Covenants not to Compete, Trade Secrecy and Unfair Competition

In today's modern service economy, information is typically the key asset of a business. The historical intellectual property protection systems of patent, copyright and trademark were created in an era of an industrial economy, and often miss the mark in protecting the key intangible assets, indeed often the key assets of a business. Today, it is up to the business owner to protect these key ingredients of a business' success, and the attorneys at Arckey & Reha, LLC are here to help in that effort.

Our law firm regularly assists businesses that wish to protect their information base - what we call a business' "soft assets," i.e. the relationships the business has with its key customers, suppliers, employees, and referral sources, or the business' unique ways of doing business, pricing strategies and business plans.

Our client base also includes executives, managers, highly-compensated salespersons and other employees who are either thinking about leaving their current employment, starting their own business, or joining a competitor. These situations commonly give rise to issues of real and potential unfair competition, either by potential or actual misuse or misappropriation of information, or questions as to acceptable pre-termination steps to compete. Our attorneys have had numerous client situations where the economic affect these issues present are in the millions of dollars. We have handled intangible asset matters where either the survival of a business or a person's ability to continue employment in his or her chosen field is directly at stake.

Colorado Non-Compete Law

For individuals concerned about "soft assets," we believe it is important to know that the law in Colorado in this area is both complex and unique, especially as related to non-compete covenants.

Colorado's legislature adopted a statute, C.R.S. § 8-2-113(2), placing significant restrictions on non-competes, such as exist in very few other states. In addition, Colorado has adopted the Uniform Trade Secrets Act, C.R.S. § 7-74-101, et. seq., which sets forth requirements for information to be deemed a trade secret, including the requirements of secrecy and protective measures.

Colorado also has criminal statutory provisions governing theft of trade secrets (with possible civil remedies available against the wrongdoer), along with a well-developed body of law regarding the level of loyalty owed by employees to current and ex-employers, as well as misappropriation of trade "values," i.e. those intangible assets of a business which, although not secret, still represent the manifestation of skill, labor or expense of the business. Colorado law in these areas presents unique drafting and systemic challenges for effective and enforceable competition and disclosure restrictions. Businesses that desire to implement intangible asset protection systems in Colorado must take extra care to create such systems within this unique framework. Likewise, employees who wish to leave their current employer, either to start their own business or to go to a competitor, need to be mindful of Colorado's unique legal setting when planning their exit strategy.

John Reha's article, "The Law of Trade Secrecy and Covenants not to Compete in Colorado," which appears on this website courtesy of The Colorado Lawyer, the Colorado Bar Association's professional journal, provides an in-depth discussion of this area. Many Colorado attorneys use John's article as a major recitation of authority in these areas. Click here to download and read the article. (Part 1) (Part 2)

Examples of clients our attorneys help include:

• Business owners who wish to protect intangible information (whether secret or not), key relationships, and client contacts.
• Business owners who believe an employee is trying to take intangibles or key relationships with him or her when resigning.
• Employees or ex-employees who have an issue relating to a covenant not to compete, a trade secrecy or non-disclosure provision, a "non-solicitation" clause in an employment agreement, or a sense that some issue as to the scope of permissible competition may exist.
• Employees who have concerns as to the permissible scope of pre-termination preparation for post-termination employment, or as to the permissible scope of post-termination activity itself.

Intangible Asset Protection

At Arckey & Reha, LLC we are often asked to provide intangible asset protection advice for our clients, and to create systems that attempt to protect intangibles to the full extent the law permits. Our attorneys provide legal services for clients who are burdened by a covenant not to compete, trade secrecy, other non-disclosure agreement, or other intangible asset protection documents.

Three federal statutory systems protect intangible information - patent, copyright and trademark. There are numerous state protection statutes as well, primarily the Uniform Trade Secrets Act ("UTSA"), which in Colorado has been adopted as C.R.S. §7-74-101, et. seq. In addition, contractual protections are available to those who wish to protect their intangible asset base, through such devices as covenants not to compete, trade secrecy or non-disclosure agreements, non-solicitation agreements and the like. In Colorado, however, significant restrictions exist as to non-competes, which means that extra care needs to be exercised in developing non-compete agreements that are valid in Colorado.

