HB 22-1317: A New, More Restrictive Era For Restrictive Covenants In Colorado

• Published date: 18 May 2022
• Subject Matter: Employment and HR, Intellectual Property, Contract of Employment, Trade Secrets
• Law Firm: Littler Mendelson
• Author: Stephen E. Baumann II and Thomas W. Carroll

The 2022 legislative session of Colorado's General Assembly closed with a bang. Among a number of new bills affecting employers, perhaps none was as closely watched as HB 22-1317, which provides substantial changes to noncompete and nonsolicitation agreements in Colorado. The bill passed both houses of the legislature and will become effective in August 2022 if Governor Polis signs it.

Although the General Assembly abandoned an earlier bill that would have completely overhauled restrictive covenants in Colorado,¹ HB 22-1317 is nevertheless a major development. While employers felt a shift from the increased criminal penalties earlier this year, the shift with HB 22-1317 is seismic in comparison.

New Substantive Restrictions on Noncompetes and Customer Nonsolicitation Agreements

Under the bill, most noncompetes would be void unless the agreement is with "highly compensated" workers, for the protection of trade secrets, and no broader than is reasonably necessary to protect the employer's legitimate interest in protecting the trade secrets. In other words, the historical Colorado exception for executive and management personnel and their professional staff'which was always hotly litigated and subject to shifting judicial interpretation'is eliminated. The historical trade-secrets exception is now restricted to employees earning $101,250 annually (or the state "highly compensated" amount in effect when the covenant is executed in the future). As many multistate employers are aware, several states have begun requiring a certain wage threshold for restrictive covenants, with Colorado joining similar thresholds in Illinois, Oregon and Washington.

Customer nonsolicitation agreements would be similarly limited: they must be no broader than reasonably necessary to protect the employer's legitimate interest in trade secrets, and the worker must earn at least 60% of the "highly compensated" annual threshold amount when the agreement is entered into and when it is enforced, e.g., $60,750 for 2022. Of note, employee nonsolicitation agreements, which have judicially remained outside the ambit of ' 8-2-113, C.R.S., are not addressed in HB 22-1317. The General Assembly does intend to preserve existing caselaw about the sort of covenants the law affects, and therefore it would appear that the law does not apply to employee nonsolicitation agreements.

The new law is less disruptive of other historical exceptions to Colorado's general prohibition on restrictive covenants...