Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On May 31, 2011, the Colorado Supreme Court held that continued employment is sufficient consideration to support a noncompetition agreement in Lucht's Concrete Pumping, Inc. v. Horner, No. 09SC627, 2011 Colo. LEXIS 436 (May 31, 2011). An en banc panel of the Colorado Supreme Court reversed a decision of the Colorado Court of Appeals, which reasoned that continued employment was not sufficient consideration because it was nothing more than what the employee was already promised in the original at-will employment arrangement. The Colorado Supreme Court reasoned that an employer's forbearance of the right to terminate an employee at will was adequate consideration for acceptance of the noncompetition agreement.
Lucht's Concrete Pumping employs about 70 people in the concrete pumping business. Lucht's hired Horner on an at-will basis in 2001. Two years later, the company required Horner to sign a noncompetition agreement. Horner was not offered additional pay or benefits in exchange for the agreement. He was simply permitted to remain on as an employee so long as he signed the agreement. Horner subsequently resigned from Lucht's and went to work for a direct competitor. The trial court refused to enforce the agreement, finding that the noncompetition provision was unenforceable for lack of consideration.
The Court of Appeals
Lucht's appealed, arguing that Horner's continued employment constituted adequate consideration to support the noncompetition agreement. The court of appeals concluded that the employee continued to receive the same pay and benefits and nothing more, but now had to take on the additional burden of a covenant not to compete. On that basis, the court of appeals concluded that continued employment is not, by itself, consideration for a noncompetition agreement.
The Supreme Court's Decision
The Colorado Supreme Court disagreed. According to the court, an employer has an absolute legal right to discharge an at-will employee. Giving up that right, therefore, is sufficient consideration to bind an employee to a promise not to compete. The court noted in its discussion that although a valid contract must be supported by consideration, any benefit to an employee (i.e., continued employment) or detriment to an employer (i.e., forbearance of the right to terminate the employee), no matter how slight, is adequate consideration.
Continued employment is now sufficient consideration for a noncompetition agreement in Colorado and 32 other states. As the Colorado Supreme Court noted in Lucht's, the terms of a noncompetition agreement must be reasonable in Colorado and an employer cannot act in bad faith by terminating the employee shortly after the employee signs the agreement. Although some states specify a period of time after the employee signs the noncompetition agreement during which the employee may not be terminated, the Colorado Supreme Court did not specify such a period in Lucht's.
- If you do not currently have noncompetition agreements with employees in Colorado, consider obtaining them in exchange for continued employment.
- Audit existing noncompetition agreements with employees. If changes are necessary, replace them with new agreements in exchange for continued employment.
- In Colorado, noncompetition agreements are only applicable to managers and those with access to trade secret information. A noncompetition agreement with a non-management employee without access to trade secrets is therefore void at signing. Promoting an employee to manager does not revive the void agreement. However, it is now clear in Colorado that a manager can sign a new agreement not to compete during the course of his or her employment without giving any new consideration. Therefore, employers should consider entering into new covenants not to compete with all managers who have not signed a covenant not to compete since becoming a manager.
- Plan on employing an employee for a reasonable period after she or he signs a noncompetition agreement. Do not expect to enforce a noncompetition agreement for a longer period of time than you employed the employee after she or he signed the agreement.
Darren E. Nadel is a Shareholder, Oliver J. McKinstry is an Associate, and Chris Leh is Of Counsel, in Littler Mendelson's Denver office. If you would like further information, please contact your Littler attorney at 1.888.Littler, firstname.lastname@example.org, Mr. Nadel at email@example.com, Mr. McKinstry at firstname.lastname@example.org, or Mr. Leh at email@example.com.