Colorado Non-Compete Law Blog

Award of Attorneys Fees Affirmed in New Colorado Court of Appeals Decision

Dan Warden — Thu, 24 Feb 2011 16:07:53 -0700

An award of over $72,000 in fees and costs against a former employee was affirmed by the February 17 Colorado Court of Appeals decision, Saturn Systems v. Delbert J. Militare. The decision demonstrates the risks presented by a fee shifting provision in a noncompete agreement.

After an employee had been terminated by Saturn, he used his relationship with a client to obtain a password to Saturn’s confidential database. With this password, the former employee was able to access and review confidential information. After the close of evidence, the former employee stipulated to the injunctive relief requested. The trial court then found the former employee liable for misappropriation and breach of the nondisclosure and nonsolicitation provisions of his agreement with Saturn. Only $525 in damages were awarded, but the trial court also awarded Saturn over $72,000 in fees and costs under a fee shifting provision. In a lengthy decision, the Court of Appeals affirmed the trial court’s rulings and granted Saturn’s request for attorney fees and costs incurred on appeal.

The Court of Appeals rejected the former employee’s arguments that there was insufficient evidence to support the misappropriation despite the former employee’s argument that no evidence was presented about the exact data allegedly misappropriated. Many courts have recognized, as the Court of Appeals acknowledged, that a plaintiff must identify the trade secret supposedly misappropriated. General allegations about trade secrets typically are not enough. Nonetheless, the Court of Appeals ruled that the “dynamic nature of the information” made it unnecessary for Saturn to identify the confidential information. The court’s ruling may have been guided by its perception that it would have been technologically difficult for Saturn to identify the exact information misappropriated because the information was maintained electronically and continually updated.

The former employee also argued that the nonsolictation provision was void. This argument was rejected because the restriction on the employee was limited to specific customers and because Saturn included the nonsolicitation clause “within a single confidentiality provision”. These factors allowed the court to distinguish a prior decision which had declined to enforce a noncompete, at least in part, because the nonsolicitation clause was included in a different paragraph from the nondisclosure provision.

In an interesting twist, the former employee argued that Saturn had not proven any damages because the $525 awarded was not recoverable under Colorado law. The $525 represented the cost of Saturn’s computer investigation prior to the commencement of litigation. This argument had important implications because damages are an element of any claim for breach of contract. If the $525 awarded was not “damages”, then any fee award might be questioned. The Court of Appeals found, however, that the $525 represented “actual damages as a matter of law”.

Antitrust challenge to no hire clause rejected

Dan Warden — Fri, 18 Dec 2009 10:47:11 -0700

No hire or no switching clauses are agreements between companies under which one or more companies agree not to hire employees of another company.

No hire clauses are common in a variety of situations. If a company is seeking to be acquired, for example, it may want to showcase its best or key employees to the potential purchaser. If the acquisition doesn't occur, however, the seller may be concerned that the potential purchaser will seek to hire its best employees. No hire clauses are also used when one company provides temporary employees to another company. The supplier of the temporary workers will seek a no hire agreement from its customer to prevent its customer from directly hiring the temporary workers.

In a case, Haines v. VeriMed Healthcare Network, decided earlier this year by the federal district court in Missouri, the court dismissed an employee's antitrust challenge to a no hire clause. Haines was a doctor who supplied "written content for publication on medical websites" to VeriMed. VeriMed didn't publish the content itself, but instead acted as a middleman and sold the "written content" to others who published the content on websites. Haines also developed a relationship with THCN which actually published content. THCN had an agreement with VeriMed, however, under which it agreed not to hire VeriMed's contractors unless it paid VeriMed an agreed upon amount. When THCN learned that Haines was a VeriMed contractor, it terminated its relationship with Haines.

Haines filed suit against VeriMed and alleged that the no hire agreement was a violation of federal and state antitrust laws. After acknowledging that courts have found no hire clauses to violate or potentially violate antitrust laws, the court ruled that Haines's agreement was not the kind of no hire provision which violated antitrust laws. The no hire clause, according to the court, did not violate antitrust laws because it was limited in specific ways that narrowly tailored the agreement to protect VeriMed's legitimate business interests.

Antitrust challenges to no hire clauses have had mixed success depending on the facts of the cases. Challenges have also been made based on state non-compete statutes, including a successful challenge in Wisconsin in 2002. We are not aware of any Colorado appellate decisions on no hire or no switching clauses. Depending on the nature and scope of the no hire provision, there is reason to think that a successful challenge could be brought in Colorado. In evaluating the nature of any challenge presented, the remedies available need to be considered.

Top employment law blogs

Dan Warden — Tue, 08 Dec 2009 16:04:58 -0700

We pleased to let you know that the Colorado Non-Compete Law Blog was included on the Delaware Employment Law Blog's annual list of the hundred best employment law blogs.

