23 Ltd. v. Herman

          City and County of Denver District Court No. 14CV34518 Honorable J. Eric Elliff, Judge

          Sherman & Howard, L.L.C., Tamir I. Goldstein, William R. Reed, Denver, Colorado, for Plaintiff-Appellant and Cross-Appellee

          McElroy, Deutsch, Mulvaney & Carpenter, LLP, Kristi L. Blumhardt, Lily Ramirez, Englewood, Colorado, for Defendant-Appellee and Cross-Appellant

          OPINION

          BERGER JUDGE

         ¶ 1 This case presents an employment law issue of first impression in Colorado -- when, if ever, is a court required to blue pencil a noncompete or nonsolicitation^[1] agreement to conform it to Colorado law?^[2]

         ¶ 2 23 LTD, d/b/a Bradsby Group (Bradsby), sued former employee Tracy Herman for breach of noncompete and nonsolicitation provisions in her employment agreement. A jury determined that Herman had not breached the noncompete provision. The jury returned a verdict (and awarded nominal damages of one dollar) in favor of Bradsby on the nonsolicitation claim, but the district court set aside that verdict and entered judgment in favor of Herman because the nonsolicitation provision violates Colorado law and because the court declined to narrow the provision to render it enforceable. Despite entering judgment in favor of Herman on both claims, the court denied her request for attorney fees under the agreement's fee-shifting provision. Bradsby appeals the merits judgment, and Herman cross-appeals the denial of attorney fees.

         ¶ 3 We conclude that the record supports the jury's verdict on the noncompete claim and that the court did not err or abuse its discretion in declining to blue pencil the nonsolicitation provision. Thus, we affirm the court's merits judgment. We also conclude that Herman is entitled to attorney fees because she prevailed on both breach of contract claims, and we therefore reverse the court's order denying attorney fees and remand with directions.

         I. Relevant Facts and Procedural History

         ¶ 4 Bradsby hired Herman in 2009 as a legal recruiter. When she was hired, she signed an Account Executive Employment Agreement that included noncompete and nonsolicitation provisions (agreement). The noncompete provision states, in relevant part:

Upon termination of his/her employment with Bradsby, Account Executive . . . shall not . . . within the Restricted Area from a period of twelve (12) months from the date of termination of employment become an owner, partner, investor, or shareholder in any entity that competes with Bradsby without prior written consent of Bradsby . . . .

         ¶ 5 The agreement defines the "Restricted Area" as any place "within 30 miles of Bradsby's principal place of business," which is in downtown Denver.

         ¶ 6 The nonsolicitation provision states, in pertinent part:

Upon termination of his/her employment with Bradsby, Account Executive . . . shall not within the Restricted Area, for a period of twelve (12) months from the date of termination of employment, contact or solicit the business of any person, entity, applicant, client, employer or prospective employer who Bradsby has contacted or solicited during the twelve (12) months prior to the Account Executive's termination . . . .

         ¶ 7 The agreement also includes provisions prohibiting Herman from disclosing Bradsby's confidential information or using it for her own benefit (the confidentiality provisions) without the prior written consent of Bradsby.

         ¶ 8 While employed by Bradsby, Herman worked with one of Bradsby's clients, the law firm Vranesh and Raisch, LLP, to fill various hiring needs. She also worked with a lawyer applicant to help him find a job. Her efforts included setting up an interview with Vranesh. Vranesh offered the applicant a job in 2012, but the applicant declined the offer.

         ¶ 9 For reasons not relevant to our analysis, Bradsby terminated Herman's employment in 2014. At termination, Bradsby reminded Herman of her noncompete and nonsolicitation obligations. Herman sought clarification as to the scope of those obligations and requested that the Restricted Area be reduced from a thirty-mile radius to a twenty-eight mile radius (Herman's home at the time was twenty-eight miles from Bradsby's main office). Bradsby refused to modify the terms of the agreement.

         ¶ 10 Not long after, Herman formed Touchstone Legal Resources, LLC. She obtained a mailbox at a UPS store in Monument, Colorado -- outside the Restricted Area -- and listed this as the new company's address in its organizational documents (though she later testified that she did non-recruiting work for Touchstone from her home). At trial, she described Touchstone's business as "10 percent" recruiting and "90 percent" everything else, including law firm succession planning.

