Uhlig Transactional Blog

THE GENERAL RULE IS THAT NON-COMPETES ARE UNENFORCEABLE

      I’ve received several questions over the last few weeks related to covenants not to compete.  These clauses raise questions at companies, both for employers and employees. Employers wonder what they can require their employees to sign, and how to go about it.  They may worry that employees with access to sensitive information might use it for their own or another company’s advantage if the employee departs. On the other side of the coin, employees want to understand the consequences of agreeing to non-competes.  Rather than retaining flexibility to found their own competing business in the near future, employees are usually more concerned about whether signing a non-compete will impair their ability to find a similar job if the current one doesn’t work out.  Both sides have equally valid concerns and, from a practical standpoint, want to keep the other side happy. Fortunately, in Colorado the answers are pretty clear.  Under Colorado law the general rule is that non-competes are void and unenforceable.   This is because public policy tilts against restricting an employee’s or contractor’s right to make a living by performing skilled or unskilled labor.

ENFORCEABLE NON-COMPETES: 4 EXCEPTIONS TO THE GENERAL RULE

     As with most rules, the general rule that non-competes are unenforceable is subject to four relatively straight-forward exceptions.  First, non-competes entered in connection with the sale of a business or of business assets are enforceable.  Likewise, non-competes designed to protect trade secrets are enforceable.  Third, if an employee has worked for a company less than two years and the company pays for them to obtain additional education, such as an MBA, the company may restrict the employee’s right to work for a competing business as a means of recovering its costs. Finally, non-competes are enforceable against executives and management level employees and also professional staff to executives and management level employees.

EVEN WHEN AN EXCEPTION APPLIES, NON-COMPETES MUST BE REASONABLY LIMITED

     Over the years, in addressing and interpreting the underlying rule and its exceptions, Colorado courts impose a reasonableness restriction on covenants not to compete.  To be enforceable, non-competes must be reasonably limited in time and geographic scope.  For example, a non-competition clause in a stock purchase agreement, prohibiting the sellers from opening a competing business, is enforceable only if the restriction expires after a reasonable period of time and is reasonably limited as to where the sellers aren’t allowed to compete.  Naturally, this rule leads one to ask what is “reasonable.”  The answer depends on a question of fact; what is the non-compete intended to protect?  When acquiring a business, the buyers wants to protect the goodwill of the acquired business as well as more tangible assets like customer lists.  So, while a perpetual and worldwide prohibition against competition will always be void, the reasonableness of less broad non-competes depends on the nature of the business being sold.  For example, depending on the nature of a business, a prohibition against opening a competing business for two years within a 5-mile radius of the store location or one restricting completion for two years within the entire state can each be enforceable, or unenforceable.       

     Non-Solicitation clauses provide an interesting twist on the rules. Colorado courts treat prohibitions on soliciting existing clients and customers of a business the same as non-competition agreements.  Therefore, a non-solicitation agreement restricting an employee from actively soliciting a company’s present customers and clients after he or she quits or is terminated can be enforceable if one of the four exceptions applies, and if the scope of the restriction is reasonably limited.  Customer lists and contact lists may or may not be trade secrets under Colorado’s trade secret law.  If they are, then in addition to possible remedies under the trade secret law, employers may restrict a departing employee’s right to solicit customers and contacts on that list with a binding non-solicitation agreement.  If a company doesn’t protect such lists as trade secrets, a non-solicitation agreement or provision may still be enforceable if another exception to the general rule against enforceability of non-competes exists.  To date, non-solicitation agreements forbidding employees from soliciting their co-workers to leave a company haven’t been construed as covenants not to compete and therefore, aren’t subject to the requirements applicable to non-competes.   

            Having enforceable non-compete and/or non-solicitation agreements and policies is important in many industries and ideally, should be part of an over-all internal policy that is consistently applied.  It is particularly important to include the concepts in any agreement to acquire a business and to be sure such agreements are enforceable.  Summit 6 Legal is here to help your company navigate these issues and manage the conversation around them with your employees and can also help buyers or sellers be sure they are appropriately covered in purchase agreements for the sale of a business or business assets.  

Happy Friday!
Dave 

     It's no secret, Colorado and Denver are growing fast! In 2015 Forbes ranked Denver the 6th fastest growing metropolis in the country, just behind Seattle. That influx is apparent to anyone navigating our city streets, let alone I-25 or I-70. Accordingly, real estate prices are increasing rapidly, as is the demand for high value homes, condominiums and luxury residences.  While “high value” is a relative term, in Colorado it certainly includes any property selling for $1,000,000.00 or more, and arguably includes properties selling for $500,000.00 and up.  Steep purchase prices and large deposits, especially when paid in cash, enable buyers to close quickly, with fewer contingencies than other buyers. Those factors should afford buyers of luxury real estate a reasonable amount of leverage and justify their insistence on fair and accurate contracts. 