We've included the Delaware Employment Law Blog on our Relevant Blogs section in the left hand margin. The list of the best employment law blogs was included in a November 4 entry -- we've been slow to acknowledge our inclusion. The Delaware Law Blog is a great resource for anyone interested in employment law issues.

Wyoming non-compete law

Dan Warden — Mon, 07 Dec 2009 17:01:47 -0700

As reflected in the Wyoming Supreme Court's recent decision in CBM Geosolutions v. Gas Sensing Technology Corp, Wyoming's law on non-competes differs substantially from Colorado's.

Colorado has adopted a statute which voids any non-compete unless it falls within one of the four designated exceptions. Every case, as a result, begins with an analysis of whether the non-compete falls within one of the exceptions. If the non-compete does not, the non-compete can not be enforced and there is no need to evaluate whether the non-compete's duration and area are reasonable.

In Wyoming, on the other hand, no such statute has been adopted. There is no discussion, as there is in Colorado cases, of whether a non-compete falls within the definition of statutory terms. There are no cases, for example, about whether a non-compete was entered by someone who falls within the definition of "executive and management personnel".

There are a few preliminary hurdles to consider in Wyoming, including whether consideration exists and whether the non-compete was in writing. If these hurdles are surmounted, as they are in most cases, the remaining analysis revolves around whether the non-compete is "reasonable". As in most if not all states, this reasonableness analysis requires consideration of the duration and geographic area of the non-compete.

Reasonableness in Wyoming, however, also requires consideration of a series of other factors. These factors include the degree in inequality in bargaining power, the risk of the business losing customers, the good faith of the employee, knowledge related to the identity of customers, the employee's position with the business, the employee's training, education and the "needs of his family", the current conditions of employment and the need to protect the legitimate interests of the business. This part of the reasonableness analysis allows a court to consider virtually any factor that might be important under the individual facts presented by a case.

In short, the two states have adopted different approaches to non-competes. Whether the different approaches result in different decisions may be addressed in future blog posts. For a party subject to a non-compete in either state, however, it is important to recognize that different approaches have been adopted and that the different approaches may mean that different strategies are required.

Tenth Circuit rules that price quote not a trade secret

Dan Warden — Thu, 03 Dec 2009 15:05:43 -0700

We recently wrote about the Tenth Circuit's September, 2009 decision in Southwest Stainless v. Sappington, but the decision is worth another look. An issue presented by Southwest Stainless was whether a price quote was a a trade secret. Southwest claimed that a price quote was and asserted a claim for misappropriation of trade secret.

The defendant, a former employee of Stainless, apparently set the price that Stainless quoted to Hughes Aircraft. After the employee left Stainless and went to work for a competitor, Hughes Aircraft placed an order with the new employer at a price slightly less than Stainless' quote. If Hughes Aircraft had selected Stainless' quote, Stainless would have earned $31,200 in profit.

The trial court held that the Hughes Aircraft quote was a trade secret. It emphasized all the measures that Stainless took generally to keep its pricing information confidential, including requiring confidentiality agreements, reminding employees of the confidential nature of company information and using passwords to restrict access to information.

Despite these measures, the Tenth Circut held that the the price quote was not a trade secret for one reason. It wasn't a secret.

Some customers were allowed to know prices on certain items in advance. Furthermore, Stainless did not prevent its customers from disclosing pricing information to others. In other words, the pricing quote was known outside of Stainless (i.e. by Hughes, among others), Stainless took no measures to prevent Hughes from disseminating the information and the former employee could have obtained the price quote simply by calling Hughes.

In contrast, the Colorado Court of Appeals in 2001 affirmed a judgment which held that a contractor's bid for construction work was a trade secret. In that case, the contractor had submitted a bid for work. The former employee also submitted a bid and his bid was accepted. At trial, the jury found that the bid information was a trade secret and that the former employee had misappropriated the bid information. That judgment was affirmed on appeal despite the former employee's claim that the bid information was not a trade secret as a matter of law.

In this Court of Appeals case, there was no suggestion that the bid could have been obtained by the former employee if he had contacted the party to whom the bid had been submitted. That distinction may help explain the differning results in the two cases.

Privilege issues raised by forensic examinations

Dan Warden — Fri, 20 Nov 2009 14:44:24 -0700

A recent New Jersey decision, Stengart v. Loving Care Agency, raises questions about the limits of the attorney client privilege when an employer performs a forensic examination of the computers used by a former employee. Because it is typical for employers to conduct a forensic examination of a former employee's computers when the employee is bound by a non-compete, these privilege issues should be anticipated in any non-compete case.