         ¶ 11 After starting her new business, she reached out to the prior applicant to see if anyone in his network would be interested in an open position with the City of Fort Collins (the applicant had significantly more experience than the position required).

         ¶ 12 The applicant then inquired whether Vranesh still had a position open. As a result of this inquiry, Vranesh ultimately hired the applicant and paid Herman (or Touchstone) $12, 000 for her role in the hiring.

         ¶ 13 When Bradsby learned that Herman had played a role in Vranesh's hiring of the applicant, Bradsby sued her for breach of the noncompete and nonsolicitation provisions, arguing that enforcement of those provisions was necessary to protect its trade secrets.

         ¶ 14 Both parties moved for summary judgment. The district court granted Herman's motion for summary judgment, concluding that the nonsolicitation provision "effectively prevents [Herman] from competing at all for a one year period unless she effectively removes herself from the Denver metropolitan area" because it "prohibits [Herman] from contacting any person or entity in any of the industries to which [Bradsby] provides recruiting services if that person or entity had contact with any Bradsby employee." The court further concluded that the nonsolicitation provision is so broad that it renders the noncompete provision superfluous and concluded, as a result, that both provisions are "void and in violation of Colorado law." The court "decline[d] to 'blue pencil' the Agreement in order to bring it into compliance," stating that the agreement's confidentiality provisions adequately protect Bradsby's trade secrets.

         ¶ 15 Bradsby appealed to this court. A different division held that the enforceability of the noncompete provision turned on the existence of Bradsby's alleged trade secrets and remanded the case for a determination of, among other things, whether Bradsby held trade secrets. 23 LTD v. Herman, (Colo.App. No. 16CA1095, Aug. 3, 2017) (not published pursuant to C.A.R. 35(e)) (Bradsby I). The division also held that the nonsolicitation provision is "fatally overbroad" and directed the district court on remand to "revisit its decision not to blue pencil [the nonsolicitation provision] based on the trade secret findings." Bradsby I, slip op. at ¶¶ 23, 28. Finally, the division rejected the district court's analysis that the nonsolicitation and confidentiality provisions are coterminous with respect to trade secret protection.

         ¶ 16 On remand, the jury determined that Bradsby possessed trade secrets, but that Herman had not violated the noncompete provisions. The jury also found that Herman had violated the nonsolicitation provision and awarded Bradsby damages of one dollar. On post-trial proceedings, the district court declined to blue pencil the overly broad nonsolicitation provision (recall the district court concluded and Bradsby I held that, without modification, the nonsolicitation provision violates Colorado law) and entered judgment in favor of Herman on all claims.

         ¶ 17 The court denied Herman's request for attorney fees because it concluded that Herman had violated the confidentiality provisions of her employment agreement -- a violation that was not pleaded or at issue in the case.

         II. Analysis

         ¶ 18 Bradsby argues that the district court erred in declining to blue pencil the "fatally overbroad" nonsolicitation provision because the agreement required the court to do so. Bradsby I, slip op. at ¶ 23. To the extent the agreement did not actually require the court to blue pencil the agreement, Bradsby contends the court abused its discretion in declining to do so. Finally, Bradsby argues that the record does not support the jury's verdict that Herman did not violate the noncompete provision. We reject all these contentions.^[3]

         ¶ 19 On cross-appeal, Herman argues that the court abused its discretion in declining to award her attorney fees under the agreement's fee-shifting provision. We conclude that the court's reasoning was improper and that, under these facts, Herman is the prevailing party entitled to attorney fees under the fee-shifting provision.

         A. The District Court Did Not Err or Abuse Its Discretion in Declining to Blue Pencil the Unenforceable Nonsolicitation Provision

         1. General Principles

         ¶ 20 As a general matter, "[a]greements not to compete, with some narrow exceptions, are contrary to the public policy of Colorado." Saturn Sys., Inc. v. Militare, 252 P.3d 516, 526 (Colo.App. 2011). "The core policy underlying the unenforceability of noncompetition provisions is a prohibition on the restraint of trade or . . . the right to make a living." Phoenix Capital, Inc. v. Dowell, 176 P.3d 835, 844 (Colo.App. ...