With the recent passage of Senate Bill 25-083, Colorado continues its trend of restricting the application of non-compete agreements in the state. The new law (i) adds certain prohibitions on when non-compete agreements can be used in the healthcare context and (ii) creates additional limitations on the long-standing business sale exemption to the general prohibition on non-compete agreements. These updates will apply to any agreements entered into, or renewed, on or after August 6, 2025.
Colorado’s Historical Skepticism of Non-Compete Agreements
With the passage of Senate Bill 25-083, Colorado continues its historical skepticism of any agreement that restricts the right of an individual from competing with another individual or entity, especially in the employment context (referred to here as “non-compete agreements”). While such non-compete agreements have been generally disfavored by the Colorado judiciary for decades, a number of specific prohibitions were recently codified with the passage of the Restrictive Employment Agreement Act of 2022.
Pursuant to the 2022 act, a framework was established that generally prohibits non-compete agreements. However, the act included certain significant exceptions which allow:
- Restrictions preventing highly compensated employees from participating in competitive activities;
- The protection of trade secrets; and
- Restrictions preventing business owners from competing with a purchaser following a sale of their business.
Senate Bill 25-083 further restricts the applicability of non-compete agreements by adding two significant categories of limitations.
Healthcare Provider Restrictions
Senate Bill 25-083 creates a prohibition on non-compete agreements as applied to healthcare providers, specifically:
- Licensed physicians;
- Advanced practice registered nurses;
- Licensed dentists; and
- Certified midwives.
This prohibition applies even in cases where such healthcare providers would otherwise meet the threshold for the “highly compensated employee” exemption set forth in the 2022 Act. As a result, these healthcare providers cannot be subject to non-compete agreements regardless of their compensation level.
Additionally, the bill establishes that healthcare providers cannot be prevented from disclosing information to their existing patients regarding:
- The healthcare provider’s continued practice of medicine;
- The healthcare provider’s new contact information; or
- The right of any patient to choose their preferred healthcare provider.
Business Sale Exception
In addition to the healthcare provider changes, Senate Bill 25-083 also narrows the exemptions for non-compete agreements in connection with the sale of a business. The bill first specifies that the business sale exemption only applies to those who are selling a “business interest.”
The legislation also establishes a two-tiered system used to determine the duration of a permitted non-compete agreement as it relates to a business sale:
Majority Owners: An individual who owns more than 50% of the interest in a business being sold falls under the previously established exemption, and there are no specific limits on the duration of any non-compete agreements established in connection with such a sale.
Minority Owners with Equity Compensation: An individual who (i) owns 50% or less of the business interest in a business being sold and (ii) received such business interest via an equity compensation arrangement, is now subject to a cap on the length of time that a non-compete may last. The formula for such a cap is:
Maximum Non-Compete Duration = Total consideration received for the sale ÷ Average annual cash compensation received in the two years prior to the sale (or duration of employment if less than two years)
Take for example, a minority business interest owner who was paid an average salary of $100,000 during the two years prior to the sale of their business. If such owner was paid an amount equal to $200,000 for their interest in the business, then based on the formula, the maximum duration of a non-compete agreement for that seller would be two years.
Take-Away
Senate Bill 25-083 represents a significant evolution in Colorado’s approach to non-compete agreements, particularly affecting healthcare organizations and businesses engaged in mergers and acquisitions. The prohibition on healthcare provider non-compete agreements and the refined business sale exceptions require immediate attention and proactive compliance efforts. In light of these developments, it is critical for organizations to confirm that any non-compete agreement tracks these new changes.
