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Colorado Increases Range of Criminal Penalties for Violating Non-Compete Statute

On March 1, 2022, SB 21-271 will take effect in Colorado, exposing employers to increased potential criminal penalties for violations of Colorado's anti-non-compete statute, Colorado Revised Statute § 8-2-113.
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Section 8-2-113 contains three parts. First, § 8-2-113(1) makes it "unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place." Although other states outlaw nefarious labor practices, like boycotting and blacklisting, few (if any) prohibit as expansive a range of practices as § 8-2-113(1). Second, under § 8-2-113(2), covenants not to compete are void unless the contract at issue relates to (a) the purchase or sale of a business, (b) the protection of trade secrets, (c) the recovery of expenses related to educating and training an employee who has served the employer for less than two years, or (d) executive and management personnel and officers and their professional staff. Third, § 8-2-113(3) provides that covenants not to compete involving physicians may also be void under certain circumstances.

Currently, § 8-2-115 subjects any person, firm, or corporation who violates § 8-2-113 to a fine ranging from $10 to $250 and/or imprisonment of up to 60 days. Beginning on March 1, 2022, § 8-2-113(4) will subject violators to a Class 2 Misdemeanor, carrying potential fines of up to $750 and/or imprisonment of up to 120 days.

This expansion of criminal penalties raises multiple concerns for employers. The first is that § 8-2-113(1)'s broad (and as yet uninterpreted) prohibition could subject employers to substantial fines and/or imprisonment for attempts either to enforce restrictive covenants or to seek injunctive relief for misappropriation. A second concern involves employers adopting a broader definition of executives, management personnel, and employees who constitute their staff, than intended by § 8-2-113(2)(d), which could also subject employers to the same liability. Finally, another concern which some commentators have expressed is that Sections 8-2-113(2) or § 8-2-113(3) could be interpreted so that merely entering a void restrictive covenant amounts to a violation of the statute and, therefore, triggers criminal liability. But employers should be wary of such an expansive interpretation, as Sections 8-2-113(2) or § 8-2-113(3) appear to govern only the validity of the covenants, in and of themselves, and not the conduct of those who enter them.

Notably, SB 21-271 comes on the heels of attempts by defendants in other states to use blacklisting statutes to assert counterclaims against plaintiffs seeking to enforce covenants not to compete. See, e.g., Loparex, LLC v. MPI Release Techs., LLC, 964 N.E.2d 806, 821 (Ind. 2012) (rejecting defendant's attempt to assert a claim under Indiana's blacklisting statute against the plaintiff who sued to protect trade secrets); Moore v. Commercial Aircraft Interiors, LLC, 278 P.3d 197, 203 (Wash. Ct. App. 2012) (rejecting defendant's attempt to assert a claim under Washington's blacklisting statute against the plaintiff who threatened to sue to enforce non-compete). Although the counterclaimants in Loparex and Moore failed, this is yet another reason for employers in this space to pause and take note.

Ultimately, whatever the scope of § 8-2-113 (and, by extension, SB 21-271), Colorado employers should review their practices with respect to restrictive covenants and ensure compliance prior to March 1, 2022, given the enhanced penalties. This review should include a careful examination of covenant enforcement (consistent with § 8-2-113(1)), as well as the purpose of the covenants and the roles of individuals to whom covenants are issued (consistent with § 8-2-113(2)).

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