By statutory law, Colorado has generally prohibited restrictive agreements except for specific exemptions. More recent legislation provides greater clarity and specificity as it relates to restrictions on noncompetition agreements in the context of the sale or the purchase of a business.

In recent years, there have been many changes to the enforcement of noncompetition agreements in a number of states throughout America. Recently, the Colorado Legislature passed Senate Bill 25-083. The Colorado legislation imposes significant limitations on the use of restrictive agreements in a variety of areas. The application of the Colorado legislation in the context of business sale arrangements is instructive. The legislation takes effect in early August. 

The enforcement of an agreement in the context of a sale or purchase agreement is common throughout the United States. Colorado has traditionally recognized noncompetition agreements in the context of the purchase or sale of business. The new Colorado legislation limits this enforcement approach in that it allows noncompetition agreements only for owners of a business interest and places limits on such agreements for minority ownership and/or those who receive ownership through equity compensation. 

The Colorado approach regarding the duration of a noncompetition agreement in the context of a business sale utilizes a formula to establish the appropriate timeframe. In essence, this approach provides for the total consideration received to be divided by the annual cash compensation in the two years prior, or the duration of employment if less than two years. The precision and formulaic approach of the new Colorado legislation serves as an illustration of the increasing focus on noncompetition agreements and limits placed on such agreements through state legislation.

The exact language of the legislation in Colorado states:

A covenant not to compete related to the purchase and sale of a business, a direct or indirect ownership share in a business, or all or substantially all of the assets of a business that restricts competition by an owner of an interest in the business. For an individual who owns a minority ownership share of the business and who received their ownership share in the business as equity compensation or otherwise in connection with services rendered, the duration in years of a covenant not to compete … must not exceed a number calculated by the total consideration received by the individual from the sale divided by the average annualized cash compensation received by the individual from the business, including income received on account of their ownership interest during the preceding two years or during the period of time that the individual was affiliated with the business, whichever period of time is shorter.

This Colorado statutory limitation illustrates a growing trend throughout the United States to define restrictions on competition in a more focused and precise manner. As a result, the careful review and understanding of a given state framework is increasingly critical in this dynamic context. Restrictions on competition are not favored in many states and must be applied with care and exactness.