STEEP PURCHASE PRICES SHOULD AFFORD BUYERS SOME LEVERAGE

     In ordinary residential deals with buyers purchasing a primary residence with a traditional bank loan, real estate agents, brokers and the title companies usually have the expertise needed. Conversely, an experienced real estate attorney can be essential in high value real property transactions.  High value sales frequently involve complications and scenarios that aren’t addressed in the form contracts used by agents and brokers. Using form contracts as the base for high value real property sales is fine so long as the contract accurately reflects the realities of the deal and does not place buyers at an unfair disadvantage.  A broker’s authority to modify the form contracts they use is restricted by law so, a skilled real estate attorney is necessary to protect buyers and help them, their agents and brokers keep complex deals on track and moving toward timely closing. Below are a few examples of how an experienced real estate attorney can help buyers acquiring high value property.

buyers should have the right to terminate a contract for any reason, or no reason, and receive a refund of the deposit until they are ready to proceed to closing

     The first thing a real estate attorney should do for a buyer is to consolidate the numerous and overlapping contract termination rights and deadlines in the form contract into a single date, before which a buyer may terminate the contract for any reason or no reason and receive a refund of the deposit.  I’ve never heard a strong argument against that revision.  Further, large deposits should always be held by independent escrow agents, preferably the title company, in an account accruing interest for the buyer.  An attorney should order an ownership and encumbrance report (O&E) and based on that, estimate the length of time a contract should allow for reviewing the property.  That way, after the contract is signed, but before a buyer’s deposit is non-refundable, a real estate attorney can help buyers evaluate a property and identify any troublesome issues in the real estate records. For example, buyers planning to remodel existing structures or construct new structures or landscaping should know if an HOA and/or ArchitecturalReview Committee (ARC) has approval rights over their plans.  If an HOA or ARC has approval rights, buyers should understand the process, timing and likelihood of receiving plan approval before the deposit becomes non-refundable.  Additionally, a properly drafted contract should allow buyers to terminate the contract and get their deposit back if they are unable to obtain required approvals. Tax implications associated with high value real estate transfers should be understood and addressed before a purchase contract is executed.  Things to think about here include any transfer taxes at the city level as well as IRC section 1031 tax deferred exchanges that either party may be closing in connection with a sale.  For example, the City of Aspen, Colorado imposes substantial transfer taxes on real estate sales.

Buyers of luxury properties shouldn't feel rushed

     Ultimately, when representing a buyer, its most important to protect their right to get out of the deal and receive a refund of their deposit for as long as possible until they are ready to close.  In the current Colorado real estate market, with a dwindling supply of properties and seemingly unending increase in ready buyers, its easy for someone to get swept away and sign contracts reflexively. It is my opinion that buyers of high value real property should never feel rushed. Anyone considering acquiring high value or luxury property should seek the counsel of an experienced real estate attorney before signing the contract, or at a minimum, ask their agent or broker to include an attorney review contingency in Section 30 of the form contract.  Buyers with an experienced real estate attorney on their team, who is aware of their activities and needs, are in the best position to react quickly and make an appropriate offer on a high value property and close those deals. Over the years, I’ve helped many buyers, and also sellers, close high value real property transfers, including sales of estate class homes, luxury condominiums, trophy ranches and even fractional properties. During a 4-year stint practicing law in Aspen,Colorado I routinely managed high value sales of properties selling for several millions of dollars. When working on any luxury or high value real property purchase, I take a team approach and work with my client’s agent or broker while keeping my focus primarily on the special legal issues necessitating my involvement, always keeping the wheels moving toward a timely closing. 

                              I decided to locate Summit 6 Legal’s law offices in Denver’s RiNO district because after spending most of the first decade of my legal career in drab, brown offices inside stuffy, 17th street high-rises, I want to build a legal services firm in a dynamic environment rife with opportunities to collaborate with and draw inspiration from the creative and open-minded companies, entrepreneurs, tech jocks and artists the RiNO district is known for.  In that spirit, I was excited the other day when I was approached by two young tech company employees with an interesting question.  As a side venture, they photograph public art, specifically graffiti art, then play around with various photography processing software and finishing mediums to create something new and very cool, such as prints on anodized metal plates.  These guys are exactly the types I was hoping to be around!  As an amateur photographer myself, I was intrigued with some of the cool images they were thinking about producing; as a lawyer, I was thinking of the intellectual property issues, specifically, the question of copyright laws and the potential issues surrounding their photography.

