract for the protection of trade secrets;

                  (c)   Any contract provision providing for recovery of the expense of
                        educating and training an employee who has served an employer
                        for a period of less than two years;



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                  (d)   Executive and management personnel and officers and employees
                        who constitute professional staff to executive and management
                        personnel.5

A non-compete clause that does not satisfy one of the exceptions in the statutory framework
becomes facially void rather than voidable.6 The statutory framework for non-compete clauses
partially abrogates the legal presumptions under Colorado law regarding the enforceability of
employment contracts.7

        A.     Buyers and Sellers of Businesses. Initially, the statutory framework protects
buyers who purchase assets and goodwill of businesses from competition by the sellers. 8 These
non-compete clauses restrict sellers from soliciting their old customers and thereby potentially
destroying the goodwill purchased by the buyers.9 The statutory exception can also apply to
sales of a minority stock position in a business,10 and to security interests in loans for a new
business venture.11 The ability to enforce a non-compete clause against the seller ends when the
buyer liquidates the purchased business and extinguishes the goodwill.12

       B.     Education and Training of Employees. The statutory framework also protects
employers who invest in new employees by educating or training them for a period of up to two
years. The non-compete clause or employment agreement must expressly contain a specific
provision about the employee‟s education and training. The non-compete clause or employment
agreement may only permit the employer to recover the expense of training and education, but
may not otherwise limit competition by the employee.13

        C.      Executives, Managers, and Professional Staff. The statutory framework also
protects employers from competition by former executives or management personnel. Whether
a particular employee qualifies as an executive or management employee remains a question of
fact that depends on the employee‟s actual duties and not the employee‟s title.14 Whether a
particular employee qualifies as an executive or management employee also depends on the
nature of the business, ownership interests in the business, or the knowledge, skill or
professional licensure of the employee.15 Whether a particular employee qualifies as an
executive or management employee additionally depends upon the employee‟s duties and
responsibilities at the time of signing the non-compete clause – not at the time of breach.16
Colorado‟s appellate courts have not definitively addressed the question of which employees
qualify as “employees who constitute professional staff to executive and management
personnel.”17 Properly worded non-compete provisions may permit the assignment of the
employee‟s personal services to another employer or successor employer.18

        Non-compete clauses will become void unless facts exist to support one of the statutory
exceptions.19 If one of the statutory exceptions exist, however, non-compete clauses may apply
to professional services contracts for independent contractors as well as for employment
contracts.20 When appropriate, employment contracts could implicate more than one of the
acceptable statutory criteria to make non-compete clauses more likely to withstand later
challenges. For example, an employment contract involving a purchase of a minority ownership
interest in an entity possessing a trade secret21 which will also provide training for a
management position implicates all four statutory criteria to make a non-compete clause
enforceable.22

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        D.     Duration and Geographic Scope. Valid and enforceable non-compete clauses
must also have reasonable limitations for duration and geographic scope depending upon the
circumstances of the particular employment or position.23 Colorado courts have authority to
rewrite unreasonable limitations in duration or scope to more reasonable limits, but courts do not
have to exercise this “blue pencil” authority.24 A fact-finder has broad discretion to assess
damages for loss of net profits – not gross profits – arising from a breach of a non-compete
provision.25 An employer must produce evidence to provide a reasonable basis for the
computation of damages, including evidence of past performance as an indicator of future
damages, but may not base damages computations on speculation or conjecture.26

        An employer‟s prior material breach of an employment contract may provide the
employee with a defense to the employer‟s attempt to enforce a non-compete clause.27 After
employment begins, employers may lack the ability to enforce new non-compete clauses signed
by employees who did not receive some new and independent consideration for the new non-
compete clause.28 Yet, employers will probably avoid liability for terminating employees who
refuse to sign even void non-competition provisions.29

III.     SPECIAL STATUTE FOR EMPLOYED PHYSICIANS

       In 1982, the Colorado General Assembly amended the statute to include special
provisions addressing non-compete clauses in employment contracts for physicians.

         Any covenant not to compete provision of an employment, partnership or
         corporate agreement between physicians which restricts the right of a physician to
         practice medicine, as defined in section 12-36-106, C.R.S., upon termination of
         such agreement, shall be void; except that all other provisions of such an
         agreement enforceable at law, including provisions which require the payment of
         damages in an amount that is reasonably related to the injury suffered by reason
         of termination of the agreement, shall be enforceable. Provisions which require
         the payment of damages upon termination of the agreement may include, but not
         be limited to, damages related to competition.30

Therefore, the statute controlling non-compete clauses for physicians makes a clear distinction
between prohibitions against competition and the recovery of damages arising from competition.

        Prior to the statutory amendment in 1982, Colorado case authorities generally permitted
courts to enforce non-compete clauses in physician employment contracts. In Boulder Medical
Center v. Moore, the Colorado Court of Appeals enforced a non-compete clause that prohibited
a physician from practicing medicine in Boulder County for five years following his voluntary
separation from employment.31 The court‟s opinion noted the existence of the then-new
statutory provision prohibiting certain contractual restrictions on the right to practice medicine.
The court, however, refused to apply the statutory prohibition retroactively to the physician and
the non-compete clause in the case. The current statute, had it applied, would have rendered the
five-year practice restriction unenforceable. Yet, the holding probably continues to have vitality
in non-compete agreements that involve health care providers or employees other than
physicians.


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       The statute applicable to physicians only renders non-compete clauses unenforceable
when both of two circumstances exist. First, the non-compete clause must be contained in an
agreement “between physicians.”32 Second, the non-compete clause must restrict the
physician‟s right to “practice medicine.”33 The “practice of medicine” is defined under the
Colorado Medical Practice Act.

         (a)      Holding out one‟s self to the public within this state as being able to
                  diagnose, treat, prescribe for, palliate, or prevent any human disease,
                  ailment, pain, injury, deformity, or physical or mental condition, whether
                  by the use of drugs, surgery, manipulation, electricity, telemedicine, the
                  interpretation of tests, including primary diagnosis of pathology specimens,
                  images, or photographs, or any physical, mechanical, or other means
                  whatsoever;

         (b)      Suggesting, recommending, prescribing, or administering any form of
                  treatment, operation, or healing for the intended palliation, relief, or cure of
                  any physical or mental disease, ailment injury, condition or defect of any
                  person with the intention of receiving therefor, either directly or indirectly,
                  any fee, gift, or compensation whatsoever;

         (c)      The maintenance of an office or other place for the purpose of examining
                  or treating persons afflicted with disease, injury, or defect of body or mind;

         (d)      Using the title M.D., D.O., physician, surgeon, or any word or abbreviation
                  to indicate or induce others to believe that one is licensed to practice
                  medicine in this state and engaged in the diagnosis or treatment of persons
                  afflicted with disease, injury, or defect of body or mind, except as
                  otherwise expressly permitted by the laws of this state enacted relating to
                  the practice of any limited field of the healing arts.

         (e)      Performing any kind of surgical operation upon a human being; and

         (f)      The practice of midwifery, except [for services rendered by certain licensed
                  and certified nurse-midwives or properly registered and practicing direct-
                  entry midwife].34

Of course, a “physician” is a person who has a license to “practice medicine” under Colorado
law.35

        A non-compete clause in an agreement between physicians is not void and unenforceable
simply because a party is a physician. Rather, the non-compete clause in an agreement between
physicians must also purport to restrict a physician‟s right to practice medicine. Thus, a
physician whose scope of employment does not include the clinical practice of medicine will be
subject to the more general provisions of Colorado‟s non-compete statute.36 For example,
employers may include non-compete clauses in contracts with physicians who perform duties
that do not involve the practice of medicine in a variety of contexts, such as:

                 A medical director for a managed care organization;
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                 A medical school faculty member without clinical or attending responsibilities;
                 A risk manager for a hospital or clinic;
                 An investigator in a peer review matter; or
                 A medical consultant in any capacity (such as a medical advisor for a news
                  organization, an insurance company, a professional corporation of physicians, or
                  a law firm).

       The statute related to non-compete clauses between physicians does not apply to
agreements involving non-physician medical professionals. The definition of the “practice of
medicine” in the Colorado Medical Practice Act expressly excludes many other health care
professionals37, such as:

                 Dentists
                 Podiatrists
                 Optometrists
                 Chiropractors
                 Professional Nurses
                 Certified Nurse-Midwives
                 Acupuncturists
                 Qualified Athletic Trainers

Thus, courts may enforce non-compete clauses in agreements involving non-physicians that fall
under the more general provisions of the non-compete statute.38

       Similarly, the statute controlling non-compete clauses for physicians applies only when a
contract is an “agreement between physicians.”39 The Colorado Medical Practice Act expressly
permits “[p]ersons licensed to practice medicine” to “form professional service corporations for
the practice of medicine under the Colorado corporation code,”40 and to employ physicians.
Colorado law also permits hospitals to employ physicians.41 Therefore, the statute controlling
non-compete clauses for physicians may not apply when a hospital or hospital system directly
employs a physician.42

       The non-compete statute prohibits agreements that restrict a physician‟s right to practice
medicine, but expressly permits recovery of damages in an amount reasonably related to the
injury suffered from the termination of the non-compete agreement. These damages may
include damages related to competition.43 Therefore, under the statute, a physician who
breaches a non-compete clause cannot be restricted from practicing medicine, but may have to
pay damages to the non-breaching party for the “choice” of practicing medicine in violation of
the non-compete clause.

        The bellwether Colorado case interpreting the issue of damages in the context of
physician non-compete clauses is Wojtowicz v. Greeley Anesthesia Services.44 In that case, an
anesthesiologist entered into a professional employment agreement with a physician group that
contained a contractual non-compete clause. The non-compete clause provided for the payment
of liquidated damages to the professional corporation if the employment terminated and the
anesthesiologist continued to practice medicine within a 25-mile radius within two-years after
termination. The liquidated damages under the non-compete clause included a payment of
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$10,000 for loss of goodwill, forfeiture of the physician‟s last three months salary, and a
payment of 50% of the physician‟s future fees generated from the competing practice during the
two years following the termination.

         The Colorado Court of Appeals held that the liquidated damages provision contained in
the non-compete agreement violated the special statute relating to physician non-compete
agreements. The court noted that while the statute provides for the payment of damages related
to competition, the amount of the liquidated damages must be “reasonably related to the injury
suffered” by reason of termination of the agreement, and cannot be based on speculation or
conjecture. The court found that the liquidated damages claimed by the professional corporation
had little or no relation to the actual damages incurred as a result of the physician‟s competition.
Thus, the court ruled that the liquidated damages provisions of the physician‟s non-compete
agreement were so disproportionate as to constitute an unenforceable penalty.

