Senate Bill SB 21-217 – Intellectual Property

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I am pleased to introduce to you my partner, Adrian Castro, of Fairfield and Woods, PC’s litigation and employment law departments. In this article, Adrian discusses a recent law passed by the Colorado legislature that specifically makes violating Colorado’s non-competition laws a criminal offense. Other states in the country have also criminalized violating non-competition laws, as well as civil liability. Employers who attempt to enforce non-compete agreements should be careful not to go overboard.

On March 1, 2022, Colorado Senate Bill 21-271, approved on July 6, 2021, comes into force. While the overall objective of the bill is to reform the sentencing provisions related to misdemeanors and minor misdemeanors, it has also made violation of a number of statutes potential criminal offenses. Regarding non-compete agreements, the bill adds a new article to the applicable law, CRS § 8-2-113, making violation of the law a class 2 offense. A class 2 offense will face a sentence of up to 120 days in jail, a fine of up to $ 750, or both.

CRS § 8-2-113 is entitled “Illegal intimidation of a worker – non-competition agreement”. It currently contains three (3) different sections regarding worker intimidation and non-compete agreements.

The first section, which deals with direct bullying, is relatively straightforward. It is “illegal to use force, threats or other means of intimidation to prevent a person from engaging in lawful occupation anywhere it deems appropriate”. Violations of this section are rarely, if ever, reported (the author is not aware of any). The third section deals with non-compete agreements for physicians, which are treated differently from other non-competitors and are the subject of a separate discussion.

The second section deals with non-competition for employers and is the section most commonly encountered in practice. Under CRS § 8-2-113 (2), non-competition in Colorado is void, except for those that arise in the following circumstances: (1) the purchase and sale of a business ( or its assets); (2) protection of trade secrets; 3 ° the recovery of education and training expenses associated with an employee in post for less than two years; and (4) executive and management personnel, as well as officers and employees who are considered personal personnel. Even if an exception applies, the non-competition must be of reasonable temporal and geographic scope to be enforceable.

It is common to deal with employers who attempt to impose non-competition through the “trade secret” exception, especially given the limited applicability of the other sections. When seeking to impose non-competition, it is not uncommon for employers to classify significant parts of virtually every aspect of their business as trade secrets; However, this is not how Colorado law defines a trade secret. A trade secret must be a “secret” that gives a business a competitive advantage. Public and easily identifiable information is not secret; nor is the information previously disclosed unprotected. Colorado law requires that a company make reasonable efforts to maintain trade secrecy. Firms that do nothing to protect their “trade secrets” cannot seek to impose non-competition under this exception.

SB 21-271 makes a violation of ANY section of CRS § 8-2-113 a Class 2 offense. Accordingly, even a violation of CRS § 8-2-113 is arguably a Class 2 offense subjecting employers to incarceration, a fine, or both. SB 21-271 raises concerns that employers who take aggressive, questionable or frivolous positions regarding the application of a non-competition may face criminal liability. This is of particular concern with respect to the “trade secret” exception of CRS § 8-2-113 (2), which is easily misinterpreted.

While only time will tell how Colorado chooses to apply the new torts provision of CRS § 8 – 2-113, in the meantime, Colorado employers are urged to be cautious about how they apply non-compete agreements. When in doubt or questions, employers are advised to seek the advice of a lawyer before acting, as they could potentially face criminal liability for misdemeanor.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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