I.               COPYRIGHT BASICS.

“AUTHORS HAVE EXCLUSIVE RIGHTS TO COPY THEIR WORK, CREATE DERIVATIVE WORKS AND TRANSFER THOSE COPIES AND DERIVATIVE WORKS”

                  Copyright law and its nuances related to public art is a complex topic, too twisty to explain in a single blog post, however, before exploring the applicability of copyright law to photographs of graffiti art, a basic explanation of what copyright law protection is, the benefits of copyright law protection and the means of obtaining copyright law protection, is necessary.  WHAT IS COPYRIGHT PROTECTION?  Copyright is protection under Title 17 of the U.S Code afforded to creators of original works of authorship (authors).  By virtue of copyright protection, authors have exclusive rights to copy their work, create derivative works and transfer those copies and derivative works.  A copyright owner can transfer any or all of those exclusive rights.  Artists who create visual works may be entitled to rights of attribution and/or integrity that may afford additional levels of protection.  I’ll explain those complexities in a future blog post on copyright law related to graffiti art and other visual works.  WHAT TYPE OF WORKS QUALIFY FOR COPYRIGHT PROTECTION?  Under the letter of the law, copyright protection attaches automatically to any original work of authorship that is fixed in a tangible medium of expression.  This includes but is not limited to: graphic works such as photography; literary works; sound recordings, music and lyrics; architectural works; motion pictures; and other AV works (think video games).

“ THE KEY TO CREATION IS THE COPY”

HOW AND WHEN DOES COPYRIGHT PROTECTION ARISE?  In short, copyright protection arises automatically when a work is created and creation occurs when the work is first put into a fixed medium.  For purposes of copyright law, the key to “creation” is the copy.  For purposes of copyright law, a “copy” is a medium from which the work can be read or perceived immediately and directly, such by opening a book or looking at a painting or by using a machine, such as an e-reader or computer.  A fleeting occurrence such as an impromptu and unrecorded breakdance battle on Denver’s 16th Street Mall, while it may be art, and can certainly be perceived of directly by all innocent bystanders, is not protected by copyright law unless it is copied or fixed, i.e., created. No formal registration with the US Copyright Office or publication is required for copyright protection to attach to a work of art in any form, so long as there is indeed a form. 

II.              COPYRIGHT ISSUES RELATED TO GRAFITTI AND PHOTOGRAPHY OF GRAFITTI.

                Thinking about the basics of copyright law described above in the context of my new friends’ photography project raised numerous initial questions.  Graffiti certainly qualifies for copyright protection, but for whom?  Are walls a tangible fixed medium of expression, or does creation, for purposes of copyright, occur when the graffiti is photographed? Does it matter that graffiti may be illegal and undesirable in many cases?  What if a building owner or the City commissions the graffiti? 

                  Over the last couple years, the question of whether graffiti is protected by copyright law has been the subject of several lawsuits but there is very little published case-law on point.  Many of these suits settled before the courts rendered a final opinion.  Several are currently pending.  The context is typically something like this: large company photographs an advertisement in front of, or creates advertising campaign around, famous graffiti; graffiti artist or owner of copyright who commissioned the graffiti sues for copyright infringement.  

“COPYRIGHT PROTECTION DOES APPLY TO GRAFFITI ART”

                  Copyright protection does apply to graffiti art.  That it may be on a public structure and/or illegal and non-commissioned doesn’t prevent copyright protection from arising. Copyright protection arises automatically whenever an original work of authorship is fixed in a tangible medium (I.e., is first copied) and placing the graffiti on a wall is a fixation giving rise to copyright protection even if the installation is illegal under municipal laws.  Courts have found that while the artist may not own the physical medium (i.e., the wall) and therefore the owner of the physical medium can freely sell the building or destroy the graffiti or erase it, the artist does in fact own the copyright (i.e., the right to copy the image) unless the artist sold or licensed the copyright.   

“WE CAN HELP CREATIVES IDENTIFY AND APPROACH BUILDING OWNERS TO ASK PERMISSION TO PHOTOGRAPH GRAFFITI”

                  Protection for graffiti artists under U.S. copyright law is a newer issue legally that is growing as graffiti becomes an art-form appreciated by the public at large, especially in certain areas of cities.  Artists are filing suits against large companies that are profiting off of their work.  Companies are settling these cases.  What does this mean for photographers of graffiti art?  Technically, photographers should ask permission to photograph graffiti, especially if they are creating and/or selling derivative works.  Is that realistic?  It depends.  Many of the walls in RiNO and around downtown Denver were commissioned by the building owners and in some cases, organizations affiliated with the City.  In those cases, one could ask the building owner for permission and quickly learn whether the building owner acquired the copyright from the artist or whether the artist retained the copyright.  On the other hand, if graffiti is illegal street art, a photographer may have a tough time tracking down the artist who owns the copyright but in such cases, someone does own the copyright which includes the right to produce and sell derivative works.  Someone selling derivative works without the permission of the copyright owner is risking a suit for damages and if a photographer creates something that becomes a big hit, the potential damages could be significant.  When asked for permission, a copyright owner will either say Yes, No, or Yes if you pay a royalty.  In a Yes or Yes If scenario, the photographer and copyright owner should enter a copyright assignment agreement or license agreement.  Summit 6 Legal can help artists and copyright owners draft copyright license agreements and copyright assignment agreements that protect the interests of the owner, or the user, and reflect the deal surrounding copyrighted works, including graffiti art.  We can also help creatives who desire to remain confidential with identifying building owners and approaching the building owners regarding the right to copy graffiti on their buildings.