        A professional corporation would ordinarily limit or mitigate its damages arising from a
departing physician‟s competition by attempting to prevent the patients of the departing
physician from seeking services from the departing physician. On the other hand, the American
Medical Association‟s ethical opinions strongly protect ongoing physician-patient relationships.
The AMA‟s ethical opinions recognize that a “patient has the right to continuity of health care”
and that each “physician has an obligation to cooperate in the coordination of medically
indicated care with other health care providers treating the patient.”45 The AMA‟s Council on
Ethical and Judicial Affairs has stated that “[c]ovenants not to compete ... disrupt continuity of
care, and potentially deprive the public of medical services.”46 Similarly, the Colorado Board of
Medical Examiners has historically required a professional corporation to notify patients of the
whereabouts of departing physician or to allow the departing physician to notify patients of a
competing practice. The Board of Medical Examiners has historically viewed the failure to give
such notices as “abandoning patients” by the departing physician, or “interfering with physician-
patient relationship by the professional corporation.”47

IV.      GENERAL INFORMATION ABOUT TRADE SECRETS

        Frequently, an employer will use non-competition provisions with its employees in order
to protect one or more of the employer‟s trade secrets. The definition of “trade secret” may vary
from state to state. In general, a trade secret consists of any formula, pattern, device, or
compilation of information which is unique to the company and which provides a competitive
advantage over the company‟s competitors who do not know it or use it. Examples of trade
secrets include, but are not limited to, the following:

                 Chemical formulae and other processes
                 Compilations of information
                 Contractual information
                 Customer lists and business opportunities48
                 Design specifications for products
                 Employee compensation information
                 Financial information and revenue projections
                 Manufacturing and operational methods or techniques49
                 New product ideas and structures

{83217-1.DOC;1}                                  7
                 Proposed plans to compete50
                 Pricing techniques, forecasts, and options51
                 Software and development methods52
                 Supplier lists
                 Training materials.

For a trade secret to exist, the protected information generally must be a secret; that is, the
information must not otherwise be in the public domain. In other words, the protected
information generally must be unique to the company and not readily available from other public
sources.53 The owner of the trade secret must also make reasonable efforts to maintain the
secrecy of the protected information. A trade secret constitutes a property right and any
misappropriation of the trade secret by, for example, theft or fraud, may constitute a crime54 or a
civil tort.

        Unlike patents, copyrights, and trademarks, no federal registration or applications
processes exits to protect trade secrets.55 Therefore, state law instead of federal law usually
controls trade secret protection.56 If a business properly maintains the secrecy of proprietary
information, a trade secret may have indefinite duration. Because state law controls trade
secrets, however, the definition of a trade secret used by a court, and the evaluation criteria used
by a court in determining whether or not a trade secret exists, can vary from state to state. The
important criteria considered by most courts, and in particular the Colorado courts, includes:57

                 The extent to which the information is known outside the company;
                 The extent to which the information is known inside the company;
                 The value of the information to the company;
                 The value of the information to competitors of the company;
                 The amount of effort, time, and money expended by the company in obtaining
                  and developing the information;
                 The amount of effort, time, and money required by a competitor to duplicate the
                  information; and
                 The precautions taken by the company to maintain the secrecy of proprietary
                  information such as by (1) limiting access on a “need to know” basis, (2) limiting
                  access by passwords, access codes, or keys that change periodically, (3) limiting
                  storage to secure places and means, (4) preventing access by customers and
                  vendors, (5) providing regular training that emphasizes secrecy, (6) disciplining
                  employees who become lax with proprietary information, and (7) recovering
                  information from departing employees at exit interviews.

Of course, no single factor controls a court‟s decision regarding the existence of a trade secret.
Obviously, if more relevant factors have factual support, then the greater the likelihood that a
court will find that a trade secret exists.

        In cases involving trade secrets, the Uniform Trade Secrets Act (“UTSA”) preempts most
the remedies and damages available under common law or tort for misappropriation of trade
secrets.58 The UTSA does not, however, preempt contract or civil remedies not based upon
trade secret misappropriation, or criminal remedies.59 The UTSA allows economic damages
from misappropriation, and exemplary damages for the willful and wanton conduct in
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misappropriating trade secrets.60 At trial, the fact-finder may exercise considerable discretion in
assessing damages but may only award the loss of net profits – not gross profits.61

V.       OTHER GENERAL CONSIDERATIONS

        A.      Liquidated Damages clauses. Proper liquidated damages clauses in non-
compete agreements may only include liquidated damages amounts which are reasonably related
to the economic injury arising from competition.62 In other words, liquidated damages under a
non-compete agreement must be “reasonably related to the injury suffered by reason of
termination of the agreement . . . .”63 In addition, a liquidated damages clause is enforceable
only if: (a) at the time of contracting, the anticipated damages resulting from a breach are
difficult to ascertain; (b) the parties mutually intend to liquidate damages; and (c) at the time of
contracting, the amount of liquidated damages was a reasonable estimate of the presumed actual
damages that a breach would cause.64 Furthermore, the amount of the liquidated damages must
not be so disproportionate as to constitute a penalty.65

        Colorado courts have recognized at least two different methods for determining whether
liquidated damages reasonably estimate the damages that would result from a breach of an
employment agreement. Primarily, courts have allowed estimates of the damages from
competition that the parties would have anticipated based upon the circumstances at the time of
contracting. This estimate would necessarily require an analysis of what transpired prior to
contracting for the context of the parties expectations at the time of contracting. 66 Secondly,
courts have allowed parties to estimate any actual damages from a breach of a covenant not to
compete, and to compare the actual damages to the amount of the liquidated damages to
determine reasonableness.67

        For a professional services corporation alleging a breach of a non-compete provision by a
physician, the proper inquiry is restricted to the impact on the net revenues or profits of the
corporation and its shareholders as a group. If the professional services corporation always
distributes net revenue as physician salary, then the net profits of the corporation as a whole will
remain essentially unchanged after a physician departs and competes. If the professional
services corporation always has zero net profits after distribution of physician salaries, then a
court will find insufficient evidence as a matter of law to uphold a non-compete agreement with
related liquidated damages as reasonable.68 Yet, a liquidated damages provision is valid and
enforceable only when the anticipated damages from a breach are uncertain or difficult to
prove.69

       Because the liquidated damages clause generally replaces the determination of actual
damages upon a breach, an employer of a physician generally may not claim both liquidated
damages and actual damages for a breach of an employment agreement.70 An employer cannot
prove and recover actual damages which are uncertain or speculative.71 The employer has the
burden of proving that damages resulted from competition following the departure of the
employee.72

        B.     Injunctive Remedies. Typically, employers want to preserve the option of
seeking injunctions from courts to prevent departing employees from taking or using proprietary
information that would breach a non-competition provision. A court‟s decision about whether to
grant preliminary injunctive relief is within the sound discretion of the trial judge. 73 To obtain a
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preliminary injunction, an employer must show (1) a reasonable probability of success on the
merits; (2) a danger of real, immediate and irreparable injury exists that may be prevented; (3)
the lack of a plain, speedy and adequate remedy of law; (4) the preliminary injunction will not
disserve the public interest; (5) the balance of equities favors granting the injunction; and (6) the
injunction will preserve the status quo pending a trial on the merits.74 A probability of success
on the merits arises if the employer has raised questions going to the merits so serious,
substantial, difficult and doubtful, as to make them fair ground for litigation and deserving of
more deliberate investigation.75 Furthermore, courts may grant preliminary injunctions on
covenants not to compete only if the covenant is not void under Colorado law.76

        Injunctive relief is the most common and generally preferred relief for breach of a non-
compete clause. The principal advantage of injunctive relief is that it terminates the prohibited
conduct as well as prevents any future damages.77 Where a non-compete agreement exists, the
breach of the agreement is the controlling factor and injunctive relief follows, almost as a matter
of course. An employer‟s damages from the breach of a non-compete agreement are presumed
to be irreparable and the remedy at law is considered inadequate.78 Yet, a trial court may not
impose an injunction for longer than the duration specified in the non-compete clause.79

        A trial court should not look favorably upon a departing employee who intentionally and
willfully breaches a valid non-compete agreement.80 As with other valid contractual provisions,
the public interest favors the enforcement of a valid non-compete agreement.81 For non-compete
agreements involving trade secrets, the Uniform Trade Secrets Act (“UTSA”) permits not only
injunctive relief, but also economic damages and attorneys fees. 82 In fact, under the UTSA,
injunctions are presumed to be the proper remedy.83

        C.      Multi-State Employers. Significant difficulties may arise for employers who
have non-compete clauses that have impacts in more than one state. For example, employers
may have multi-state interests and non-compete clauses specifying a multi-state or national
geographic scope. Departing employees, however, may choose to violate and to challenge the
enforceability of non-compete clauses in states hostile to such non-competition provisions.
Under those circumstances, the courts in another state may decline to enforce non-compete
clauses because of legal hostility to limitations on competition in that jurisdiction.84 Likewise,
employers may convince local courts to issue favorable orders, but fail to convince courts in
other states to enforce orders that contradict legal hostility to limitations on competition in that
jurisdiction.85

         Employers may try to minimize some of these multi-jurisdictional issues by including
specific choice of law clauses in non-compete clauses. A choice of law clause specifies the law
of a particular state as controlling the non-compete clause. The employers may also include
specific choice of forum clauses in the non-compete clauses. In a choice of forum clause, the
employer and employee usually agree regarding which specific court will have the exclusive
power to resolve disputes regarding the non-compete clause. Such specific choice of law and
choice of forum clauses may discourage “forum shopping” by departing employees for courts in
states that will disregard non-compete clauses.

