On August 10, 2022, Colorado’s new statute further restricting non-competition and non-solicitation provisions becomes effective. The new law, which passed earlier this year, continues Colorado’s trend toward increased scrutiny of post-employment restrictions and adds Colorado to the growing list of states that restrict the use of out-of-state choice of law and forum provisions in agreements that contain such restrictions.
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Danger: Rocky Road Ahead!
Colorado Poised to Dramatically Limit the Enforceability of Non-Competes and Other Restrictive Covenants for Low-Wage Workers
Earlier this week, the Colorado state legislature voted to pass HB22-1317, which if signed into law by Democratic Governor Jared Polis, would place Colorado among several other states with the strictest bans on restrictive covenant agreements for low-wage workers. A spokesperson for Governor Polis has already indicated that the governor plans to sign the bill. If executed, the bill would become effective 90 days after the legislature adjourns (early August 2022), so immediate and very substantial changes appear to be right around the Rocky Mountain road.
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Colorado Criminalizes Attempts to Curb Competition
Yet another state has made it harder for businesses to implement restrictive covenants—this time with criminal penalties.
Colorado’s restrictive covenants statute already provides that it is unlawful to “use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation,” and further states that non-competes are invalid unless they fall into one of four categories:
- Covenants made in connection with the purchase and sale of a business (or the assets of a business);
- Covenants made for the protection of trade secrets;
- Covenants for the recovery of expenses incurred in educating and training employees who were employed for less than 2 years; and
- Covenants for executive and management personnel (and their professional staff) and officers.
That has been the law in Colorado for years—but a new, draconian portion of the statute will go into effect in just over a month.
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Location, Location, Location
As in real estate, as in law. A recent ruling in the USDC for the District of Colorado demonstrates that procedural considerations of where to file may often have substantive consequences. Plaintiff LS3, Inc. (“LS3”) sued Cherokee Federal Solutions, LLC (“CFS”) and various former employees of LS3 in the United States District Court for the District of Colorado. The gist of the action was that CFS, a competitor of LS3, solicited away former employees of LS3 to work for CFS in violation of employee non-compete agreements. Claims were asserted against the individual employees for breach of the restrictive covenant agreements and against CFS for tortious interference with those same agreements. Critically, the agreements at issue all contained Maryland choice-of-law provisions but apparently no venue or forum provisions.
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Top 10 Developments/Headlines in Trade Secret, Computer Fraud, and Non-Compete Law in 2013
By Robert Milligan and Joshua Salinas
As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all
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13 Scary Years Ago Court Issued Death Sentences In Horrid Dispute Over Vampire Fangs.
Once upon a midnight dreary, in the annus horribilis of 2000, the United States District Court for the District of Colorado issued its terrifying decision in what is the seminal artificial vampire fangs case entitled Nutting v. RAM Southwest, Inc., 106 F. Supp. 2d 1121 (D. Col. July 10, 2000).
The plaintiff in this chilling tale, Mr. Nutting, was
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Nevada and Colorado Pass Employee Social Networking Privacy Laws
Nevada and Colorado recently passed employee social networking privacy laws. Both laws prohibit employers from requiring disclosure of employees’ or applicants’ personal social-networking account login information, and from retaliating against them for refusing to provide that information. But one or both of these statutes are somewhat different from other states’ social networking laws in that:
- The Colorado law does not
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Colorado Federal Court Decision In Non-Compete Dispute Demonstrates Importance Of Drafting Enforceable Forum Selection Provisions In Business Transactions
By Robert Milligan and Jeffrey Oh
As part of the process of acquiring of a business and retaining key employees of the acquired business, multiple agreements surrounding the parameters and contingencies of the transaction are often drafted, including asset purchase agreements and employment agreements. These agreements sometimes overlap in scope and ensuring that all material aspects of the deal align in the documents is crucial in maintaining the effectiveness of any singular business transaction. In an order denying defendant’s motion to dismiss in a non-compete dispute involving a former key executive of the purchaser, the Honorable Judge R. Brooke Jackson of the United States District Court for the District of Colorado illustrated the importance of congruity within these sorts of agreements, particularly forum selection provisions. The bottom line is that special care needs to given in the drafting of these documents so that the non-compete provisions and forum selection provisions remain consistent.
