Subtitle: 
The court’s decision significantly increases the risks associated with hiring employees from competitors.
Important Tip When hiring an employee from a competitor, always determine whether the prospective employee is subject to a non-compete agreement.

Last week the Colorado Court of Appeals issued an opinion with enormous implications for businesses that hire employees from competitors, increasing the employers’ risk of liability, as well as the possibility that the new employee will be prevented from working for his or her new employer.

In Colorado, non-competition agreements are ordinarily void unless they fall into an exception and are reasonable in duration, purpose, and scope.  Last week, the Colorado Court of Appeals issued a ruling broadly interpreting the “management personnel” exception – non-compete agreements that apply to management personnel and officers and employees who constitute professional staff to executive and management personnel.

The lawsuit, Dish Network Corp. v. Altomari, Case No. 08CA1741, involved an employee who left plaintiff Dish Network to work for its competitor, DIRECTV.  Dish sought an injunction to prevent the employee from working for DIRECTV for one year from the date he left Dish.  At issue was whether the non-compete agreement entered between the defendant and Dish was enforceable under the management personnel exception.  The defendant was not a top-level Dish executive, but had some supervisory and management responsibilities such that the court was required to determine whether the management personnel exception is limited only to the very top executives, or extends to mid-level managers as well.

The defendant-employee served as one of nine directors employed to perform installation and service work, and was the only director who worked on the commercial side of Dish’s business, which comprised approximately 5% of Dish’s total business.  Although several levels below the Dish CEO, the defendant supervised fifty out of Dish’s 22,000 employees, earned top-level compensation, and had a degree of autonomy.

Noting that the Colorado General Assembly didn’t define the term “management personnel,” the court applied traditional statutory construction principles and concluded that the management personnel exception extends to mid-level employees in addition to top-level key employees.

This decision significantly limits the ability of a small business to hire employees from competitors.  Before hiring, small businesses need to determine whether the prospective employee signed or will sign a non-compete agreement with the previous employer and if so, what its scope and duration are.  The job of determining whether prospective employees’ responsibilities fit within the “management personnel” exception is now more difficult, and the answer to this question is now more likely to be “yes.”  Since there is currently only one court opinion applying the new standard, there is much uncertainty about its boundaries and contours.  We recommend that employers seek advice from their attorneys when evaluating the validity of non-compete agreements.

 

Additional Information
Important Tip: 
When hiring an employee from a competitor, always determine whether the prospective employee is subject to a non-compete agreement.