In Stengart, the employer provided the employee with a laptop and a work email address. Prior to her resignation, the employee communicated with her lawyer by email about a possible lawsuit against the employer. These communications were sent on a personal, web-based Yahoo account. After the employee resigned, the employer conducted a forensic examination of the hard drive on the laptop and was able to review the emails sent on the personal account. Once the employee discovered that the employer had reviewed these confidential communications, she demanded that they be returned. The employer refused and the employee was forced to seek relief from the trial court, which denied the motion to require the employer to return copies of the emails sent by the employee to her lawyer.

On appeal, the New Jersey Appellate Court held that the communications were privileged and directed that the emails should be returned. It also directed employer's counsel to delete any such emails from the hard drive where they were stored. The case was remanded for a hearing to determine whether employer's lawyers should be disqualified from representing the employer.

Employees should not assume that this result was inevitable. The law on this issue is still being developed and the New Jersey court struggled to make its decision. The employer argued that it had adopted a policy that all emails sent on company computers were consider company property. This argument led the court to balance the employer's interest in enforcing its regulations against the employee's interest in the confidentiality of her communications with her lawyer.

In 2007, a New York court reached a different conclusion than Stengart when it held that emails sent by plaintiff to his lawyer were not entitled to the attorney client privilege protection when the plaintiff had used the employer's email system.

Lessons can be learned from these cases by both employees and employers.

Employees need to recognize that a forensic examination of a work computer's hard drive may allow an employer to review not only the emails sent on the employer's email system, but also the emails sent by the employee using a personal email account. Employees should communicate with counsel through their own personal computers, not through any computer at work.

On the other hand, employers need to recognize the importance of instituting a plain, clearly-stated policy about email communications through computers furnished by the employer. Any such policy may be enough to overcome any assertion of the attorney client privilege.

Colorado has not considered these issues that test the limits of the attorney client privilege. But it is important to note that Colorado has adopted a different version of the rule of professional conduct that influenced the appellate court in Stengart.

Damages Awarded for Breach Prior to Modification of Non-compete Agreement

Dan Warden — Mon, 26 Oct 2009 10:02:25 -0700

Damages may be awarded for breach of a non-compete agreement even if the agreement is modified after the breach occurs, according to the recent First Circuit decision in Astro-Med v. Nihon Kohden.

In Astro-Med, the trial court modified the scope and range of the prohibited conduct set forth in the non-compete when it issued a preliminary injunction. Instead of North America and Europe, the trial court limited the prohibited conduct to a specific state and a limited subset of customers. Such limitation was consistent with Rhode Island law which disfavors non-compete agreements -- as Colorado law does. Later, at trial, damages were awarded for breach of the modified non-compete. The opinion isn't clear, but presumably the breach and resulting damages occurred prior to the preliminary injunction.

On appeal, defendants sought to have the damage award vacated as they argued that the non-compete was not enforceable until it had been modified by the district court. In the words of the First Circuit, defendants were seeking the application of the "one free breach" rule, which would bar damages for breach of a non-compete if the non-compete was subsequently modified by a court. At first blush, this argument seems plausible. As the First Circuit noted: "We have no quarrel with the defendant's general contention that under the partial enforcement rule, an overly broad noncompetition provision cannot be enforced until it is modified, a proposition that seems self-evident".

The First Circuit rejected defendants' argument, however, as it reasoned that the one free breach rule "would eviscerate all but the most narrowly tailored non-competition agreements, since a modification of any term of the provision would justify a breach of all its terms".

This case raises some perplexing issues. The First Circuit may be right that employees should not be able to enjoy the benefits associated with the "one free breach" rule. On the other hand, there may be situations where it would be unfair to ask employees to anticipate whether and how an unreasonable restraint will be construed. And, in those situations, a court may not be inclined to award damages against a former employee when the employee guesses wrong about how the restrictions in a non-compete should be enforced.

Damages For Lost Profits Awarded

Dan Warden — Sun, 25 Oct 2009 14:18:22 -0700

Profits lost on specific orders are recoverable for breach of a non-compete agreement, according to the recent Tenth Circuit decision in Southwest Stainless v. Sappington.

Oklahoma law was applied to determine that the non-compete was enforceable. As a result, the trial court's reasoning about why the non-compete was enforceable has limited value for a case governed by Colorado law. Oklahoma's non-compete statute differs from Colorado's. Nonetheless, the Tenth Circuit's damages analysis may provide guidance in Colorado cases.

In Sappington, the trial court rejected the plaintiff's claim for "general lost profits"; that is, plaintiff's claim for lost profits on all the business done by its former employees' new employer. Other jurisdictions have similarly concluded that damages should not be measured by the benefit to the party in breach. The trial court awarded damages, however, on two contracts where there was evidence that the former employees' breach of their non-compete had caused damages.

On appeal, the defendants challenged the ruling that lost profit damages were recoverable on the two contracts at issue. The former employees argued that any breach of their non-competes had not caused damages to their former employer because the plaintiff had not shown exactly what the defendants had done or how the damages had resulted. The Tenth Circuit rejected this evidentiary argument with little difficulty, as it noted that Oklahoma law provided that a causal connection could be proved by circumstantial evidence.