The Federal System - Patent, Copyright and Trademark

Patent

Patent protects the manifestation of "invention" by affording the inventor a 20-year monopoly on use of patented technology, in return for public disclosure of the invention and the eventual relegation of the technology into the "public domain," at which point it may be used by all. Typically, patent applies to physical, tangible items and components of items (for instance, the "twist-off" bottle cap component of a bottle may be patented, even though the bottle might not be). Patent registration is conducted by filings made with the United States Patent and Trademark Office ("USPTO") in Washington, D.C. Proper patent filings are very technical matters and require the assistance of a licensed patent attorney to be properly accomplished. Our firm does not engage in patent law, but we do have relationships with patent attorneys to whom we refer patent registration matters. Patents are exclusively matters of federal law. There is no such thing as a state or "common-law" patent.

Copyright

Copyright protects "expression" usually but not always of an artistic nature, such as books, scripts, paintings, sculpture, music and the like. Copyright exists for the life of the "author" and 70 years thereafter. Like patent, federal law exclusively governs copyright, and there is no such thing as state or common-law copyright. Unlike patent, which has always been subject to federal statute since the founding of the nation, there was, at one time, common-law copyright. No longer the case, the modern federal copyright statute, passed in 1976, includes provisions, which "preclude" all other copyright law. Copyright registration is accomplished by filing a Copyright Application with the Copyright Office of the Library of Congress in Washington, D.C. Forms for registration are available at: www.copyright.gov/forms/.

Trademark/Tradename

Federal Statutory Trademark Registration & Common-Law Trademark

The law governing trademark, and its close counterpart, tradename, arises primarily under federal statute. Trademark protects the identifiable marks, names and logos used by businesses. As a general rule, trademark and trade name under the federal trademark statute grant the exclusive right to use properly registered marks and names to the holder of the registration for the mark or name. The registry is managed by the USPTO, and the registry can be accessed from the "TESS" system at www.uspto.gov/.

Unlike patent and copyright, however, there is still a viable concept of common-law trademark and, depending on the circumstances, the holder of a common-law trademark or trade name may have rights in a mark or name (hereinafter a "mark") that are superior to those of a party that registers a mark or name with the USPTO. Under the Lanham Act, 15 U.S.C 1051, et. seq., USPTO registration immediately constitutes prima facie evidence of the registrant's ownership of the mark, nationwide notice of the registrant's ownership thereof, the mark's validity, and the registrant's exclusive right to its use (15 U.S.C. § 1115). The Lanham Act does not preempt state law except to the extent that state law directly conflicts with its provisions. Further, the Lanham Act does not provide any rights other than those enumerated in its provisions. Accordingly, except to the extent it may conflict with the Lanham Act, common-law trademark still exists. Mesa Springs Enterprises, Inc. v. Cutco Industries, Inc., 736 P.2d 1251 (Colo. App. 1986).

If five years have passed since USPTO registration of a mark, the registrant's ownership of the mark, its validity and the registrant's exclusive right to use the mark, subject to certain defenses, become incontestable. 15 U.S.C. §1065.

Assuming the holder of a common-law mark begins use of the mark before the registered holder's USPTO registration, the common-law holder will be the senior user of the mark within the "zone of actual goodwill" of the mark. Hanover Star Milling v. Metcalf, 240 U.S. 403 (1916). Such zone is divided into three subparts, the "zone of actual market penetration", which is the area within which the common law holder has actually used the mark in commerce, the "zone of reputation," an area in which the mark's reputation has been carried by word of mouth and/or advertisement, Stork Restaurant v. Sahati, 166 F.2d 348 (9th Cir. 1948), and the "zone of natural expansion," which is the area within which the common law user would have, in normal good faith, extended use of the common-law mark. Weiner King, Inc. v. Weiner King Corp., 615 F.2d 512, 522 (C.C.P.A. 1980); Pedi-Care, Inc. v. Pedi-Care Nursing, Inc., 656 F.Supp. 449 (D.N.J. 1987).

Accordingly, if one entity uses a mark locally before another entity registers the same mark with the USPTO, the first entity will have prior rights in the mark, but only to the extent it can show presence in one or more of the above three zones. Assuming the first holder can make such a showing, it may only claim priority from use of the mark which occurs within the applicable zone(s) and then only for presence in such zone(s), which occurs prior to the date the competing entity completes its USPTO registration. Such priority will exist into the future with continued use, but the only use of the common-law mark which grants it priority over the federally registered mark is that done before the federal mark's registration.