        In general, courts will enforce specific choice of law and choice of forum clauses in
contracts unless: (1) the specified state lacks any substantial relationship to the parties or the
transaction at issue; (2) no reasonable basis exists for the parties‟ choice of law or choice of
{83217-1.DOC;1}                                  10
forum; or (3) enforcement of the contract provision in the chosen state would violate a
fundamental policy of the chosen state.86 Courts will generally enforce choice of law clauses
that identify the law of the same state in which the contract was negotiated and in which services
were performed.87

       D.       Arbitration Provisions. Many employers include arbitration provisions in
employment agreements designed to save time and expense, and to allow private resolutions, of
future employment disputes. Yet, employers rarely consider the impacts of arbitration
provisions on future disputes over non-competition provisions. For instance, courts may
exercise immediate powers to provide injunctive relief for a breach of a non-compete agreement,
but arbitrators do not possess those immediate powers. Moreover, arbitrators generally do not
have to resolve disputes consistent with Colorado‟s substantive law controlling non-competition
provisions.88 Similarly, parties have extremely limited appellate rights from an arbitration
award.89

         For these reasons, employers should examine whether to include an arbitration provision
at all in an employment contract containing non-competition provisions. If employers include
arbitration provisions in employment contracts, then employers should consider excluding non-
competition provisions from the disputes that arbitrators have power to resolve.90 In other
words, the employment contract should identify the courts in a specified forum – applying
specified substantive law – to resolve only disputes involving non-competition provisions, and
allow arbitrators to resolve other disputes arising under the employment contract. In the
alternative, the arbitration provision could limit the arbitrator‟s power to resolving disputes
strictly consistent with Colorado substantive law.91

VI.      NON-DISCLOSURE PROVISIONS

       A.      Express Contracts. Courts will usually treat non-disclosure and non-solicitation
provisions in employment contracts differently from covenants not to compete. 92 Non-
disclosure agreements allow former employees “to work for whomever they wish, and at
whatever they wish, subject only to the prohibition against misusing ... proprietary
information.”93 A non-disclosure agreement must be no broader than necessary to protect the
former employer, but may not impose significant hardships on the employability of a former
employee.94 Courts will not enforce non-disclosure provisions unless the information the
employer intends to protect is truly confidential or a trade secret.95

        B.      Implied Contracts. Another area of law addresses the status of employees who
have acquired confidential or proprietary information during their employment, but who do not
have formal non-competition or non-disclosure agreements. Under the emerging “doctrine of
inevitable disclosure,” courts may enjoin certain employees who possess proprietary or trade
secret information from accepting employment with competitors.96 Thus, the doctrine has the
potential effect of imposing a de facto non-competition provision on certain employees under
applicable circumstances. The holdings of several cases provide guidance on how the courts
have defined the parameters of this doctrine.

               Pepsico. Inc. v. Redmond.97 The Seventh Circuit Court of Appeals upheld
         a preliminary injunction that prevented a former high-level Pepsi manager who
         previously had access to proprietary information about Pepsi‟s sports drink from
{83217-1.DOC;1}                                11
         working in a similar position with Quaker Oats – the seller of Gatorade and
         Snapple. The Court found that the absence of candor by the former Pepsi
         manager in accepting the offer from Quaker Oats indicated a willingness to
         misuse Pepsi‟s trade secrets.

               Barilla Am. Inc. v. Wright.98 Plant manager did not sign the usual non-
         compete agreement required by employer‟s policies, but received considerable
         proprietary information before leaving five months later to become production
         manager for a competitor. Court enjoined the new employment for one year
         because his retention of confidential documents, photographs and notes suggested
         “a nefarious intent” to misuse proprietary information.

                Hyman Cos. v. Erwin Pearl, Inc.99 After working as general legal counsel
         for seven years, an attorney left to become general counsel for a competitor. The
         court permanently enjoined the attorney‟s ability to engage in lease negotiations
         for the competitor against the old employer, or in any other competing
         transactions, due to the fiduciary duties owed as an attorney to the prior employer.

                Doebler’s Pennsylvania Hybrids v. Doebler Seeds, LLC.100 Third Circuit
         Court of Appeals applied Pennsylvania law to enjoin a former employee from
         disclosing confidential information to the new employer, and from performing
         certain employment duties for the new employer, because of the risk of disclosure
         of the confidential information.

               DoubleClick, Inc. v. Henderson.101 Court enjoined two former executives
         from launching a new competing business for a period of six months because of a
         high probability that the executives would disclose trade secrets and because of
         the executives‟ “cavalier attitude toward their duties to their former employer.”

                Merck & Co. Inc. v. Lyon.102 A former employee obtained employment
         with a competitor while still employed with the original employer. Court allowed
         the employment, but enjoined the use of trade secrets, noting that the employee‟s
         misrepresentations about his future plans indicated a willingness to misuse the
         trade secrets of the former employer.

                Uncle B’s Bakery. Inc. v. O’Rourke.103 A manager at bagel manufacturing
         plant was enjoined from working for direct competitor. As grounds for the
         injunction, court noted the potential disclosure of proprietary information
         acquired during the course of the manager‟s previous employment.

                Bayer Corp. v. Roche Molecular Systems.104 California courts decline the
         invitation to adopt the inevitable disclosure doctrine because of California‟s
         consistent public policy against limitations on mobility of employees.

                Del Monte Fresh Produce Co. v. Dole Foods Co.105 After sixteen years,
         the Senior Vice President of Research and Development for Del Monte, who had
         signed a confidentiality agreement but had not signed a non-compete agreement,
         left to work for Dole as Vice President of Quality Assurance. Del Monte moved
{83217-1.DOC;1}                                  12
         for an injunction to prevent the employment. The Florida court refused to enjoin
         the employment because neither state involved, California nor Florida, had
         previously adopted the inevitable disclosure doctrine. Moreover, no evidence
         existed that the employee involved had taken “documents or confidential
         information with him when he left Del Monte” or that “he made an effort to take
         such information.” Thus, the court could not find a genuine threat to
         misappropriate trade secrets under the Uniform Trade Secrets Act.

                Leach v. Ford Motor Co.106 After twenty-five years, a Ford executive,
         who had signed both confidentiality and non-compete agreements, left to work for
         Fiat. The court refused to enjoin the new employment because disputed evidence
         existed about whether the executive had left Ford involuntarily which would
         negate the non-compete agreement. The court also noted the absence of evidence
         that the departing executive lacked candor, or intended to misuse trade secrets in
         the new position, to provide a legal basis to compromise the employee‟s right to
         change jobs.

                EarthWeb, Inc. v. Schlack.107 Departing from Doubleclick, the court
         refused to enjoin the employment of a departing employee because no evidence
         supported a finding of an actual misappropriation of confidential information. In
         the absence of evidence of misconduct by the departing employee, the court held
         that “the inevitable disclosure doctrine treads an exceedingly narrow path through
         judicially disfavored territory.”

                Colonize.com v. Perlov.108 Following EarthWeb, the court refused to
         enjoin the new employment of a departing employee unless “evidence of theft of
         trade secrets exists[,]” but that “mere knowledge of the intricacies of a business is
         simply not enough” to overcome New York‟s strong policy against non-compete
         agreements.

                Gov’t Technology Svcs., Inc. v. Intellisys Technology Corp.109 The court
         dismissed former employer‟s claim for departing employee‟s breach of a
         confidentiality and non-disclosure agreement based only on alleged inevitable
         disclosures to the new employer that would breach the agreement. The court held
         that the former employer‟s claim failed for lacking the required allegation and
         proof of an actual “direct or indirect disclosure of confidential information.”

                Mulei v. Jet Courier Service. Inc.110 In a leading Colorado case
         addressing the issue of non-compete clauses in employment contracts, the court
         rejected a claim for breach of a non-compete agreement against an employee who
         had left the employer to start his own business. The court held that covenants not
         to compete may protect confidential information acquired during the course of
         employment, but not general knowledge of a business operation.

       Taken together, these cases demonstrate that the doctrine of inevitable disclosure may
prevent competition by a former employee under certain limited circumstances regardless of the
terms of a written agreement. The doctrine of inevitable disclosure may prevent competition by
a former employee if the new employment makes it impossible to perform the new duties
{83217-1.DOC;1}                                   13
without revealing the trade secrets of the former employer. These cases indicate several general
prerequisites for the application of the doctrine of inevitable disclosure to a former employee‟s
new employment:

                 The departing employee must accept a new job with a direct competitor in the
                  same industry;
                 The departing employee‟s new job duties must be very similar, if not identical, to
                  the old job duties;
                 The former employer‟s efforts to maintain the secrecy of trade secrets –
                  particularly through limited access and confidentiality or non-disclosure
                  agreements – remain critical to the success of the claim;
                 The candor of the departing employee in leaving his old job can indicate
                  trustworthiness with the former employer‟s trade secrets at the new job;
                 The covert activities of the former employee prior to departure – such as meeting
                  with or soliciting former customers, or making copies of proprietary information
                  to take to the new employer – remain important if not critical considerations;
                 Evidence of the new employer‟s nefarious expectations and motivations with
                  respect either to luring the employee or to hiring the employee away from the
                  former employer could sway a close case; and
                 At best, the old employer can only expect a judicial remedy against the new
                  employer for a limited duration or impacting limited categories of information.111

        C.      Other Potential Legal Theories. Departing employees who violate non-
competition clauses generally will also engage in conduct the triggers claims under related legal
theories. For example, “[a]t all times during his employment, an employee is subject to a duty
of loyalty to his employer in all matters connected with his employment.” 112 Similarly, an agent
has a duty of loyalty to act with utmost good faith and loyalty for a principle. 113 In general, the
duty of loyalty may apply only to employees in positions of trust and confidence, 114 and the duty
of loyalty usually ceases when employment ceases.115 Thus, in cases in which companies
entrust confidential information to independent contractors or employees in a fiduciary capacity,
a claim for a common law breach of fiduciary duty may arise. 116 One possible remedy for a
breach of the duty of loyalty is disgorgement – requiring the employee to repay all compensation
received from the former employer while the employee breached the duty.117

        A departing employee may become liable for interference with contract if he or she
intentionally or improperly interferes with a contractual relationship of the employer about
which the departing employee knew or should have known.118 Similarly, a departing employee
may become liable for the improper or intentional interference with the prospective business
advantage of the former employer.119 Departing employees have the qualified privilege of
competition for defense of claims for interference with contract or interference with business
advantage.120 The employer may recover compensatory damages arising from the improper
interference including lost net profits.121

       Conduct by a departing employee that intends to destroy competition in a particular
market may trigger a claim for restraint of trade under the Unfair Practices Act.122 Conduct by a
departing employee that involves the unauthorized and intentional taking of an employer‟s
proprietary information may constitute theft of trade secrets, 123 or the common law tort of
conversion.124
{83217-1.DOC;1}                                   14
        Colorado has recognized the common law tort of unjust enrichment. In the context of
non-competition provisions, the claim requires proof that (1) at the former employer‟s expense;
(2) the departing employee obtained a benefit; (3) under circumstances that make it unjust for
the departing employee to retain the benefit without paying the employer. 125 A claim for unjust
enrichment closely resembles another little-know common law theory called misappropriation of
trade values or simply unfair competition. The misappropriation of trade values claim requires
proof that (a) the departing employee misappropriated a novel idea with inherent business value,
(b) arising from the former employer‟s expenditure of labor, skill or money. 126 Finally, the
conduct of a departing employee could constitute a deceptive trade practice 127 under the
Colorado Consumer Protection Act, or a sub-theory of defamation law known as product
disparagement.128

VII.     EMPLOYEE CHOICE DOCTRINE

        Generally, enforceable non-competition provisions require a dual showing that
employees provide sufficiently special services, and employers have legitimate business interests
justifying protection.129 In certain circumstances, employers may avoid general legal restrictions
on non-competition provisions by linking payment of post-employment compensation or
benefits to an employee‟s choice to refrain from competition after quitting. The “employee
choice doctrine” involves a contractual promise that if an employee voluntarily competes after
quitting, then the employee forfeits specified employment benefits or compensation.