The case, Robert Stuart v. Marshfield Doorsystems, Inc. Civil Action No. 12-cv-00454-RBJ, 2012 WL 872766 (D. Colo. March 14, 2012), concerns a dispute over agreements signed during defendant’s acquisition of plaintiff’s company and retention of his employment services. In 2004, Stuart and his business partner David Cox sold Consolidated Fiber, LLC, which deals in the manufacturing and selling of commercial and residential doors, to Marshfield Doorsystems. By the terms of the Asset Purchase Agreement (“APA”), Stuart and Cox received $2 million each and agreed to stay with the company and sign separate employment agreements. The APA included reference to unsigned employment agreements that were attached as exhibits and incorporated by reference.
The APA included a non-competition clause that barred them from joining a competing business for 24 months after the termination of their employment agreements. Additionally, the APA stipulated it would be governed by Delaware law, where Marshfield is incorporated, and that “any dispute, controversy or claim arising out of or relating to” the APA would be settled through arbitration in Chicago, IL. Any dispute not able to be settled through arbitration would then be settled in an applicable court in Chicago.
In concordance with the APA, Stuart signed an Employment Agreement with Marshfield that had him under contract for a five year “Initial Term.” Per the Employment Agreement’s “Renewal Terms” the contract was extended automatically at the end of the Initial Term for one year every year unless terminated by either party through 45 days advance notification. Stuart’s Employment Agreement contained a non-competition clause largely identical to the one found in the APA, but, in contrast with the APA, provided that any and all disputes “arising out of or related to” the Employment Agreement were to be resolved by a court trial without a jury. Moreover, the Employment Agreement contained a merger clause stating that it “merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature between the parties hereto relating to…employment.” The APA and Employment Agreements were apparently executed on the same day.
After the Initial Term had passed, in addition to three subsequent Renewal Terms, Stuart informed Marshfield on January 9, 2012 that he intended to resign approximately four weeks later. A few days after this, Stuart informed Marshfield that upon his departure, he would be joining TruStile Doors, LLC in Denver, CO. Marshfield terminated Stuart’s employment on January 17, 2012 and cited the non-competition clauses of the APA and his Employment Agreement in insisting he quit his job with TruStile Doors, which Marshfield considers a competitor. Marshfield also informed TruStile Doors of Stuart’s agreements and pressed them to terminate his employment.
On February 22, 2012, Stuart filed a complaint in federal court in Denver, Colorado against Marshfield seeking a declaration that the non-competition agreements are not enforceable, or that they were waived, or that they were not violated, as well as an injunction against Marshfield from interfering with his employment at TruStile Doors. In response, Marshfield requested arbitration through the American Arbitration Association to settle the arbitrable aspects of the dispute in Chicago, per the APA. Marshfield also filed a complaint against Stuart in the United States District Court for the Northern District of Illinois, Eastern Division, seeking an order from the court for arbitration as well an injunction barring Stuart from working at TruStile Doors. Similarly, Marshfield filed a motion to dismiss Stuart’s complaint filed in the Colorado federal action due to improper venue based on the forum selection clause found in the APA, as well as motion to transfer venue based upon forum non conveniens.
Denver Club Owner Fails to Bounce His Partner’s Trade Secrets Lawsuit for Alleged MySpace Friends Theft
On March 14th, a federal court in Denver, Colorado kept alive an electronic dance club owner’s trade secret theft and antitrust lawsuit against one of his former partners, alleging his partner stole his clubs’ MySpace “friends” and tried to drive the owner out of the Denver electronic dance market. In Christou v. Beatport, LLC, No. 10-cv-02912-RBJ-KMT, 2012 WL
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Colorado Federal Court Rules That Former Employer Stated A Claim Against Former Executive and His New Employer Under The Computer Fraud Abuse and Act Regardless Of Differing Circuit Interpretations Of The Act
By Robert Milligan and Jeffrey Oh
In its order denying defendants’ motion to dismiss in SBM Site Services, LLC v. Garrett, et al., Case No. 10-cv-00385, a Colorado federal court identified a circuit split over the interpretation of “unauthorized access” under the Computer Fraud and Abuse Act and then found a former employer had stated a CFAA claim against a former executive and his new employer regardless of the different circuit interpretations based upon his post-termination computer activities. The case is significant because it provides employers with authority that the CFAA should apply in cases where an employee steals or destroys company data on a company computer after his or her termination.