While the decision is not surprising, it does include lessons for both employees and employers. Employees subject to non-competes should recognize that there are times when damages have been awarded for the breach of a non-compete. Employers should recognize, on the other hand, that their case for damages may depend on showing how the employee's conduct caused it to incur damages. It is often not enough for a former employer to show that the new employer of its former employee has been successful.

Colorado's Non-Compete Statute

Dan Warden — Fri, 28 Aug 2009 16:31:24 -0700

In the last several years, several states have adopted statutes governing the enforcement of non-competes, including Oregon, Connecticut and Idaho. In other states, legislation has been proposed but not adopted. None of the statutes in other states are identical to Colorado's although similarities exist.

In the midst of these changes in other states, it is worthwhile to reconsider the history of Colorado's non-compete statute.

Colorado's statute, Colo.Rev.Stat. 8-2-113(2), was adopted in 1973. Only one change has been made since the statute was adopted: subsection (3) was adopted in 1982. That subsection generally voids physician non-competes. To our knowledge, there has been little if any discussion of changes to the Colorado statute.

Prior to the adoption of the statute, Colorado followed the common law under which a covenant not to compete was valid and enforceable if the covenant was reasonable in duration and geographic scope. That rule was first adopted in a 1909 decision in which the Colorado Supreme Court considered various English and American cases and ruled that "Reasonable restrictive covenants are consistent with public convenience, individual interest, and the general welfare".

In these pre-statute cases, an employee had the burden to show that any restriction was unreasonable. That burden was difficult to meet. Throughout these decisions runs a theme of moral disapproval of anyone who would seek to breach his contractual obligation. The Colorado Supreme Court noted on more than one occasion that the employee's conduct was "wrong" because he was "deliberately doing what he plainly agreed not to do". Non-competes were sustained for terms up to five years and with distances of 100 miles.

After the Colorado statute was adopted, courts recognized that the burden had been flipped to the employer who now had the burden of showing that any non-compete fell within one of the exceptions to the general rule voiding non-competes in Colorado. If the non-compete fell within an exception, the employee still could challenge the restrictions on duration and geographic area as unreasonable.

Colorado's non-compete statute is an important part of any analysis of whether a non-compete is enforceable under Colorado law. It is important to recognize that this statute is different than the statutes adopted in other states. It is also important to recognize that the statute does not answer all the questions raised in non-compete cases. Those answers may come from the common law in Colorado or from the law in other states.

TRO Issued to Preserve Evidence

Dan Warden — Wed, 19 Aug 2009 16:44:09 -0700

Once an employer becomes suspicious that former employees are acting wrongfully, employers often consider seeking injunctive relief ex parte or prior to providing notice to the employee. Significant hurdles must be overcome, however, before a party can obtain a temporary restraining order ex parte. Under the Colorado and federal rules, a court may issue a temporary restraining order only if the applicant can show that immediate and irreparable injury will result to the applicant before the adverse party can be heard in opposition. In addition, the applicant must certify any effort made to give notice to the adverse party and the reasons why notice should not be required.

Together, these requirements often doom any application for a temporary restraining order. In the Gustafson case which we discussed last February, for example, Judge Krieger found that the plaintiff had failed to show that it would incur irreparable injury absent the injunction. As a result, she denied the employer’s application for a temporary restraining order.

In the July 17, 2009 decision in Statera v. Henrickson, Judge Blackburn on the federal district court in Colorado granted an employer’s application for a temporary restraining order against former employees even though the employer did not certify its efforts to give notice to the former employees. The order did not, however, compel the former employees to comply with their contractual or statutory duties to their former employer. Instead, the order “enjoined and restrained” the former employees from (1) deleting or destroying any of the employer’s trade secrets, confidential information and the like in their possession”; (2) taking any action to delete any information related to the former employer in their hard drive or other computer storage media; (3) making any copies of the employer’s confidential information; (4) making any use of the computers in their possession; and (5) deleting any email messages in certain accounts.

In the documents filed in support of the temporary restraining order, the employer presented evidence that the former employees had been employed as Vice Presidents and had had access to confidential information and trade secrets. The employees had signed agreements which barred them from using the employer’s trade secrets. After the employees left, the employer discovered that they were engaged in competitive activities. The employer hired a forensic computer expert who was able to determine that the employees had downloaded confidential files and had used the computers to organize their competitive enterprise. In addition, the expert discovered that the employees had attempted to use an “anti-forensics software shredder” program to disguise their activity on the computers.

Based on this record, Judge Blackburn declined to compel the employer to give notice of the temporary restraining order to the former employees. Judge Blackburn reasoned that notice should not be required because of the risk that the employees would, after receiving notice, again take action to alter, erase, or destroy evidence in their possession.