        For example, trust agreements for employment benefits could make employees trust
beneficiaries, but require forfeiture of trust distributions if they leave employment and compete
against their employers.130 Courts have upheld such contractual agreements because employees
may freely chose whether to preserve their right to benefits by refraining from competition, or
risk forfeiture of benefits by competing.131 Under the employee choice doctrine, courts
generally enforce these forfeiture-for-competition provisions without judicial inquiries regarding
the reasonableness of the scope or duration of competition, or the existence of trade secrets.132

        Because forfeiture-for-competition provisions do not constitute non-competition
provisions, employers may not ask courts to enjoin departing employees from competing
altogether.133 Despite this limitation, forfeiture-for-competition provisions may allow employers
to avoid the irony of paying financial benefits to departing employees who might use those
proceeds to further a competing venture. In addition, some courts have construed forfeiture-for-
competition provisions to allow employers to require former employees to repay benefits
received before the prohibited competition.134 Thus, such forfeiture-for-competition provisions
may constitute powerful disincentives to departing employees who risk forfeiture of deferred
incentive compensation or employee stock options if they chose to compete.135

        On the other hand, some courts have enforced forfeiture-for-competition provisions only
when employees quit, but not when employees separate from employment involuntarily.136
Those courts have apparently misplaced the focus on the employee‟s choice whether to quit,
rather than on the employee‟s choice whether to compete, when deciding not to enforce
forfeiture-for-competition provisions.137 In most cases, however, employers could wisely deter
unwanted competition by including forfeiture-for-competition provisions in employment
contracts when employment compensation involves some deferred compensation, employee
{83217-1.DOC;1}                                15
stock options plans, severance agreements, or separation packages.

VIII. NON-SOLICITATION PROVISIONS

        Non-solicitation clauses generally attempt to prohibit former employees from soliciting
the customers, or recruiting the remaining employees, of their former employers. Initially,
Colorado courts have generally approved non-solicitations provisions involving former
customers.138 Colorado courts have enforced a non-solicitation provision that prevented a
former employee of a recruiting agency from soliciting known “candidates” of the former
agency for a competing agency within one year after leaving employment.139 Courts in other
jurisdictions have considered non-solicitation provisions for customers of the former employer
as less onerous than covenants not to compete, and have generally enforced reasonable non-
solicitation provisions.140 Reasonable non-solicitation provisions generally must protect a
specific interest of the employer, and must have a limited duration and a limited geographic
scope.

       Colorado courts have likewise addressed the enforceability of non-solicitation provisions
involving other employees of the former employer. Colorado courts will likely enforce
employee non-solicitation clauses to “prohibit only the initiation of contact with” the remaining
employees of a former employer.141 Other jurisdictions have enforced non-solicitation
provisions involving other employees as long as those provisions had limited duration and
geographic scope. 142

IX.        CONCLUSIONS

        The legal complexities surrounding non-compete, non-disclosure, and non-solicitation
provisions requires considerable care and creativity in drafting contracts with enforceable terms.
Those contracts occasionally become even more complicated when the employment contract
arises from “the purchase and sale of a business or the assets of a business” such as the purchase
of a physician‟s medical practice.143 Consequently, employers and their legal advisers should
undertake a careful review of the nature of their underlying business operations, and the
expected duties of key employees, before entering into written employment agreements that
attempt to restrict the actions of employees after their separation from employment.144

                                              AUTHORITIES
1
    Colo. Rev. Stat. § 8-2-113(2) (2007).
2
  See, e.g., David Armstrong, “What Does a Noncompete Pact Truly Bar? Nasty Row Sorts It Out,” The Wall Street
Journal A1 & A8 (Mon., June 14, 2004, Vol. CCXLII, No. 115) (dispute arising after merger between records
storage competitors, Iron Mountain Inc. and Pierce Leahy Corp., when family members of Peter Pierce began
forming a competing business with his assistance).
3
 Neil Caesar, J.D., “A Too-Tough Noncompete Clause Could Defeat Its Own Purpose” Managed Care Magazine
(Nov. 1996).
4
 Colo. Rev. Stat. § 8-2-113(2) (emphasis added). The statute addresses the relationship between employers and
employees, but does not apply to disputes solely between separate businesses. Energex Enterprises, Inc. v. Anthony
Doors, Inc., 250 F. Supp. 2d 1278 (D. Colo. 2003).
5
    Id.
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6
  Harvey Barnett, Inc. v. Shidler, 143 F. Supp. 2d 1247 (D. Colo. 2001); Management Recruiters of Boulder v.
Miller, 762 P.2d 763 (Colo. App. 1988); Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *3 (No.
05CA2712, Colo. App., July 26, 2007).
7
  Under established Colorado law, “[w]here a party enters into a contract, then absent fraud, duress, or incapacity,
courts will not relieve that party of the consequences of the bargain simply because it may have been improvident.”
Fox v. I-10 Ltd., 957 P.2d 1018, 1022 (Colo. 1998); Great Am. Ins. Co. of New York v. City of Boulder, 476 P.2d
586 (Colo. App. 1970) (“the mere fact that a contract is unprofitable to one of the parties, or that it was
improvidently entered into, is not, in and of itself, sufficient basis for avoiding contractual obligations”). A court
has the general duty to interpret and to enforce contracts as written, and not to interfere with the valid bargain of the
parties. Fox v. I-10 Ltd., 957 P.2d at 1022.
8
  See Colo. Rev. Stat. § 8-2-113(2)(a); see also Boulder Med. Ctr. v. Moore, 651 P.2d 464, 465 (Colo. App. 1982);
Weber v. Nonpareil Baking Co., 85 Colo. 232, 274 P. 932 (1929). Under proper circumstances, a business may sell
a valid and enforceable non-compete clause in an employment agreement as a business asset. See Miller v. Kendall,
541 P.2d 126, 127 (Colo. App. 1975); Cantrell v. Lemons, 200 P.2d 911 (Colo. 1948).
9
 See DBA Enterprises, Inc. v. Findlay, 923 P.2d 298, 302 (Colo. App. 1996); see also Gibson v. Eberle, 762 P.2d
777, 779 (Colo. App. 1988).
10
     Boulder Med. Ctr. v. Moore, 651 P.2d 464, 464 (Colo. App. 1982).
11
     Harrison v. Allbright, 577 P.2d 302, 303 (Colo. App. 1978), cert. denied.
12
  Nat’l Propane Corp. v. Miller, 18 P.3d 782 (Colo. App. 2000); see also Gibson v. Eberle, 762 P.2d 777 (Colo.
App. 1988).
13
 Colo. Rev. Stat. § 8-2-113(2)(c); see also Dresser Industries, Inc. v. Sandvick, 732 F.2d 783, 787 (10th Cir. 1984);
Am. Express Financial Advisors, Inc. v. Topel, 38 F. Supp. 2d 1233 (D. Colo. 1999).
14
  Occusafe, Inc. v. EG&G Rocky Flats, Inc., 54 F.2d 618, 622 (10th Cir. 1995); Atmel Corp. v. Vitnesse
Semiconductor Corp., 30 P.3d 789 (Colo. App. 2001), cert. denied (employee not management if three levels of
management exist above employee); Management Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763, 765 (Colo.
App. 1988); Porter Industries v. Higgins, 680 P.2d 1339, 1342 (Colo. App. 1984).
15
  Harrison v. Allbright, 577 P.2d 302, 304 (Colo. App. 1977) (partner qualifies as executive or management
employee); Boulder Med. Ctr. v. Moore, 651 P.2d 464, 465 (Colo. App. 1982) (executive or management includes
employees possessing degrees or licenses such as lawyers, engineers, physicians, and their professional staffs); cf.
Management Recruiters of Boulder, Inc. v. Miller, 762 P.2d 763 (Colo. App. 1988) (previous non-competition
agreement may not apply to employee later promoted to management position).
16
   Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *3 (No. 05CA2712, Colo. App., July 26, 2007)
(“the validity of a noncompetition provision is determined as of the time the agreement is entered into, and not as of
any time thereafter.”); see also id. at *4 (employer should enter into new employment agreements as employees
subsequently acquire new positions or new management responsibilities).
17
  Colo. Rev. Stat. § 8-2-113(2)(d); see Occusafe, Inc., 54 F.2d 618 at 622 (leaving as a question of fact for trial
whether unlicensed industrial hygienists fall under “professional staff to executive and management personnel”
under the statute); see also Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *6 (No. 05CA2712,
Colo. App., July 26, 2007) (“„professional staff to executive and management personnel‟ is limited to those persons
who, while qualifying as „professionals‟ and reporting to managers or executives, primarily serve as key members
of the manager‟s or executive‟s staff in the implementation of management or executive functions.”). Thus, the
question may remain open whether this statutory exception could apply to para-professionals such as bookkeepers,
executive assistants, and paralegals. See id., 2007 WL 2128330, *11 (concurring opinion commending the General
Assembly to provide statutory clarification to the term “professional staff” under the statute).