Most landlords have a vague knowledge of the implied warranty of habitability but don’t have firm understanding of what it actually means for them or their tenants.  Originally an implied warranty in the truest sense: i.e., one implied by precedent handed down by courts, today the implied warranty of habitability is defined by statute in 49 of 50 U.S. states.  Colorado became the 2nd to last state to adopt a statutory implied warranty of habitability in 2008.  On first blush, this may seem like old news but I frequently talk with landlords and even other attorneys who are unaware of the addition to Colorado’s landlord-tenant statute.  This may be due to the upheaval in the real estate world that manifested in 2008.  

Waivers of The Implied Warranty of Habitability Are Ineffective in Colorado.

On October 1, 2008, Colorado’s legislature enacted the Colorado Implied Warranty of Habitability Act. CRS 38-12-501, et.  By doing so it required residential landlords to provide and maintain premises that are suitable for human habitation. As mentioned, case-law has long provided some degree of protection for tenants against by holding landlords to an implied warranty of habitability, unless of course the lease document provides for a waiver of such implied warranties.  Most standard apartment complex leases in Colorado, contained such waivers and it is my experience that many still do.  Under the new Colorado law, the warranty cannot be waived.     

The law specifies numerous conditions that constitute uninhabitable premises per se.  These include: a lack of water-proof and weatherproof windows, doors and roofing;  non-functional plumbing or gas facilities; lack of running water, sewage disposal or a reasonable amount of hot water; non-functioning and non-compliant heating systems; non-working electrical systems; common areas that are not free of garbage, filth, rodents or vermin; lack of appropriate extermination in response to infestations on the Premises; lack of adequate exterior waste receptacles; floors, stairs and railings not in good repair; and non-compliance with applicable building, housing and health codes.  The list is not exhaustive and the law contains a catch all clause providing that premises may be uninhabitable if found to be otherwise unfit for human habitation.

In Addition to Establishing A Condition Rendering Uninhabitable, Premises Must Be Materially Dangerous and the Condition Must Remain Un-Remedied.

The presence of one or more of the per-se conditions does not alone, render a landlord in violation of the habitability statute.  In addition to the conditions being present, those conditions must actually be materially dangerous or hazardous to the tenant’s life, health or safety.  Further, the condition must remain un-remedied after two notices by the tenant.  The tenant must deliver one notice specifying the conditions rendering the premises uninhabitable and demanding that Landlord cure the conditions.  If the Landlord does nothing or fails to cure the condition within a reasonable time after receiving this first notice then the tenant may deliver a second notice, terminating the lease at least 10 days after the date of the second notice and at most 30 days after the date of the second notice.  The landlord still has a chance to save the lease by curing the situation within 5 business days after receiving the second notice. If it fails to do so then the tenant may terminate the lease.  The statute provides that the Landlord can cure the situation by relocating the tenant into comparable space that is habitable and that is not dangerous.   If the landlord opts for the relocation remedy them the landlord is obligated to pay the tenant’s moving expenses.

In certain situations, the tenant’s only remedy under the statute is termination.  If the landlord cannot control the situation causing the uninhabitable state of the premises and has made reasonable and timely efforts to resolve the uninhabitable condition, the only remedy available to the tenant is termination of the lease.  The law also provides that a tenant may ask a court to award an injunction, effectively ordering the landlord to remedy the situation. Additionally, tenants may request damages and pursuant the statute, the court must determine the amount of actual damages due and owing to the tenant at the time it awards any injunction.  The damages may include the reduction of rent to the fair market rental value of the premises.  Under the statute, if a landlord tenders the amount of damages to the Court within two (2) business days after the order is issued, then the court will not enforce the injunctive relief under the order and will release the damages to tenant upon application.   Effectively, a damages award is an alternative to an injunction under the statute.  This makes sense, if the condition is quantified and offset against the rent pursuant to the Court’s order.

The Colorado statute also addresses circumstances where uninhabitable conditions are actually caused by the tenant and affords some protection for landlords.  I will explain that aspect of Colorado’s implied warranty of habitability statute in a future blog-post.