There are a number of lessons in the case for employees. Employees need to recognize that employers often will spend the time and money necessary to enforce confidentiality and non-compete agreements. Employers will examine a former employee’s computer to find out whether the employee has engaged in wrongful or suspicious behavior prior to leaving the company. Employers will find out if the employee has attempted to run an erasure program on his computer prior to leaving. The decision also provides yet more evidence that courts may be eager to grant relief, ex parte or otherwise, to employers when the employer is able to show that a former employee has engaged in intentional conduct to disguise potentially wrongful conduct.

"Management" Exception Construed

Dan Warden — Tue, 11 Aug 2009 14:36:32 -0700

Under the Colorado non-compete statute, non-competes are void unless they fall within one of the designated exceptions. One of those exceptions is for "executive and management personnel".

Another decision recently was entered on this "management" exception when the Colorado Court of Appeals issued its June 2009 decision in Dish Network v. Altomari. In Dish Network, the trial court, Judge Habas of the Denver District Court, had denied Dish Network's motion for preliminary injunction in part. Judge Habas had found that the employee was not "management personnel" under the non-compete statute. The Court of Appeals reversed as it found that Judge Habas had misconstrued what was meant by the "management" exception. This exception, according to the Court of Appeals, was not limited to "key personnel at the heart of the business".

In ruling that the exception applied, the Court of Appeals noted, at different points in the opinion, that the employee was a director of Dish Network, that the employee was "at the top of the compensation scheme", that the employee "directly" supervised fifty out of Dish's 22,000 employees, that the employee's division had a ten million dollar budget, and that the employee "was employed in a decision-making capacity, and had a certain level of autonomy".

In reaching its ruling, the Court of Appeals acknowledged that the Colorado Supreme Court had not considered this exception and "other courts that have considered the exception have not provided a clear definition for who qualifies as 'executive and management personnel'". It is worth questioning whether this decision contributes substantially to the definition of this exception. Most cases, after all, won't involve employees who "directly supervise" fifty employees and who manage a ten million dollar budget.

The decision underscores how difficult it can be for a court to determine whether an employee falls within the "management" exception. By underscoring this difficulty, the decision demonstrates how important equitable considerations can be in determining the scope of any exception to the general rule that non-competes are not enforceable.

Colorado law applied to enforce non-compete

Dan Warden — Thu, 16 Jul 2009 14:57:31 -0700

In a June 12, 2009 decision, Haggard v. Spine, Judge Arguello of the federal district court in Colorado ruled that Colorado law should be applied to determine the enforceability of a non-compete despite the parties' agreement that Pennsylvania law should govern.

Consistent with Colorado's choice-of-law rules, Judge Arguello concluded that the law chosen by the parties would be applied unless application of the chosen law would be contrary to a "fundamental policy" of a state with a materially greater interest. In Haggard, Judge Arguello found that Colorado had a materially greater interest in the dispute because the employee lived and worked in Colorado and the "threatened employment" would also be in Colorado. In addition, the employer had a large facility in Colorado and the employee signed the employment agreement in Colorado. Judge Arguello also found that there were sufficient differences in Colorado and Pennsylvania law that would make application of Pennsylvania law contrary to Colorado's policy on non-competes.

Choice-of-law provisions in non-competes have received considerable attention from Colorado courts in the last several years. Employers often include choice-of -law provisions in their employment agreements, either because they want all employees to be bound alike or because they believe that a specific state's law provides them with an advantage.

There have been decisions in which these choice of law provisions have been enforced. More frequently, however, Colordo courts have elected to apply Colorado law to determine the enforceability of a non-compete. These decisions rest on a factual inquiry performed by the Court. If a case involves facts that relate exclusively to Colorado, Haggard suggests that another state's law will not be applied.

The rest of Judge Arguello's decision is anticlimatic. Among other things, Judge Arguello found, under the evidence presented, that the non-compete was necessary for the protection of trade secrets. As a result, Judge Arguello issued a preliminary injunction barring the employee from violating the non-compete.

Ongoing Employment Is Not Sufficient Consideration for the Enforcement of a Non-compete

Dan Warden — Sun, 28 Jun 2009 08:53:32 -0700

Uncertainty existed when we entered our blog post in April which discussed the consideration required for the enforcement of a non-compete. On June 11, the Colorado Court of Appeals ruled, however, that continued employment is not sufficient consideration for the enforcement of a non-compete.

In Lucht's Concrete Plumbing v. Horner, the employee executed a non-compete agreement after working for the company for two years. The employee was not given a pay increase, promotion or additional benefits in consideration for the new commitment. Later, the employee went to work for a competitor in violation of the non-compete and the employer sought to enforce the non-compete.

