COLORADO SUPREME COURT REVERSES COLORADO COURT OF APPEALS

Posted by BairdQuinn on September 15th, 2011

On May 31, 2011, the Colorado Supreme Court held that continued “at-will” employment is sufficient consideration to support a non-competition agreement.  In Lucht’s Concrete Pumping, Inc. v. Horner, the Court reversed a widely publicized decision of the Colorado Court of Appeals which held that continued employment does not constitute adequate consideration for a noncompetition agreement once an employee has begun working for an employer because the employee is in the same position as he was before he signed the noncompetition agreement.  The Court of Appeals decision is reported at 224 P.2d 355 (Colo. App. 2009).

FACTS OF LUCHT’S

Lucht's hired Horner as Mountain Division Manager on an at-will basis beginning in 2001. Lucht's hired Horner as its "key person" with connections to the concrete pumping industry. As such, Horner was solely responsible for establishing and maintaining the company’s client relationships in the mountain region – clients upon which Lucht's relied for business.

On April 15, 2003, while Horner was employed by Lucht’s, Horner signed a noncompetition agreement. Among other things, the agreement stated that in the event that Horner left his position, he would not "directly or indirectly solicit, induce, recruit or encourage any of [Lucht's] employees or customers to leave [Lucht's]" for twelve months following his termination, and he would not divulge any trade secrets or other confidential information to any future employer.  Horner was not offered any pay increase, promotion, or additional benefits at the time he signed the agreement.

Horner resigned from Lucht's on March 12, 2004, and began working for Everist three days later. Everist is a supplier of ready-mix concrete and had many of the same customers in the mountain region as Lucht's. Shortly after Horner started, Everist entered the concrete pumping business in the mountain region, directly competing with Lucht's, with Horner as its pumping manager.

Lucht's sued Horner for breach of contract, breach of duty of loyalty, breach of fiduciary duty, and misappropriation of trade value. It also sued Everist for intentional interference with contract, aiding and abetting a breach of duty of loyalty, aiding and abetting a breach of fiduciary duty, and misappropriation of trade value.

DECISIONS OF TRIAL COURT AND COURT OF APPEALS

The trial court granted summary judgment against Lucht's on its claims for breach of contract and intentional interference with contract, concluding that the noncompetition agreement was unenforceable due to lack of consideration, which comes under the clause of equal employment opportunity. Following a bench trial, the trial court issued a judgment that included extensive findings of fact and found in favor of Horner and Everist on the remaining claims.

Lucht's appealed. As is relevant here, it argued that summary judgment was improperly entered on its breach of contract and interference with contract claims because Horner's continued employment constituted adequate consideration to support the noncompetition agreement.

The Colorado Court of Appeals had concluded that as per Colorado employment laws the continued employment of an at-will employee cannot, by itself, constitute consideration for a noncompetition agreement if the employee had already begun working for an employer.  Lucht’s, 224 P.3d at 358.  The Court of Appeals reasoned that, even though an employer may agree to continue an at-will employee's employment if the employee agrees to sign the covenant, nothing prevents the employer from discharging the employee at a future date and therefore the employee receives nothing more than what was already promised in the original at-will agreement. Id.

SUPRMEME COURT’S REVERSAL OF COURT OF APPEALS

In an en banc decision, the Colorado Supreme Court reversed the court of appeals, holding:

"We hold that an employer that forbears from terminating an existing at-will employee forbears from exercising a legal right, and that therefore such forbearance constitutes adequate consideration for a noncompetition agreement.  We have recognized that continuation of at-will employment is adequate consideration in the context of an employee's receipt of a benefit, Continental Air Lines [v. Keenan], 731 P.2d [708,] 711 [(Colo. 1987)], and now apply that reasoning to the context of consideration for a noncompetition agreement."

The Court reasoned that because employment in Colorado is at-will, meaning that an employer may terminate an at-will employee at any time during the employment relationship as a matter of right, the forbearance from terminating an employee presented with a non-compete agreement after hire is sufficient consideration for such an agreement.  The Court further reiterated that there appears to be no question that sufficient consideration for a non-compete agreement exists when entered into at the commencement of at-will employment. The incumbent can seek the help of Colorado employment lawyers for filing suit against employers or vice-versa.

LIMITED IMPACT OF LUCHT’S

 Employers and employees should keep in mind that the Lucht’s decision only addresses the issue of whether the continuation of at will employment is sufficient consideration to support a non-competition agreement.  There are other potential impediments to enforcement of a non-competition agreement.  First, non-competition agreements are void in Colorado unless one of four statutory exceptions apply – such as the exceptions for “executive and management personnel” and their staff, and for agreements to protect trade secrets.  See C.R.S. § 8-2-113(2).  Further, in order to be enforceable, a non-competition provision must be reasonable in terms of its geographic scope and duration. 

Author Bio:

J. Mark Baird and Beth Doherty Quinn, the employment law attorneys at Baird Quinn, LLC have practiced law for more than 25 years and 15 years, respectively, with an emphasis on employment law and labor-management.  They have extensive experience litigating employment law matters,  including discrimination, harassment, unlawful termination, wage and hour, retaliation, unfair labor practice, non-compete/employee loyalty, and breach of contract.  They also litigate commercial fraud matters.  Not only have they represented clients before a variety of administrative agencies and courts, Mr. Baird and Ms. Doherty Quinn have conducted numerous seminars, such as seminars on ADA compliance, and in-house training for clients regarding sexual harassment and other Title VII discrimination issues as well. http://www.bairdquinn.com/