Phx. Capital, Inc. v. Dowell - 176 P.3d 835 (Colo. App. 2007)

Rule:

Covenants not to compete, with some narrow exceptions, are contrary to the public policy of Colorado and are void. In the preliminary injunction context, the employer has the burden to establish that the covenant not to compete falls within one of those narrow exceptions. Colo. Rev. Stat. § 8-2-113(2)(d) (2006) provides that the prohibition on covenants not to compete shall not apply to executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. 

Facts:

Plaintiffs, Phoenix Capital, Inc. (PCI) and Phoenix Analytic Services, Inc. (PAS), appealed the trial court's order (1) denying their motion to preliminarily enjoin defendant, Robert M. Dowell, from violating a noncompetition agreement and (2) denying injunctive relief against Dowell beyond a one-year time limit specified in a nonsolicitation agreement. Dowell cross-appealed the trial court's order preliminarily enjoining him from violating the nonsolicitation agreement for the remainder of the specified period. The trial court determined that Phoenix had not established a reasonable probability of success on the merits and thus was not entitled to relief with respect to the noncompetition provision because (1) Dowell, at the time he signed the agreement, was not "professional staff to executive [or] management personnel" within the meaning of § 8-2-113(2)(d), C.R.S. 2006, and thus, the noncompetition provision was void ab initio; and (2) the void ab initio provision could not be given effect when, subsequently, Dowell attained a prominent managerial position with PCI and PAS. The trial court ruled that Phoenix was, however, entitled to enforce the provisions addressing nonsolicitation of customers and employees because, consistent with Atmel Corp. v. Vitesse Semiconductor Corp., 30 P.3d 789, 796 (Colo. App. 2001), abrogated in part on other grounds by Ingold v. AIMCO/Bluffs, L.L.C. Apartments, 159 P.3d 116, 124 (Colo. 2007), Phoenix had voluntarily agreed to limit the scope of those provisions to only "active" efforts to solicit clients or employees.

Issue:

Did the trial court err in ruling that Phoenix had not established a reasonable probability of success on its request to enforce the noncompetition provision?

Answer:

No.

Conclusion:

The court found that Dowell did not fall within the "professional staff" provision and there was no error in the trial court's refusal to extend the terms of the preliminary injunction beyond the one-year term specified in the parties' agreement. Although the invalidity of the noncompetition provision did not render invalid Dowell’s agreement not to solicit the employers' employees, it rendered invalid Dowell’s agreement not to solicit the employers' customers. Thus, the trial court erred in preliminarily enjoining Dowell from soliciting the customers, but not from actively soliciting its employees.