It is a common misconception that obtaining a Statement of Trade Name from the Colorado Secretary of State may be evidence which supports the claim of a non-USPTO registered holder of a mark (in the form of a tradename) to priority under one of the above zones, or that it otherwise creates some form of exclusive rights in the mark. This is not true. Trade name registration with the Secretary of State has no real significance, aside from perhaps being some evidence of use for purposes of establishing some common-law rights in the mark. It is use, not registration, of a non-UPSTO registered mark that provides any common-law rights in the mark. Accordingly, if an entity has done nothing more than obtain a Statement of Trade Name from the Secretary of State (i.e. if the entity has not actually used the mark/name in business in a geographic area), very little if any priority rights will extend to such entity in the face of a USPTO registration by a competing holder of the same mark, even if the USPTO registration occurs after the Statement of Trade Name is obtained from the Secretary of State. Again, state registration, without actual use, is not much evidence of use itself.

In order to have any rights beyond any of the above zones and to insure the ability to use the mark for future expansion outside of such zones, it is necessary to first have a USPTO registration. The only alternative is to take a risk that the mark will not be available in the new territory and then to again create presence in one of the three above zones, new zones being created by new use of the mark. This would likely be true even for a satellite office being opened by a Denver company in an area in Colorado outside of the Front Range (Pueblo, Grand Junction, the Vail Valley, etc.), since such new territory would likely be outside the zone(s) within which the company has already created presence for the mark. A Statement of Trade Name filed with the Colorado Secretary of State would only again be evidence (probably slight evidence) of presence in the new zone. Expansion outside of Colorado presents the exact same set of concerns, with the additional factor that a Colorado Statement of Trade Name has no effect whatsoever outside the state's borders.

At Arckey & Reha, LLC the legal services our attorneys offer clients include copyright and trademark applications, registration renewals, and infringement disputes.

State/Common-Law Protections; Trade Secrecy, Covenants not to Compete, Trade "Values" and the Duty of Loyalty

Trade Secrets

Trade Secrecy Under the UTSA, C.R.S. §7-74-101, et. seq. Various state law protections exist for intangible information and Arckey & Reha, LLC stands ready to provide its clients with the best representation possible regarding this component of today's business environment. Included in the state law system is the Uniform Trade Secrets Act ("UTSA"), which provides protection for "trade secrets." In order for information to constitute a trade secret, the UTSA requires that it be both secret and of value. Value will likely be assumed for any information that has any type of recognized commercial value, so the real issue under the UTSA is usually that of secrecy. Secrecy means what the term implies - that the information not be generally known to those outside of a select number of people to whom access is given to such information on a need to know, commercial necessity basis. This does not necessarily mean that the information is unknown to anyone outside the company, but universal knowledge of information clearly removes its status as anyone's secret. For secrecy to exist, the UTSA requires that the reputed owner of the information take "protective measures" to guard against unwarranted disclosure of such information to those persons to whom access should not be given. What will be sufficient protective measures is a case-by-case issue, and likely depends upon the type of information professed to be secret. For instance, customer lists, a segment of information that business owners routinely believe is secret, may not be afforded the same general sense of secrecy as might be afforded to a secret recipe, formula or business method. For example, the recipe for Coca-Cola syrup has never been patented. It is simply a very closely guarded secret, the secrecy of which has been maintained by Coca-Cola for more than 120 years, as patent protection has only a limited lifetime before the technology is deemed to be in the public domain. In addition, just how far the owner must go to meet the protective measures requirement is uncertain. Adopting a system that incorporates company-wide mandatory trade secrecy agreements and the like may be sufficient, or it may not be (having such agreements is, however, a very good initial step along the protective measures pathway and they should be adopted wherever possible). The attorneys at Arckey & Reha regularly provide legal advice and guidance for clients in establishing viable and enforceable trade secrecy systems.

Non-Compete Agreements; Covenants not to Compete.

Protection against competition, and hence protection of existing business lines and customer base, may be accomplished by covenants not to compete. The restrictions in these agreements may range from a prohibition against post-termination solicitation of certain customers or co-employees, to a broad form, across the board bar against post-termination competition of all types. Such agreements are often used by employers and can serve as a valuable tool in protecting good will, future business and client relationships.

Restrictions, Part I: Time and Geographic Reasonableness. Care must be taken, however, in drafting such agreements. First, in all or virtually all states, non-compete agreements must be reasonable both as to time and geographic scope. What is a reasonable geographic or time restriction will depend on the circumstances, but it does appear that the courts will routinely enforce non-competes which fall within certain time periods and certain geographic limitations. What is reasonable for one employer or industry may not be reasonable for another, however, and the owner should seek legal advice on this issue. For instance, a large geographic territory for a non-compete between general practice dentists might not be reasonable since most patients of most dental practices, at least small dental practices, come from a geographic area which is fairly close to the practice itself, but a very broad geographic zone might be reasonable for a non-compete entered into to protect a developer of software that serves a world-wide market.