For a contract to be enforced, each party to the agreement must provide the other with something of value. That "something of value" is called the consideration for the contract. In Lucht's Concrete Plumbing, the issue was whether continued employment of the employee was sufficient consideration for the enforcement of the non-compete. The employer in Lucht's Concrete Plumbing argued that that an employer's forbearance of its right to discharge an at-will employee is sufficient consideration.

The Court of Appeals rejected the employer's arguments and held that continued employment does not create consideration for a non-compete once an employee begins working for an employer. The court reasoned that an employer might agree to continue the employment of the employee if he agrees to sign the non-compete but nothing prevents the employer from discharging the employee at a future date. Accordingly, the employer's promise "requires nothing more than was already promised in the at-will agreement".

Lucht's Concrete Plumbing is a favorable decision for employees and, under the right circumstances, may mean that non-competes signed by existing employees are not enforceable. it is important to remember, however, that most non-competes are signed when employees are initially hired and are a condition of employment. In those cases, employers will argue that consideration did exist (that is, the job) for the non-compete regardless of this new decision. It is also important to remember that this is a decision from the Colorado Court of Appeals. The decision could be appealed to the Colorado Supreme Court.

Non-compete rules vary by state: Don't Assume that Colorado will follow decisions from other states

Dan Warden — Thu, 09 Apr 2009 11:35:53 -0700

We are often contacted by potential clients who have already researched the non-compete or other issue in dispute. These potential clients already understand, for example, that Colorado has adopted a statute that sets forth when a non-compete may be enforced. In addition, they have used the internet to look at recent decisions from Colorado and other states.

Sometimes, however, a little information can be a dangerous thing. A recent post in another blog is a good example. In that blog post, the author reported that, at least in South Carolina, a non-compete could not be enforced when the only consideration provided for the execution of the non-compete was continuing at-will employment. That is, that a non-compete, signed by an employee after he had started his job, was not enforceable unless the employer provided the employee with some benefit ( e.g. a bonus, a promotion) other than continuing employment.

That may be the law in South Carolina. We don't practice there and we wouldn't profess to know. But this issue is not so easily resolved in Colorado.

In Colorado, a non-compete, like any other contractual obligation, must be supported by consideration. The employer, in other words, must provide the employee with some benefit. It isn't as clear, however, whether an employee's continuing employment is sufficient to support the non-compete obligation (that is, an explicit or implicit threat that the employee would be terminated unless he signs the non-compete). Colorado courts have held, for example, that continuing employment can be sufficient consideration to bind an employer to a promise in a employee handbook. Those cases imply that continuing employment is sufficient to support a non-compete obligation.

As a practical matter, cautious employers will combine any request to sign a non-compete with a bonus or some other benefit. That added benefit will assist the employer in showing that consideration existed for the non-compete.

More importantly, however, an employee should not rely on a blog post about the law in another state in making a decision about whether his non-compete in Colorado is enforceable. The law on non-competes varies widely across the United States. Do not assume that Colorado will follow the approach adopted in other states.

Adverse inference instruction directed for spoliation of evidence

Dan Warden — Thu, 26 Mar 2009 12:16:44 -0700

There are times when employees take information with them when their employment is terminated. Employees often believe that this information, whether it be customer lists or technical information, will assist them when they are looking for a new job or after they find a new job.

When their former employer files a lawsuit or sends a threatening letter, however, these employees often panic. They rush to purge the stolen information from their computer to hide evidence of the stolen information.

These efforts often fail. There are many computer forensic companies, and they actively market their services to companies in connection with the issues raised by terminated employees. Once a company files a lawsuit against the former employee, these companies assist the company in developing evidence that demonstrates that information was stolen. Alternatively, these companies can develop evidence to show that information was purged or wiped from the former employee's computer. That evidence can lead to dire consequences for the former employee, as a recent case demonstrates.

In Telequest International v. Dedicated Business Systems, a March 11, 2009 decision from the federal district court in New Jersey, the defendant formed a new company and began competing with his former employer, Telequest, shortly after his employment terminated. Telequest's Complaint alleged that the defendant had stolen a list of customers and vendors that it had taken Telequest fifteen years to develop. The Court ordered that the defendant produce his computers for a forensic examination. When the computers were produced, however, Telequest discovered that "defrag" and "wiping" programs had been run on the computers.

As a result, Telequest sought a default judgment against the defendant for the destruction or "spoliation" of evidence. The Court declined to enter the default judgment but did order that an adverse instruction should be given to the trier of fact based on the efforts to purge information from the computer. That is, an instruction that the defendant had destroyed evidence "out of the well-founded fear that the contents would harm him". This instruction would permit the fact finder to conclude that the former employee had breached any non-compete or stolen trade secrets.

Litigants have an affirmative obligation to preserve evidence. Lawyers may debate the scope and timing of this obligation but there is no question that the obligation arises under the proper circumstances.