Pertinent Allegations
In its ruling, the court laid out the pertinent allegations which it accepted as true for purpose of ruling on defendants’ motion. According to the complaint, defendant John Garrett, formerly the Senior Vice President/Chief Business Development Officer at SBM, a janitorial, recycling, and moving services company, worked remotely from home using two desktop computers and two laptop computers provided to him by SBM. He used these SBM-provided devices to remotely access SBM’s computer system. Prior to his move to Able, a direct competitor of SBM, Garrett allegedly had his administrative assistant download numerous SBM files from its network, had them burned to a cd, and then had them sent to him.
According to the amended complaint, on January 4, 2010 Garrett informally notified SBM that he was resigning effective January 22, 2010. SBM then informed Garrett that he would need to return all SBM property, including computers, records and other confidential information, before his departure. After failing to return the company computers at an initial meeting on January 26, 2010, SBM scheduled another meeting for January 29, 2010 to collect the items. Garrett allegedly canceled this second meeting and did not return the last of his company computers until February 16, 2010, over two weeks after starting his new job at Able. Garrett began his employment with Able on January 28, 2010 and SBM alleges that Garrett loaded SBM’s confidential information onto a laptop provided to him by Able. Upon examination of the returned laptop, SBM allegedly found that the hard drive had been encrypted to prevent access in addition to being “intentionally erased.” SBM asserted several claims against Garrett and Able, including violation of the CFAA.
CFAA and Circuit Split
As with most cases where the CFAA is invoked, the question of what constitutes unauthorized access is central to the arguments made by both sides. Section 1030(a)(5)(C) of the CFAA makes it unlawful to “intentionally access[] a protected computer without authorization and as a result of such conduct, cause[] damage and loss.” Garrett argued that because he was authorized to access the laptop while he was employed by SBM, he cannot have accessed the laptop without authorization.
The court acknowledged that the Tenth Circuit has yet to address what constitutes “unauthorized access” for purposes of the CFAA. The court analyzed differing interpretations of the provision made by the Seventh and Ninth Circuits.
In its interpretation of what constitutes “unauthorized access,” the Seventh Circuit applied agency principles in International Airport Centers, LLC v. Citrin to determine that an employee’s access was unauthorized from the moment he decided to quit and had undertaken actions in violation of his duty of loyalty to his employer. According to the decision, access is only authorized within the agency relationship between employer and employee. This agency relationship relies on loyalty as well as transparency, and violating the duty of loyalty, or failing to disclose adverse interests, voids the agency relationship. Under the Seventh Circuit’s approach, whether access to a computer was “unauthorized” depends upon the status of the agency relationship between the employer and employee.
The Colorado federal court noted that the Ninth Circuit has taken a more restrictive view of what constitutes “unauthorized access” for purposes of the CFAA. In LVRC Holdings LLC v. Brekka, the Ninth Circuit determined that “authorization” depends on actions taken by the employer and “[i]f the employer has not rescinded the defendant’s right to use the computer, the defendant would have no reason to know that making personal use of the company computer in breach of a state law fiduciary duty to an employer would constitute a criminal violation of the CFAA.” In other words, unless an employer rescinds an employee’s right to use or access a computer, the employee arguably has authorized access to all systems and files within the scope of their position. Thus, the onus is on the employer to end an employee’s right to access by explicitly informing them of such. It is notable that the Colorado federal court’s decision does not address the exceeds authorized access section of the CFAA, which provides an alternative theory of liability under the CFAA. An en banc panel of the Ninth Circuit is presently considering that section in U.S. v. Nosal and will issue a decision soon.