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Colorado’s Non-Compete Law Governs Regardless of Choice of Law

Texas business owners may have remote employees from every part of the United States. If an employee signs a non-compete agreement, then later feels it is invalid based on state law, they may find themselves in litigation with their employer. Noncompete laws vary from state to state. Some states are lenient; others are stricter, and some states do not allow non-compete agreements at all.  So it’s critical that employers understand which state’s non-compete law applies. In Texas, under the Business & Communication Code §§15.50 -52, non-competes must accompany an enforceable agreement. By law, noncompetes must be reasonable with scope restrictions, geographic reach, and time. It should only be as broad as necessary to protect the interests of the business. The only occupation that is exempt from Business & Communication Code §§15.50 -52 is doctors.

But when dealing with a non-compete agreement in Colorado, employers might be surprised to learn that that Colorado’s statute for non-compete agreements is void unless the following three exceptions apply:

Colorado’s noncompete law restricts are void, but can be enforceable under these circumstances:

  1. Contracts for the purchase of a business or assets of a business;

  2. Contacts for trade secret protection;

  3. Contractual agreements between employers and executive staff, management personnel, and their professional staff.

However, when a non-compete agreement does not fit into one of the above three categories, one strategy is for employees or contractual workers to choose a more favorable non-compete agreement law from another state. On September 29, 2021, an employer sued several former employees for breach of contract of their non-compete agreement.  In the case, LS3 Inc. v. Cherokee Federal Solutions, L.L.C., the US District Court of Colorado rejected the former employees’ choice of Maryland law as stipulated in their agreements.

It was held that the non-compete agreements were governed and enforceable by Colorado’s non-compete statute.

Under the Colorado statute CRS §8-2-113(2), the former employee’s choice of law governing the agreement will be considered unless (1) the parties chosen state’s non-compete agreement law contradicts the fundamental policy held in the state of Colorado and (2) if there is a greater material interest than the chosen state in determining the issue of the breach of the noncompete agreement. In the case LS3 Inc. v. Cherokee Federal Solutions, L.L.C., the judge determined that Colorado had a materially greater interest in the dispute because all but one defendant lived and worked in Colorado, while the employer was only incorporated in Maryland. The judge surmised that applying Maryland law to a dispute would violate Colorado’s non-compete law for two reasons:

  1. The non-compete statute of Colorado is a fundamental policy.

  2. Under Maryland law, the non-compete agreement would have been enforceable in contradiction to Colorado's principles.

A choice-of-law provision no longer carries the weight it once did for non-compete agreements. Natalie Lynch is licensed in both Colorado and Texas and can help your organization navigate this issue with precision.  Give us a call today.