Restrictions, Part II: Colorado's Statutory Prohibition, C.R.S. §8-2-113(2). Secondly, and more importantly at least in Colorado, a statute exists which prohibits many non-competes and which requires extra care in drafting to ensure enforceability. When drafting, enforcing and defending against non-competes, Arckey & Reha, LLC routinely takes this statute into account. C.R.S. §8-2-113(2) provides that all contractual restrictions on a person's post-employment competitive activity are "void" unless they fit into one of three categories - a non-compete entered into as part of the sale of a business or the assets of a business, non-compete agreements entered into for the goal of protecting trade secrets, and when the non-compete is entered into between an employer and management or executive personnel or employees who constitute professional staff thereto.

The sale of business exception is fairly straightforward. A non-compete entered into with an owner who is selling his or her business or the assets thereof is enforceable. This makes sense, since goodwill is almost always one of the assets being sold.

The other two exceptions are not so clear, however. For the trade secrecy exception, the courts may not always enforce an agreement that bars all competition by an ex-employee under the trade secrets exception when a restriction barring such person from using information that is truly secret (likely under the UTSA) may suffice. It is also unclear as to which employees may constitute managers, executives or professionals. Professionals likely include persons within the traditional licensed professions, but it is uncertain how far beyond this limited category such exception reaches. Managers and executives must be shown to have certain management or executive functions as part of their job, or they must be shown to be a key employee. Who will be found to be a manager or executive for purposes of the statute will be determined on a case-by-case basis.

When you are dealing with non-compete and trade secrecy issues in your business, it is wise to seek competent legal assistance. With significant expertise in the area of non-competition covenants, the attorneys at Arckey & Reha stand ready to help you navigate the complexities of the law and protect you and the interests of your company. Likewise, if you are an employee or ex-employee burdened by an agreement that restricts competition, it is fundamental to obtain competent legal assistance in determining future competitive activity strategy.

Restrictions, Part III: Physicians, C.R.S. §8-2-113(3). A special rule exists for non-compete agreements between physicians. The rule is set forth in C.R.S. §8-2-113(3), which was added to the Colorado non-compete statute a number of years after the main provision was enacted. Provisions that prevent "physicians" (a term which obviously includes medical doctors, most likely osteopathic physicians, but it is unsure what other medical specialties), from practicing in any specific location are void in Colorado. Instead, physicians can agree to certain damages provisions in the event a physician leaves a practice to engage in a competing practice. There are specific case law restrictions on how such damages can be calculated, however, and it is strongly recommended that competent legal counsel be retained prior to drafting covenants not to compete involving a medical doctor. Our firms' lawyers have a wealth of experience designing, enforcing and defending against covenants not to compete between physicians and have successfully represented doctors in court regarding these special covenants.

The Duty of Loyalty and Trade Values

There are other non-statutory protections available under state common-law relating to competition. Among them is the duty of loyalty which certain employees owe to their employer, as well as the doctrine of trade "values," trade values being information which is not itself secret, but is nonetheless valuable, and represents the manifestation of the owner's labor, time or expense. These doctrines may provide substantial protection for a business owner, but resort should be made to an attorney who specializes in intangible information protection for guidance. For instance, the duty of loyalty may not apply to all employees, and qualifying non-secret information as a trade value depends upon a number of factors, which competent legal counsel can analyze.

The attorneys at Arckey & Reha possess an in-depth knowledge and have significant experience regarding the factors that render certain employees to be under a duty of loyalty, as well as the factors needed for a finding of trade values. Our law firm has litigated some of the largest cases in Colorado dealing with duty of loyalty and trade issues.

Arckey & Reha offers legal services in all areas of intangible asset protection except patent law. Our attorneys have represented many clients in instituting intangible asset protection plans, non-disclosure and non-compete agreement systems, and protective measures to help insure that information is indeed found to be a trade secret. We have also litigated a number of cases involving various intangible asset issues, including trying major cases to judges and juries around the state arising from non-disclosure, non-solicitation or non-compete agreements, as well as those involving major issues arising from the duty of loyalty, misappropriation of trade secrets and trade values, unwarranted use of confidential or proprietary information or other forms of "unfair competition." Our clients universally value the attention, creativity, ingenuity, knowledge and passion Arckey & Reha brings to the table in these areas.

If you have questions about intangible asset protection, trade secrecy or unfair competition, or need assistance, either in a planning project or with a lawsuit arising in these areas, Arckey & Reha's legal team stands ready to provide committed, creative, passionate assistance. Call us at (303) 798-8546 to learn how our expertise can benefit you.