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18
   See Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *9 (No. 05CA2712, Colo. App., July 26,
2007) (non-compete clause stating that the “Agreement shall be binding upon and shall inure to the benefit of the
parties, and [employer‟s] successors and assigns” allowed employer to assign personal service contract to a
successor company); see also Seale v. Bates, 359 P.2d 356 (Colo. 1961) (employer may assign employment contract
for personal services with employee‟s consent); Bill C. Berger, “From Dyer’s Case to Hard Bargains: Six Centuries
of Covenants Not to Compete,” 36 Colo. Law. 39, 42 & nn. 45 & 46 (No. 4, Apr. 2007).
19
   Courts must construe the statutory exceptions narrowly and the employer bears the burden of proving the
enforceability of a non-competition provision. See Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330,
*3 (No. 05CA2712, Colo. App., July 26, 2007); Porter Industries v. Higgins, 680 P.2d 1339, 1342 (Colo. App.
1984); see also Nat’l Propane Corp. v. Miller, 18 P.3d 782 (Colo. App. 2000) (courts may apply the exception for
the sale of a business more favorably for buyers).
20
   Colorado Supply Co. v. Stewart, 797 P.2d 1303 (Colo. App. 1990); see also Ovation Plumbing, Inc. v. Furton, 33
P.3d 1221 (Colo. App. 2001); but see Smith v. Sellers, 747 P.2d 15 (Colo. App. 1987) (refusing to enforce a
covenant not to compete in an independent contractor agreement in which one dentist provided independent services
in the office of another dentist).
21
     See Part IV (General Information about Trade Secrets), below; see also Colo. Rev. Stat. § 8-2-113(2)(b).
22
   See generally Colo. Rev. Stat. § 8-2-113(2). One Colorado court has enforced a non-compete agreement in a
franchise agreement against a non-signatory – the life partner of the signatory to the agreement. Gold Messenger,
Inc. v. McGuay, 937 P.2d 907 (Colo. App. 1997). The Code of Professional Responsibility for lawyers prohibits
employment agreements that restrict the subsequent practice of law, Colo. R. Prof. Conduct 5.6, except in situations
involving the sale of a law practice, Colo. R. Prof. Conduct 1.17(f).
23
   In re Marriage of Fischer, 834 P.2d 270, 273-74 (Colo. App. 1992) (non-competition with related business within
20 highway miles upheld); Harrison v. Albright. 577 P.2d 302, 304-05 (Colo. App. 1977) (citing “[n]umerous
appellate decisions [that] have sustained covenants not to compete for terms of up to five years and within distances
of 100 miles” in upholding 5 year/50 mile provision); Electrical Distributors, Inc. v. SFR, Inc., 166 F.3d 1074, 1086
(10th Cir. 1999) (upholding covenant not to compete in sale of Utah business to Colorado corporation for 7 years
over entire State of Utah); Nutting v. RAM Southwest, Inc., 106 F. Supp. 2d 1121, 1127 (D. Colo. 2000) (citing
Colorado cases enforcing county-wide to nationwide geographic restrictions, but refusing to uphold a world-wide
and perpetual restriction); Gold Messenger, Inc. v. McGuay, 937 P.2d 907 (Colo. App. 1997) (3 years/50 miles);
Colo. Urology Assoc., P.C. v. Grossman, 529 P.2d 652 (Colo. App. 1974) (2 years/30 miles); Taff v. Brayman, 518
P.2d 298 (Colo. App. 1974) (2 years/65 miles); Flower Haven, Inc. v. Palmer, 502 P.2d 424 (Colo. App. 1972) (5
years/Boulder County); Short v. Fahrney, 502 P.2d 982 (Colo. App. 1972) (2 years/Denver City limits); Gibson v.
Angros, 491 P.2d 87 (Colo. App. 1971) (5 years/Boulder County); Wagner v. A&B Personnel, 473 P.2d 179 (Colo.
App. 1970) (1 year/50 miles); Sprague’s Aetna Trailer Sales v. Hruz, 474 P.2d 216 (Colo. 1970) (1 year/75miles);
Zeff, Farrington & Assoc. v. Farrington, 449 P.2d 813 (Colo. 1969) (3 years/200 miles); Fuller v. Brough, 411 P.2d
18 (Colo. 1966) (5 years/45 miles); Weber v. Nonpareil Baking Co., 85 Colo. 232, 274 P. 932, 934 (1929)
(upholding perpetual duration and county-wide geographic scope following sale of a baking business); Freudenthal
v. Espey, 45 Colo. 488, 102 P. 280 (1909) (5 years/city limits); but see Earthweb v. Schlack. No. 99 Civ. 10035,
1999 U.S. Dist. LEXIS 16700 (S.D.N.Y. Oct. 27, 1999) (“When measured against the information technology
industry in the Internet environment, a one-year hiatus from the work force is several generations, if not an
eternity.”); Charles Milne Assoc. v. Toponce, 770 P.2d 1313 (Colo. App. 1988) (no limits stated); National
Graphics Co. v. Dilley, 681 P.2d 546 (Colo. App. 1984) (same).
24
  See Wittenberg v. Williams, 110 Colo. 418, 135 P.2d 228 (1943) (world-wide limitation reduced to a portion of
Colorado); Gulick v. A. Robert Strawn & Assoc. Inc., 477 P.2d 489 (Colo. App. 1970) (reducing 35 mile limit to 10
miles); Taff v. Brayman, 518 P.2d 298, 299 (Colo. App. 1974) (2 year provision reduced to 1 year); see also Bill C.
Berger, “From Dyer’s Case to Hard Bargains: Six Centuries of Covenants Not to Compete,” 36 Colo. Law. 39, 40
& nn. 20-24 (No. 4, Apr. 2007); but see National Graphics Co. v. Dilley, 681 P.2d 546 (Colo. App. 1984) (court
declined to supply missing geographic limit); Grossman v. Sherman, 599 P.2d 909, 911 (Colo. 1979) (court
declined to rewrite excessive liquidated damages amount).
25
     Logixx Automation, Inc. v. Lawrence Michels Family Trust, 56 P.3d 1224, 1227 (Colo. App. 2002); see also DBA
{83217-1.DOC;1}                                         18
Enterprises, Inc. v. Findlay, 923 P.2d 298 (Colo. App. 1996); Lee v. Durango Music, 144 Colo. 270, 355 P.2d 1083
(1960).
26
  Logixx, 56 P.3d at 1227; Airborne, Inc. v. Denver Air Ctr., Inc., 832 P.2d 1086 (Colo. App. 1992); Wojtowicz v.
Greeley Anesthesia Svcs., P.C., 961 P.2d 520 (Colo. App. 1997).
27
  See generally Converse v. Zinke, 635 P.2d 882 (Colo. 1981) (generally preexisting breach defense requires a
complete breach of contract or total failure of consideration); see also Rocky Mtn Hosp. & Med. Svcs. v. Mariani,
916 P.2d 519 (Colo. 1996) (violation of public policy to terminate employment for employee‟s refusal to perform
unlawful, unprofessional or unethical act); Martin Marietta v. Lorenz, 823 P.2d 100 (Colo. 1993) (same).
28
   See, e.g., Labriola v. Pollard Group, Inc., 100 P.3d 791 (Wa. 2004) (refusing to enforce a non-competition
provision that added new restrictions to an earlier non-competition provision because employer did not give
independent consideration for the new restrictions). The Colorado Courts have not specifically addressed this issue,
and courts in other jurisdictions remain split. See “Sufficiency of Consideration for Employee‟s Covenant Not to
Compete, Entered Into After Inception of Employment,” 51 A.L.R.3d 825; see also Rivendell Forest Products, Ltd.
v. Geogia-Pacific Corp., 824 F. Supp. 961, 968 (D. Colo. 1993) (refusing to enforce confidentiality agreement not
supported by independent consideration); Richardson v. Jordan, 95 Colo. 56, 32 P.2d 826, 827 (1934) (promise to
perform an existing obligation does not constitute consideration for new contract). Consequently, employers
usually chose to condition pending and discretionary bonuses, raises, stock options, or promotions on employees‟
agreement to sign new non-competition agreements. See, e.g., M.S. Jacobs & Assoc. v. Duttey, 452 Pa. 143, 303
A.2d 921 (1973); see also Simko, Inc. v. Graybar Co., 464 A.2d 1104 (Md. App. 1983) (sufficient consideration
existed when employee facing discharge after 10 years of employment signed new non-competition provision to
remain employed). Some courts have held that continuing at-will employment generally constitutes adequate
consideration to support a new non-competition provision. See Bill C. Berger, “From Dyer’s Case to Hard
Bargains: Six Centuries of Covenants Not to Compete,” 36 Colo. Law. 39, 41 & n. 38 (No. 4, Apr. 2007).
29
  Vaske v. DuCharme, McMillen & Assoc., Inc., 757 F. Supp. 907 (D. Colo. 1990) (rejecting employee‟s claims for
violation of public policy and outrageous conduct against employer who fired employee for failing to sign non-
competition provision).
30
     Colo. Rev. Stat. § 8-2-113(3).
31
   651 P.2d 464 (Colo. App. 1982); see also Colo. Urology Assoc., P.C. v. Grossman, 529 P.2d 652 (Colo. App.
1974) (upholding $20,000 in liquidated damages for competition within 2 years and 30 miles); Freudenthal v.
Espey, 45 Colo. 488, 102 P. 280 (1909) (upholding non-compete clause between physicians for 5 years within city
limits). Several courts in other states, that do not have Colorado‟s special statute for physicians, have occasionally
struck down non-competition provisions involving health care providers. See, e.g., Cardiovascular Surgical
Specialists Corp. v. Mammana, 61 P.3d 210, 214 (Okla. 2002) (2 year clause prohibiting practice of medicine
within 20 miles effectively constituting a 100 mile restriction invalidated); Whitten v. Malcolm, 541 N.W. 2d 45, 47
(Neb. 1995) (1 year clause prohibiting practice of dentistry with 25 miles invalidated): Darugar v. Hodges, 471 S.E.
2d 33, 35-36 ( Ga. App. 1996) (2 year clause prohibiting practice of medicine within 25 miles invalidated).
32
  Colo. Rev. Stat. § 8-2-113(3); see also Wojtowicz v. Greeley Anesthesia Services, 961 P.2d 520 (Colo. App.
1997), cert. dismissed as improvidently granted and reh’g denied (1999); cf. Turner v. Four Corners Heart Clinic,
P.C., No. 9 N 1394 (D. Colo. Jan. 17, 1995).
33
     Colo. Rev. Stat. § 8-2-113(3).
34
     See Colo. Rev. Stat. § 12-36-106(1).
35
     See generally Colo. Rev. Stat. § 12-36-106(2).
36
     See Colo. Rev. Stat. § 8-2-113(2).
37
     Colo. Rev. Stat. §§ 12-36-106(3)(a) to (u).

