Colorado Supreme Court: Continued At-Will Employment is Adequate Consideration for Noncompetition Agreement

On May 31, 2011, the Colorado Supreme Court held that the continued employment of an at-will employee may constitute adequate consideration for a noncompetition agreement.  The Court's decision in Lucht's Concrete Pumping, Inc. v. Horner, No. 09SC627 (Colo. May 31, 2011), reversed an earlier Colorado Court of Appeals decision that required employers to provide something more than continued employment when requiring at-will employees to sign noncompetition agreements.  Writing for the Court, Justice Eid reasoned that "an employer that forbears from terminating an existing at-will employee forbears from exercising a legal right" and "therefore such forbearance constitutes adequate consideration for a noncompetition agreement."  The decision also noted that noncompetition agreements need not cite specifically the consideration to be given, but rather the consideration may be inferred.

Combined with the long-standing law that new employment is adequate consideration for noncompetition agreements, the ruling allows employers to require at-will employees to sign noncompetition agreements at any time, from the inception of employment forward.  However, the Court did provide a note of caution: all noncompetition agreements must still be assessed for reasonableness and "what is reasonable depends on the facts of each case."  Specifically, the Court suggested that an agreement may fail for lack of consideration where, for example, "an employer enters into a noncompetition agreement with an employee with the intention of terminating the employee immediately afterwards[.]"  Because the district court held the agreement to be invalid for lack of consideration, the case was remanded to determine reasonableness.

Although the Colorado Supreme Court's decision in Lucht's Concrete has now made it easier to obtain noncompetition agreements from at-will employees, such agreements and other restrictive covenants are disfavored in Colorado and remain subject to various statutory and judicial requirements.  To ensure compliance with the law and to avoid using unenforceable noncompetition agreements, we recommend that employers work closely with outside counsel in developing and executing noncompetition agreements and other restrictive covenants.