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I often get questions about non-competes and their contractual “cousins,” which include “non-solicit,” “covenant to refrain from conflicts,” and many other creatively titled contract provisions. The bottom line in this area of law, which is sometimes a little infuriating for business owners trying to make decisions about how to operate, is that non-competes are NOT ALWAYS ENFORCEABLE, but sometimes they are. Crystal clear, right?
Exactly. While there are important and legitimate public policy reasons why non-competes are disfavored in many states, including Colorado. I won’t get into those here (perhaps a later blog post), but suffice it to say that it’s complex and varies quite a bit from state to state and change frequently. Washington, DC, for example, just passed comprehensive legislation banning these provisions outright in certain contracts affecting DC residents. (More on the status of that law, which has “passed” but will not be effective until at least April 1, 2022, here.)
Without going into all of the public policy arguments and background for why these agreements get the side-eye from courts reviewing them, just know that, to the extent that you are attempting to sign a contract with one of these clauses or ask someone else to do so, it’s no guarantee. And for that reason it’s important to conduct your actual business as if the agreement might not hold up in court–because it might not. (Yes there are ways to get comfortable that you have an “iron-clad” non-compete/non-solicit, as long as they’ve been carefully vetted and tailored by an attorney with knowledge of this area of law.) If attorney review is cost-prohibitive, protect truly secret information (including things like customer lists) carefully by not making it widely available, and don’t rely on a non-compete to compensate for ordinary business diligence with new or untrusted third party business partners/vendors. After all, depending on how valuable the information is, what you think is a strong non-compete might not be worth the paper (or computer screen) it’s written/transmitted on.
Below is an example of both a non-compete clause and a non-solicit clause, for background only. Usually parties negotiate two main areas: 1) the applicable time period, and 2) the “scope” of the provision, i.e. how “competitive” is defined. There are many other nuances that can get negotiated as well, so again it’s important to take a close look and make sure everyone is completely comfortable with the rights they’re giving up.
- Non-Solicitation/Non-Compete. (Also sometimes called “Restrictive Covenants“)
- For the purposes of this Agreement, the “Cooperation Period” means: ____________________________________________.
- Non-Solicit. During the Cooperation Period and for three (3) years after the termination or expiration thereof, the PARTY B (for whatever reason, with or without cause), PARTY B shall not, directly or indirectly (including, without limitation, through any other person or entity or other principals, employees, or agents thereof), solicit, call on, cause, induce, or attempt to solicit, cause, or induce any employee, consultant, or advisor of PARTY A to leave the employ of PARTY A, or in any other way damage or reduce the relationship between PARTY A and such person. The foregoing shall not be breached by PARTY B’s general posting of job openings in print publications or online without specifically targeting PARTY A’s employees, provided that no hiring of PARTY A’s employees results therefrom.
- Non-Competition. During the Cooperation Period and for three (3) years after the termination or expiration thereof (for whatever reason, with or without cause), PARTY B shall not, directly or indirectly (including, without limitation, through any other person or entity or other principals, employees, or agents thereof), engage anywhere in the world in a business of __________________________ (including, without limitation, _____________) or in any other business that designs, manufactures, markets, sells, or distributes products or services substantially similar to the products and services designed, manufactured, marketed, sold, and/or distributed by PARTY A as of the date of this Agreement; provided, that the foregoing shall not preclude PARTY B from (i) holding an ownership interest in and participating in the management of competitive business entities (including sole proprietorships) that are privately owned, or (ii) holding an interest of not more than five percent (5%) of any competitive publicly traded business entity, so long as, in either case, PARTY B does not have the power to participate directly or indirectly in controlling or directing the management of such business entity.
- PARTY B acknowledges and agrees that in addition to the remedies PARTY A may seek under this Agreement, the aforementioned three (3) year period shall be extended by the duration of all periods in which PARTY B is found to have been in violation of the covenants contained in the foregoing Sections 1(B) and 1(C).