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38
     Colo. Rev. Stat. § 8-2-113(2).
39
     Colo. Rev. Stat. § 8-2-113(3).
40
     Colo. Rev. Stat. § 12-36-134(1).
41
     Colo. Rev. Stat. § 25-3-103.7(2)
42
   On the other hand, under the Stark II, Phase II regulations for the Medicare program, if hospitals provide any
remuneration for a physician recruited to practice at the hospital, then the physician‟s contract “may not impose
additional practice restrictions . . . other than conditions related to quality of care[.]” 42 C.F.R. § 411.357(e)(4)(vi)
(Mar. 2004). These regulations apply regardless of whether the hospital in the Medicare program employs the
physician directly, or whether the hospital provides remuneration to assist a private physician group to recruit the
physician. The “additional practice restrictions” under the Stark II, Phase II regulations include non-compete
agreements. For hospitals in the Medicare program, the Stark II, Phase II regulations contradict Colorado‟s
covenant not to compete statutory framework which prohibits restrictions on the practice of medicine, but permits
liquidated damages including damages from competition. Compare id., with Colo. Rev. Stat. § 8-2-113(3).
43
     Colo. Rev. Stat. § 8-2-113(3).
44
     961 P.2d 520 (Colo. App. 1997), cert. dismissed as imnrovidentlv granted and reh’g denied (1999).
45
  Code of Medical Ethics. xv (American Medical Association, Council on Ethical and Judicial Affairs, 1998-99 ed.)
(Fundamentals of the Patient-Physician Relationship); see also id. at 141 (Ethics Opinion 8.115, Termination of the
Physician-Patient Relationship) (“Physicians have an obligation to support continuity of care for their patients”).
46
  Id. at 158 (Ethics Opinion 9.02, Restrictive Covenants and the Practice of Medicine); see also D. Loeser, “The
Legal, Ethical, and Practical Implications of Noncompetition Clauses: What Physicians Should Know Before They
Sign,” 31 J.L.Med. & Ethics 283 (Summer 2003).
47
   The Colorado Board of Medical Examiners has adopted polices consistent with the American Medical
Association‟s Ethics Opinions as the generally accepted standards of practice for physicians practicing in Colorado.
See Medical Board Policy No. 40-8. The Board of Medical Examiners has authority to impose discipline on a
physician for “[a]ny act or omission which fails to meet the generally accepted standards of medical practice[.]”
Colo. Rev. Stat. § 12-36-117(1)(p). The Board of Medical Examiners also has authority to impose discipline on a
physician for “[v]iolation of any valid board order or any rule or regulation promulgated by the board in
conformance with law[.]” Id. § 12-36-117(1)(u).
48
 See generally Suburban Gas Co. v. Bockelman, 401 P.2d 268 (Colo. 1965); Colo. Accounting Machines, Inc. v.
Mergenthaler, 609 P.2d 1125 (Colo. App. 1980); see also 28 A.L.R.3d 7 (2005).
49
  See Gold Messenger, Inc. v. McGuay, 937 P.2d 907, 911 (Colo. App. 1997); Master Palletizer Sys. v. T.S.
Ragsdale Co., 123 F.R.D. 351, 352 (D. Colo. 1988).
50
     See Echostar Comm. Corp. v. News Corp., Ltd., 180 F.R.D. 391, 395 (D. Colo. 1998).
51
  See Colo. Supply Co. v. Stewart, 797 P.2d 1303, 1306 (Colo. App. 1990); Ovation Plumbing, Inc. v. Furton, 33
P.3d 1221 (Colo. App. 2001).
52
     See Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823 (10th Cir. 1993).
53
   Yet, employers may glean some of the information compiled into a trade secret formula (for instance, the
interpretation of Medicare and Medicaid regulations) through materials in the public domain. The employer‟s
decision regarding what information to include, compile and assimilate, and in what format, may still become
specific and unique to the employer and support a claim for a trade secret. See Rivendell Forest Products, Ltd. v.
Georgia-Pacific Corp., 28 F.3d 1042, 1045 (10th Cir. 1994); Hyman and Co. v. Velsicol Corp., 233 P.2d 997, 998-
99 (Colo. 1951). For example, one judge has described Medicare and Medicaid regulations as “the most completely
{83217-1.DOC;1}                                        20
impenetrable texts within human experience” and to be approached “with dread, for not only are they dense reading
of the most tortuous kind, but Congress also revisits the area frequently, making any solid grasp of the matters
addressed merely a passing phase.” Rehabilitation Ass’n of Virginia, Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir.
1994). Moreover, although a program may have been disclosed in large part and become subject to re-creation by
others does not necessarily destroy the trade secret “as a whole.” Harvey Barnett, Inc. v. Shidler, 338 F.3d 1125
(10th Cir. 2003) (reversing summary judgment).
54
  Colorado law defines the theft of trade secrets as a criminal misdemeanor. Colo. Rev. Stat. § 18-4-408. The
federal Economic Espionage Act provides criminal sanctions for theft of trade secrets under certain circumstances.
18 U.S.C. § 1832. A violation of the criminal standard would support a civil tort claim for negligence per se.
55
   When employers hire particular employees with the expectation that the employees will produce inventions,
patent waiver and non-disclosure agreements do not constitute non-competition provisions. See MAI Basic Four,
Inc. v. Basis, 880 F.2d 286, 287-88 (10th Cir. 1989). When employers do not hire employees specifically to invent,
then separate consideration in addition to continued employment becomes required to support a non-disclosure or
patent assignment agreement. See Hewett v. Samsonite Corp., 507 P.2d 1119, 1121-22 (Colo. App. 1973).
56
     Colorado has adopted the Uniform Trade Secrets Act or UTSA. See Colo. Rev. Stat. §§ 7-74-101 to –110.
57
  Network Telecommunications v. Boor-Crepeau, 790 P.2d 901 (Colo. App. 1990); Porter Industries v. Higgins,
680 P.2d 1339 (Colo. App. 1984).
58
  See Colo. Rev. Stat. § 7-74-108; see also Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823 (10th Cir.
1993). Misappropriation of a trade secret requires a defendant (1) to possess a valid trade secret; (2) to disclose or
use the trade secret without consent; and (3) to know or to should have known that he or she acquired the trade
secret by improper means. Colo. Rev. Stat. § 7-74-102(2); see also Chasteen v. Unisia Jecs Corp., 216 F.3d 1212,
1216 (10th Cir. 2000).
59
  See Powell Products, Inc. v. Marks, 948 F. Supp. 1469, 1473-74 (D. Colo. 1996) (UTSA did not preempt claim
for interference with business advantage).
60
   See Colo. Rev. Stat. § 7-74-104; see also In re S&D Foods, Inc., 144 Bankr. 121 (D. Colo. 1992). Using a
negligence per se theory and applicable criminal statutes, a plaintiff could also make a claim for treble damages and
attorneys fees for a theft of trade secrets. See Colo. Rev. Stat. §§ 18-4-405, -408; see also Itin v. Bernard T. Unger,
P.C., 17 P.3d 129 (Colo. 2000).
61
  See Sonoco Prod. Co. v. Johnson, 23 P.3d 1287 (Colo. App. 2001); Logixx Automation, Inc. v. Laurence
Michaels Family Trust, 56 P.3d 1224 (Colo. App. 2002).
62
   See Colo. Rev. Stat. § 8-2-113(3); see also Powder Horn Constructors, Inc. v. City of Florence, 754 P.2d 356,
365 (Colo. 1988); H.M.O. Systems, Inc. v. Choicecare Health Services, Inc., 665 P.2d 635, 638 (Colo. App. 1983);
Dikeou v. Dikeou, 916 P.2d 601, 604 (Colo. App. 1995); Rohauer v. Little, 736 P.2d 403, 410 (Colo. 1987); Perino
v. Jarvis, 135 Colo. 393, 312 P.2d 108, 109 (Colo. 1957); Oldis v. Grosse-Rhode, 35 Colo. App. 46, 528 P.2d 944,
947 (Colo. App. 1974).
63
     See Colo. Rev. Stat. § 8-2-113(3).
64
  See H.M.O. Systems, Inc., 665 P.2d at 638; see also Rohauer, 736 P.2d at 410; Perino, 312 P.2d at 109; Oldis,
528 P.2d at 947; O’Hara Group Denver, Ltd. v. Marcor Housing Sys., Inc., 595 P.2d 679, 683 (Colo. 1979).
65
   Rohauer, 736 P.2d at 410; Jobe v. Writer Corp., 526 P.2d 151, 152 (Colo. App. 1974); Knoebel Merchantile Co.
v. Siders, 439 P.2d 355, 358-59 (Colo. 1968) (non-competition agreements “must not impose undue hardship” on
the right to pursue other employment); Whittenberg v. Williams, 135 P.2d 228 (Colo. 1943); see generally John
Paddock, Jr., 16 Colorado Employment Law & Practice § 5.28 (Non-competition agreements with physicians)
(West 2d ed. 2006); Humana Medical Plan, Inc. v. Jacobson, 614 So. 2d 520 (Fla. App. 1992); MCA Television Ltd.
v. Public Interest Corp., 171 F.3d 1265, 1271 (11th Cir. 1999) (disproportionate liquidated damages amount “held in
terrorem over the promisor to deter him from breaking his promise.”).
{83217-1.DOC;1}                                           21
66
     See HMO Systems, Inc., 665 P.2d at 638.
67
  See Rohauer 736 P.2d at 411; Wojtowicz v. Greeley Anesthesia Services, P.C., 961 P.2d 520 (Colo. App. 1997),
cert. dismissed as improvidently granted and reh’g denied (1999).
68
     See Wojtowicz, 961 P.2d at 523.
69
  See Rohauer, 736 P.2d at 410; see also In re Union Square Dev. Co., 140 B.R. 544, 548 (D. Colo. 1992); but see
In re Winston XXIV, Ltd.Partnership, 170 B.R. 453, 461 (D. Kan. 1994) (liquidated damages unenforceable when
damages ascertainable at time of contracting); ZA Consulting, L.L.C. v. Whittman, 2002 Phila. Ct. Com. Pl. 114
(Jan. 29, 2002) (liquidated damages consisting of triple the estimate of gross billings, without deduction for
expenses, constituted unenforceable penalty).
70
     See Medema Homes, Inc. v. Lynn, 647 P.2d 664, 667 (Colo. 1982).
71
     See Wojtowicz, 961 P.2d at 522; Graphic Directions, Inc. v. Bush, 862 P.2d 1020, 1024 (Colo. App. 1993).
72
     See Irish v. Mountain States Telephone and Telegraph Co., 31 Colo. App. 89, 500 P.2d 151 (1972).
73
     See, e.g., Rathke v. MacFarlane, 648 P.2d 648, 653 (Colo. 1982).
74
  See Colo. R. Civ. P. 65; see also Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *2 (No.
05CA2712, Colo. App., July 26, 2007); Bishop & Co. v. Cuomo, 799 P.2d 444, 446 (Colo. App. 1990).
75
     See, e.g., George Washington Homeowners Ass’n, Inc. v. Widnall, 863 F. Supp. 1423, 1426 (D. Colo. 1994).
76
  Porter Industries, Inc. v. Higgins, 680 P.2d 1339, 1341 (Colo. App. 1984); see generally Colo. Rev. Stat. § 8-2-
113.
77
     DBA Enterprises, Inc. v. Findlay, 923 P.2d 298, 302 (Colo. App. 1996).
78
     Miller v. Kendall, 541 P.2d 126, 127 (Colo. App. 1975).
79
   Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789, 796 (Colo. App. 2001), cert. denied; see also Wagner
v. A&B Personnel Systems, Ltd., 473 P.2d 179 (Colo. App. 1970) (not selected for official publication); Gulick v. A.
Robert Strawn & Assoc., Inc. 477 P.2d 489 (Colo. App. 1970) (not selected for official publication).
80
     See Gold v. Holiday Rent-A-Car, 627 F. Supp. 280 (W.D. Mo. 1985).
81
  See I Can’t Believe It’s Not Yogurt v. Gunn, 1997 WL 599391 (D. Colo. 1997). The existence of a liquidated
damages remedy does not necessarily preclude an injunctive remedy. See Boulder Med. Ctr. v. Moore, 651 P.2d
464, 466 (Colo. App. 1982).
82
     See Colo. Rev. Stat. §§ 7-74-103 to –105.
83
     Kodekey Elec., Inc. v. Mechanex Corp., 486 F.2d 449, 458 (10th Cir. 1973).
84
  See Keener v. Convergys Corp., 342 F.3d 1264 (11th Cir. 2003) (employer with world-wide operations had a non-
compete clause drafted under Ohio law for an employee who worked only in Ohio and Illinois, and who later
challenged the non-compete clause in Georgia after leaving to work for competitor in Georgia).
85
   See generally Advanced Bionics Corp. v. Medtronic Inc., 59 P.3d 231 (Calif. 2003) (California Supreme Court
ruling that California trial courts could not enjoin Minnesota trial courts from enforcing non-compete clause, but
rejecting an argument that a judgment from a Minnesota court would have binding effect on California courts for
purposes of enforcement on former employee now working in California).