New study reports that employee information theft is common

Dan Warden — Wed, 18 Mar 2009 12:21:24 -0700

Laid off or terminated employees commonly take confidential company information, according to media reports covering a recent study released by the Ponemon Institute, an Arizona based research company.

Nearly sixty percent of departing employees steal proprietary company data. Employees took this information in different ways. Most employees take documents (paper) with the information. But employees also admitted that they downloaded information onto a disc or sent information as attachments to personal emails. Of the nearly sixty percent of the employees that took information, seventy nine percent admitted that they did so even though they knew that their former employer had forbidden them from taking the information.

In perhaps its most intriguing finding, the survey reports that approximately twenty five percent of the employees said that they were able to access data on a company's network even after they had been terminated or quit.

These results were based on a survey of approximately 950 employees who were laid off, fired or lost jobs in the last twelve months.

According to a recent article in the Washington Post, the Ponemon Institute's founder suggested that employees took this information because they believed that they were entitled to information that they had helped create. Another expert made the practical suggestion that the information was taken to assist employees locate a new position or improve their performance once they obtained a new position.

Not surprisingly, computer forensics companies have used this report to promote their services. These companies sell their ability to prove that a former employee stole information.

Employees, who are preparing to leave an employer, should take note of the survey. Employers frequently file suit against former employees for the theft of confidential information. As employers become more educated about the risk presented by departing employees, more effort will be expended to prove an employee's theft.

Employers, on the other hand, also need to be vigilant. To the extent that information is readily accessible by former employees or if a company knows and does not prevent employees from taking information, a court may be reluctant to find that the information is confidential or proprietary.

Colo Court of Appeals affirms judgment against former employees

Dan Warden — Sun, 08 Mar 2009 11:11:36 -0700

Employees sometimes are lulled into a false sense of security when they haven't been asked to sign a non-compete (or after they conclude that their non-compete is not enforceable). These employees think that they can do almost anything in anticipation of competing with their employer after they quit their jobs. That's not true and a March 5, 2009 Colorado Court of Appeals decision in Harris Group, Inc. v. Robinson demonstrates how an employee's pre-termination conduct can result in liability.

The facts in Harris Group are worth considering because they provide a lesson on what an employee should not do when preparing to compete with his employer.

Prior to quitting their jobs, the employees began to make plans to form a new business to compete with their employer. They copied company files and emailed or saved files for use with their new company. The original files were deleted after they were copied. The employees developed a website stating that one of the employees had left the company and taken along the company's entire consulting team. Five employees then quit and gave their employer one day notice. Once they quit, the five employees offered jobs in a new company to five of the seven employees who remained in their department. During the new company's first week, the former employees contacted the company's clients and and told them that the new company could take over their projects. As a result of the employees' promotional efforts, the new company was able to transfer seventeen of the twenty-none active projects from the old employer to the new company.

Prior to the jury verdict, the company's claims for computer fraud and abuse, for defamation, and for civil theft and misappropriation were dismissed. At trial, the former employer sought to recover damages and lost profits.

A Denver District Court jury found that the company had proved its claims against the new business for intentional interference with contract, conversion and unjust enrichment. The jury also found that the company had proved its claims against the former employees for breach of confidentiality agreements, breach of fiduciary duty, intentional interference with contract, conversion; and unjust enrichment. Actual damages of over $1.9 million were awarded against the former employees and the new company. The jury also awarded punitive damages of over $600,000.

The Court of Appeals' opinion does not include any surprises. The Court held that the case should be remanded because pre-judgment interest had been improperly calculated and held that damages should not have been awarded for unjust enrichment. The remaining challenges were rejected.

There are a number of lessons to be drawn from Harris Group. Employees face many economic challenges when they leave a company to form a competing business. Nonetheless, employees should not engage in conduct prior to terminating their employment that will expose them to liability to their former employer. Employers can and will use computer forensics to determine what an employee did before his employment was terminated. An employee should assume that his former employer will be able to determine what the employee did to prepare to engage in competition. Any effort to copy or email computer files will be discovered and may form the basis for claims against the employee.

Colorado and the Computer Fraud and Abuse Act

Dan Warden — Wed, 04 Mar 2009 16:24:00 -0700

In cases filed to enforce non-compete agreements, employers often include a claim against a former employee under the Computer Fraud and Abuse Act.

In a typical claim, the employer asserts that the employee accessed confidential business information on a work computer, emailed the information to a personal computer and then used the information in connection with the employee's new job. Based on these allegations, the employer asserts a claim under (a)(4) or (a)(5) of the Act.

Section (a)(4) of the Act states that a violation occurs when an individual who "knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value". A key issue is whether the employee's actions were authorized by the employer.

Employers have had mixed success with these claims. Some courts have adopted an expansive construction of the Act in recognizing that employers have stated claims under the Act. These courts have concluded that, while an employee may have been authorized to access information, that access was terminated when the employee accessed and appropriated the information for their own personal gain and against the interest of their employer.