{83217-1.DOC;1}                                           22
86
  Restatement (Second) Conflict of Laws §§ 187 & 188; see also Electrical Distributors, Inc. v. SFR, Inc., 166 F.3d
1074, 1084 (10th Cir. 1999) (upholding Colorado choice of law clause against Utah employee); King v. PA
Consulting Group, Inc., 485 F.3d 577 (10th Cir. 2007) (applying a New Jersey choice of law clause for a New Jersey
company with international employees and headquarters in Washington D.C. against an exclusively Colorado
employee because the non-compete clause at-issue was enforceable under both Colorado and New Jersey law); cf.
Dresser Indus. v. Sandvick, 732 F.2d 783 (10th Cir. 1984) (refusing to enforce choice of law clause because Texas
law on non-compete provisions violated fundamental policy of Colorado to limit such provisions).
87
   See Gahagen Iron & Metal Co. v. Transportation Ins. Co., 812 F. Supp. 1106 (D. Colo. 1992); see also Am.
Express Fin. Advisors, Inc. v. Topel, 38 F. Supp. 2d 1233 (D. Colo. 1999) (applying Minnesota choice of law clause
against Colorado employee because employer maintained its headquarters in Minnesota and employee had attended
training in Minnesota); cf. Curtis 1000, Inc. v. Youngblade, 878 F. Supp. 1224 (N.D. Iowa, 1995) (court in Iowa
would only apply Iowa law against an Iowa citizen who was former employee of Delaware corporation with
headquarters in Georgia); DeSantis v. Wackenhut Corp., 793 S.W.2d 670 (Texas 1990) (Texas court refused to
apply Florida choice of law clause against Texas resident who performed employment services only in Texas and
who later started a competing business in Texas; the court applied Texas law instead).
88
  See, e.g., Cabus v. Dairyland Ins. Co., 656 P.2d 54 (Colo. App. 1982); Byerly v. Kirkpatrick Pettis Smith Polian,
Inc., 996 P.2d 771 (Colo. App. 2000).
89
     See Colo. Rev. Stat. § 13-22-223(1)(a) to (f) (vacating award).
90
     Id. § 13-22-223(1)(d) (grounds to vacate an award when “[a]n arbitrator exceeded the arbitrator‟s powers”).
91
  See id. As another alternative, employers could designate arbitrators from specific arbitration providers with
known records for following Colorado‟s substantive law regarding non-compete agreements.
92
  Harvey Barnett, Inc. v. Shidler, 338 F.3d 1125 (10th Cir. 2003) (upholding confidentiality clause in a franchise
agreement and rejecting argument that the non-disclosure clause evidenced a disguised non-compete clause); Colo.
Accounting Machines, Inc. v. Mergenthaler, 609 P.2d 1125 (Colo. App. 1980) (non-disclosure clause may provide
adequate protection to the exclusion of a non-compete clause).
93
     MAl Basic Four. Inc. v. Basis. Inc., 880 F.2d 286, 288 (10th Cir. 1989).
94
  Electrical Prods. Consol. v. Howell, 117 P.2d 1010, 1012 (Colo. 1941); see also Boettcher DTC Bldg. Joint
Venture v. Falcon Ventures. 762 P.2d 788, 790 (Colo. App. 1988) (even after separation from employment “an
agent owes a continuing duty not to use or disclose confidential information obtained during the course of the
agency”).
95
  See Godby v. Dist. Court, 229 F.3d 1157 (9th Cir. 2000); Metro Traffic Control, Inc. v. Shadow Traffic Network,
22 Cal. App. 4th 853, 27 Cal. Rptr. 2d 573 (Cal. App. 1994).
96
  An injunction under the “inevitable disclosure” doctrine usually involves an extrapolation of a court‟s power to
impose an injunction under common law or under the Uniform Trade Secrets Act or UTSA. See Colo. Rev. Stat. §
7-74-103; see also Restatement (Third) of Unfair Competition § 44 (“injunctive relief may be awarded to prevent a
continuing or threatened appropriation of another‟s trade secret.”).
97
     54 F.3d 1262 (7th Cir. 1995).
98
     No. 4-02-CV-90267, 2002 U.S. Dist. LEXIS 12773 (S.D. Iowa, July 5, 2002).
99
     119 F. Supp. 2d 499 (E.D. Pa. 2000).
100
   88 Fed. Appx. 520 (3d Cir., Feb. 12, 2004), citing Air Products & Chemicals, Inc. v. Johnson, 442 A.2d 1114
(Pa. Sup. Ct. 1982).
101
      No. 116914/97, 1997 N.Y. Misc. LEXIS 577 (Sup. Ct. N.Y. Co., Nov. 7, 1997); cf. EarthWeb, Inc. v. Schlack,
{83217-1.DOC;1}                                       23
71 F. Supp. 2d. 299 (S.D.N.Y. 1999) (refusing to follow DoubleClick); Colonize.com v. Perlov, No. 03-CV-466,
2003 U.S. Dist. LEXIS 20021 (N.D.N.Y., Oct. 23, 2003) (same).
102
      941 F. Supp. 1443 (M.D.N.C. 1996).
103
      920 F. Supp. 1405 (N.D. Iowa 1996).
104
      72 F. Supp. 2d 1111 (N.D. Cal. 1999).
105
      148 F. Supp. 2d 1326 (S.D. Fla. 2001).
106
      299 F. Supp. 2d 763 (E.D. Mich. 2004).
107
      71 F. Supp. 2d. 299 (S.D.N.Y. 1999).
108
      No. 03-CV-466, 2003 U.S. Dist. LEXIS 20021 (N.D.N.Y., Oct. 23, 2003).
109
      51 Va. Cir. 55 (Va. Cir. Ct., Oct. 20, 1999).
110
      739 P.2d 889 (Colo. App. 1987).
111
   Jessica Lee, “The Inevitable Disclosure Doctrine: Safeguarding the Privacy of Trade Secrets,” 33 Colo. Law. 17-
26 (Oct. 2004); Michele B. Fagin, “Non-compete by Non-disclosure: The Doctrine of Inevitable Disclosure,” 28
Colo. Law. 73, 75 (Sept. 1999).
112
    Jet Courier Svcs., Inc. v. Mulei, 771 P.2d 486, 492 (Colo. 1987) (departing manager held liable for breach of
loyalty for pre-resignation recruitment of customers and other employees for post-resignation competing business);
Koontz v. Rosener, 787 P.2d 192 (Colo. App. 1989) (departing real estate brokers liable for breach of loyalty for
recruiting other brokers to work for, and refraining from listing several properties until, beginning employment at a
competing real estate brokerage); Marsh v. Delta Airlines, Inc., 952 F. Supp. 1458 (D. Colo. 1997) (employee
violated duty of loyalty by criticizing employer in the newspaper rather than using the employer‟s grievance
process); T.A. Pelsue Co. v. Grand Enters., Inc., 782 F. Supp. 1476, 1486 (D. Colo. 1991) (employee has fiduciary
duty to refrain from engaging in enterprises in direct competition with employer‟s business and necessarily injurious
or detrimental to employer); Alexander & Alexander, Inc. v. Frank B. Hall & Co., 1990 WL 8028, *8 (D. Colo.
1990) (employee must act solely for employer‟s benefit in all matters connected with employment despite right to
make preparations to compete); Am. Express Fin. Advisors, Inc. v. Topel, 38 F. Supp. 2d 12133, 1247 (D. Colo.
1999) (during period of employment, employee cannot solicit for himself future business which his employer
requires him to solicit for his employer); E.D. Lacey Mills, Inc. v. Keith, 359 S.E.2d 148, 155 (Ga. App. 1987) (full-
time employee may not conduct numerous meetings and telephone calls, with frequent absences, in pursuit of plans
to compete); Long v. Vertical Techs., Inc., 439 S.E.2d 797, 801-02 (N.C. App. 1994) (violation of fiduciary duties
for employees to use employer‟s staff, facilities, computers, and software to set up competing business); see
generally Kevin Allen & Jennifer Schlatter, “The Duty of Loyalty and Preparations to Compete,” 34 Colo. Law. 61-
66 (Nov. 2005).
113
   Jet Courier, 771 P.2d at 492; Hart v. Colo. Real Estate Com’n, 702 P.2d 763, 765 (Colo. App. 1985); see also
Restatement (Second) of Agency, § 387.
114
    Michaelson v. Michaelson, 939 P.2d 835 (Colo. 1997) (duty of loyalty applied to officer to assign patent to
employer); cf. Hewett v. Samsonite Corp., 507 P.2d 1119 (Colo. 1973) (apparently applying a lesser duty of loyalty
for shop foreman to assign patent under written patent assignment agreement). The duty of loyalty may not exist
for employees who do not have fiduciary positions carrying the trust and confidence of their employers. See Jet
Courier, 771 P.2d at 492 n.10 (discussing authorities and the unresolved question under Colorado law regarding
whether the duty of loyalty exists only for corporate officers or other fiduciary agents in whom employers place
trust and confidence).
115
      Graphic Directions, Inc. v. Bush, 862 P.2d 1020 (Colo. App. 1993).

{83217-1.DOC;1}                                           24
116
   See United Fire & Casualty Co. v. Nissan Motor Corp., 433 P.2d 769, 771 (Colo. 1967) (fiduciary duty arises in
a business or other confidential relationship which induces a party to relax the usual care and vigilance ordinarily
exercised with a stranger); see also Dolton v. Capitol Fed. Sav. & Loan Ass’n, 642 P.2d 21, 23 (Colo. App. 1981).
117
      See Jet Courier, 771 P.2d at 499.
118
   See Trimble v. City & County of Denver, 697 P.2d 716 (Colo. 1985); Cronk v. Intermountain Rural Elec. Ass’n,
765 P.2d 619 (Colo. App. 1988); Bithell v. Western Care Corp., 762 P.2d 708 (Colo. App. 1988); Amoco Oil Co. v.
Evin, 908 P.2d 493 (Colo. 1995); cf. Colo. Accounting Machine, Inc. v. Mergenthaler, 609 P.2d 1125, 1126 (Colo.
App. 1980) (refusing to find liability for interference with contract after finding non-compete agreement void).
119
   See Memorial Gardens, Inc. v. Olympia Sales & Management Consultants, Inc., 690 P.2d 207 (Colo. 1984);
Dolton v. Capitol Fed. Sav. & Loan Ass’n, 642 P.2d 21, 23 (Colo. App. 1981); Montgomery Ward & Co. v.
Andrews, 736 P.2d 40, 47 (Colo. App. 1987); Restatement (Second) of Torts, § 766B.
120
    See Occusafe, Inc. v. EG&G Rocky Flats, Inc., 54 F.3d 618 (10th Cir. 1995); DP-Tek v. AT&T Global
Information Solutions Co., 100 F.3d 828, 828-36 (10th Cir. 1996); Powell Products, Inc. v. Marks, 948 F. Supp.
1469, 1479 (D. Colo. 1996); Am. Express Fin. Advisors, Inc. v. Topel, 38 F. Supp. 2d 1233, 1246 (D. Colo. 1999);
Restatement (Second) of Torts, § 768(1) (interference is not improper if the matter at issue involves legitimate
competition, competition is served by the conduct, and the actor did not employ improper means or improperly
restrain trade by the conduct).
121
      See Hein Centers v. San Francisco Real Estate Inv., 720 P.2d 975 (Colo. App. 1985).
122
   See Colo. Rev. Stat. §§ 6-2-101 to –117; see also Beneficial Finance Co. v. Sullivan, 534 P.2d 1226, 1228-29
(Colo. App. 1975) (not selected for official publication).
123
   See Colo. Rev. Stat. § 18-4-405 (defining civil remedies including the availability of damages, and treble
damages and reasonable attorneys fees for conduct in bad faith); see also Itin v. Bernard T. Ungar, P.C., 17 P.3d
129 (Colo. 2000); Chryar v. Wolf, 21 P.3d 428 (Colo. App. 2000).
124
   See In re Burress, 245 B.R. 871 (Bankr. D. Colo. 2000); see also Beneficial Finance Co. v. Sullivan, 534 P.2d
1226, 1228-29 (Colo. App. 1975) (not selected for official publication).
125
   DCB Const. Co. v. Central City Dev. Co., 965 P.2d 115 (Colo. 1998); Cablevision of Breckenridge, Inc. v.
Tannhauser Condominium Ass’n, 649 P.2d 1093 (Colo. App. 1982); Restatement of Restitution § 1.
126
    See Heller v. Lexton-Ancira Real Estate Fund, 1972, Ltd., 809 P.2d 1016 (Colo. App. 1990), rev’d on other
grounds, 826 P.2d 819 (Colo. 1992); see also Smith v. TCI Communications, Inc., 981 P.2d 690 (Colo. App. 1999).
This legal theory has an advantage because the novel idea or material need not be secret, but the theory still requires
that the novel idea or material must represent the “essence” of the employer‟s business. See generally Am.
Television & Communications Corp. v. Manning, 651 P.2d 440, 444 (Colo. App. 1982) (upholding injunction based
on tort of unfair competition).
127
   See Colo. Rev. Stat. § 6-1-105 (deceptive trade practices); see also id. §§ 6-1-101 to –115 (Colo. Consumer
Protection Act); Heller v. Lexton-Ancira Real Estate Fund, 1972, Ltd., 809 P.2d 1016 (Colo. App. 1990), rev’d on
other grounds, 826 P.2d 819 (Colo. 1992); Hall v. Walter 969 P.2d 224 (Colo. 1998).
128
   See Living Will Center v. NBC Susidiary (KCNC-TV, Inc.), 857 P.2d 514 (Colo. App. 1993); Teilhaber Mfg. Co.
v. Unarco Materials Storage, 791 P.2d 1164, 1166 (Colo. App. 1989); People ex rel. Dunbar v. Gym of Am., Inc.,
493 P.2d 660 (Colo. 1972).
129
   See, e.g., BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999); see generally Colo. Rev. Stat. §§ 8-2-113(2)
& (3).
130
    Kristt v. Whelan, 164 N.Y.S. 2d 239 (N.Y. App. Div. 1957), aff’d without opinion, 5 N.Y.2d 807 (1958)
(involving a pension trust before Congress enacted the Employee Retirement Income Security Act of 1974
{83217-1.DOC;1}                                     25
(ERISA)).
131
    See id.; see also Rochester Corp. v. W.L. Rochester, 450 F.2d 118 (4th Cir. 1971) (applying Virginia law);
Dollgener v. Robertson Fleet Services, Inc., 527 S.W.2d 277 (Texas App. 1975); York v. Actmedia, Inc., 1990 U.S.
Dist. Lexis 3483 (S.D.N.Y. 1990) (forfeiture-for-competition provisions properly serve employers‟ interests in
retaining employees and rewarding loyalty).
132
      See Lucente v. Int’l Business Machines Corp., 310 F.2d 234 (2d Cir. 2002).
133
      See Sarnoff v. Am. Home Products Corp., 798 F.2d 1075, 1083 (7th Cir. 1986) (applying New York law).
134
      See Int’l Business Machines v. Marston, 37 F. Supp. 2d 613 (S.D.N.Y. 1999).
135
   See Int’l Business Machines v. Bajorek, 191 F.3d 1033 (9th Cir. 1999) (enforcing forfeiture-for-competition
provision requiring repayment of profits realized from competing employee‟s sale of his stock option within six
months after leaving to accept competing employment); but see Bosley Med. Group v. Abramson, 161 Cal. App. 3d
284 (1984) (refusing to enforce similar provision that court called a sham to avoid California‟s statute that voids
non-compete provisions).
136
      See Post v. Merril, Lynch, Pierce, Fenner & Smith, Inc., 433 N.Y.S. 2d 800 (1980).
137
   But see In re UFG Int’l, Inc., 225 B.R. 51 (S.D.N.Y. 1998) (refusing to enforce non-competition provision after
involuntary lay-off of employee by employer).
138
   See Colonial Life & Accident Ins. Co. v. Kappers, 488 P.2d 96 (Colo. App 1971); but see Phoenix Capital, Inc. v.
Dowell, __ P.3d __, 2007 WL 2128330, *8 (No. 05CA2712, Colo. App., July 26, 2007) (refusing to enforce non-
solicitation provision regarding customers of former employer after court found accompanying non-competition
provision unenforceable under Colo. Rev. Stat. § 8-2-113(2)).
139
      See Management Recruiters of Boulder. Inc. v. Miller, 762 P.2d 763, 765 (Colo. App. 1988).
140
      See e.g., Alpha Tax Serv. Inc. v. Stuart, 761 P.2d 1073 (Ariz. App. 1988).
141
  Atmel Corp. v. Vitnesse Semiconductor Corp., 30 P.3d 789 (Colo. App. 2001), cert. denied (citing Colo. Rev.
Stat. § 8-2-113(2)); see also Phoenix Capital, Inc. v. Dowell, __ P.3d __, 2007 WL 2128330, *8 (No. 05CA2712,
Colo. App., July 26, 2007) (“Where a nonsolicitation provision is limited to prohibiting only initiating contacts or
„active‟ solicitation of the employer‟s employees, it is enforceable, despite the invalidity of an accompanying
noncompetition provision.”).

142
   See e.g., Loral Corp. v. Moye, 219 Cal. Rptr. 836 (Cal. App. 1985) (employee non-solicitation clauses are
generally valid if reasonable in scope); but see Cap Geminie America. Inc. v. Judd, 597 N.E.2d 1272 (Ind. App.
1992) (refusing to enforce over-broad non-solicitation provision); Robinson v. Jardine Ins. Brokers Int'l Ltd., 856 F.
Supp. 554 (N.D. Cal. 1994) (same).

143
   Colo. Rev. Stat. § 8-2-113(2)(a); see also Jon-Mark C. Patterson & Joel M. Funk, “Covenants Not to Compete in
the Sale of a Business: Protecting Goodwill,” 26 Colo. Law. 31, 33 (Dec. 1997).
144
   See Beverly Garofalo & Mitchell L. Fishberg, “Trade Secrets: Noncompete Agreements,” The National Law
Journal, (Jan. 17, 2000) at B7.


These materials are intended to provide general information on selected legal topics and
are not intended to provide legal advice on any specific transaction or situation, or to serve
as a substitute for consulting with legal counsel.


{83217-1.DOC;1}                                             26