Last month, a Nebraska federal district court in Ervin & Ervin Smith Advertising v. Ervin joined those courts which have sided with employers in adopting a liberal construction of the Act. In Ervin, the defendants were former executives who emailed documents to their home computers when they were preparing to compete with the company. There was no dispute that the computer access was done prior to the end of employment. Based on these facts, the court denied the employee's motion to dismiss the claim under the Act.

Neither the tenth circuit, nor Colorado's federal district courts have provided much guidance on the Act. The tenth circuit or Colorado's federal district courts may adopt the approach in Ervin which favors employers. As a result, any employee who transfers company information from his work computer to his personal computer for use in his future employment incurs the risk that a claim may be asserted under the Act. An employer also may be able to assert additional state law claims for breach of the employee's duty of loyalty or breach of the employee's agreement to maintain the confidentiality of information.

Inadequate affidavit causes Motion for TRO to fail

Dan Warden — Sun, 08 Feb 2009 11:11:52 -0700

American Family's efforts to obtain a temporary restraining order against a former employee recently were rebuffed when Judge Krieger from the federal district court ruled that American Family had failed to sustain its burden.

In American Family v. Gustafson, 2008 WL 5377969, American Family alleged that a former agent had retained customer lists and other information after he had resigned. And that the agent had used that information to solicit American Family's customers to cancel their policies and purchase new policies from another company. Claims were alleged under the Computer Fraud and Abuse Act, the Colorado Trade Secret Act and the Colorado Consumer Protection Act.

In support of its motion for a temporary restraining order, American Family submitted a single affidavit. Judge Krieger concluded, however, that the affidavit was insufficient for a number of reasons.

Most importantly, she ruled that the affidavit failed to demonstrate that American Family would suffer immediate injury absent an injunction. According to American Family's own affidavit, nearly six months had passed since the agent had engaged in the allegedly wrongful conduct. Judge Krieger also concluded that American Family had not demonstrated why the motion needed to be heard before the agent could be heard in opposition.

There are a number of obvious lessons in this decision. In non-compete, computer fraud and trade secret cases, plaintiffs often believe that they must move immediately for a temporary restraining order. Courts may be skeptical, however, of granting that relief, however, if a substantial amount of time has passed since the defendant initially engaged in the wrongful conduct. Temporary restraining orders, by definition, are limited to a brief period of time. There may be no reason to grant this relief if the plaintiff has sat on his rights.

It is also noteworthy that Judge Krieger was generally skeptical about the affidavit. She questioned, for example, whether the assertions in the affidavit were truly based on the personal knowledge of the company representative who signed the affidavit.

Utah rules that damages for breach of a non-compete limited to lost profits

Dan Warden — Sun, 25 Jan 2009 09:20:39 -0700

In a November 2008 decision, TruGreen Companies v. Mower Brothers, the Utah Supreme Court ruled that lost profits is the appropriate measure of damages for breach of a contractual non-compete provision.

In TrueGreen, TruGreen Companies had argued that an unjust enrichment or restitution measure of damages should be used. TruGreen sought to recover the economic benefit realized by its employees' breach of their non-compete agreements. The Utah Supreme Court rejected this argument as it expressly held that restitution or unjust enrichment was not an appropriate measure in non-compete actions. The court reasoned that restitution and unjust enrichment should only be used when no express contract is present. The use of these equitable remedies would "punish" the breaching party, according to the TruGreen court, and would be inconsistent with the basic rule of contract damages that the non-breaching party should be placed in the position that it would have enjoyed if the contract had been performed.

In reaching its decision, the court in TruGreen relied heavily on the 2007 decision by the Idaho Supreme Court in Trilogy Network Systems v. Johnson. The TruGreen court approved of the ruling in Trilogy that a plaintiff could "examine" the defendant's profits in an attempt to assess it own economic loss. A plaintiff can not rely solely on the defendant's gains to prove its lost profits, however, and must submit proof of its own costs and profits. Because the plaintiff in Trilogy had failed to introduce evidence about its own costs and profits, the Idaho Supreme Court declined to award damages because the plaintiff had failed to "to take the measure of its damages out of the realm of speculation".

In rejecting the use of restitution as a measure of damages for breach of non-compete provisions, Utah joins not only Idaho, but also a number of other states, including Wyoming, Alaska and Connecticut.

For those with non-competes governed by Colorado law, it is worth noting that Utah has not adopted a statute governing non-competes comparable to Colorado's. In that sense, Utah is generally more favorably inclined to enforce non-competes. It is also worth noting that the Utah Supreme Court's decision was limited to the question of the appropriate measure of damages for breach of a non-compete. Any employer seeking to recover damages in a non-compete case may face additional hurdles.