Fail to Honor Your Obligations and Lose the Right to Enforce Restrictive Covenants

August 23, 2023

By: Adrian P. Castro

Covenants not to compete and other restrictive covenants can be enforceable under some circumstance, as discussed in previous posts on this blog. But, what happens if the employer fails to live up to its contractual obligations to employee? In this post, Adrian Castro discusses a recent Colorado case that sheds light on the subject.  

- Colin Walker

Fail to Honor Your Obligations and Lose the Right to Enforce Restrictive Covenants

Contracts are legally binding on both parties, and what you agree to matters. If you are an employer, and you want to enforce a restrictive covenant such as a non-solicitation or non-compete clause, then you have to comply with your material obligations under an employment contract. 

In Zuni Payments LLC v. Ryan Kosarek and Paybase LLC, 22CA1249, the Colorado Court of Appeals upheld a district court ruling barring enforcement of a non-solicitation clause. Specifically, Zuni entered into an employment agreement with Mr. Kosarek requiring the payment of severance payments in the event he is terminated without cause. The agreement also contained a non-solicitation provision barring Mr. Kosarek from soliciting Zuni’s customers for a period of time following termination. Dissatisfied with Mr. Kosarek’s work performance, but lacking cause under the agreement, Zuni terminated Mr. Kosarek but refused to provide the agreed upon severance. In return, Mr. Kosarek created his own company, through which he reached out to and performed work for Zuni’s customers. Zuni brought suit to enforce the non-solicitation provision. 

The District Court held that Zuni improperly terminated Mr. Kosarek, a material breach of their employment agreement. As a result, the District Court refused to enforce the non-solicitation provision against Mr. Kosarek, and awarded him not only his severance, but also attorney’s fees and costs pursuant to the agreement. Zuni sought to avoid approximately $30,000 in severance payments, only to incur significantly higher losses. The Court of Appeals upheld the District Court’s decision, focusing primarily on the improper termination of Mr. Kosarek. 

“One party’s failure to perform under a contract precludes that party’s demand for performance by the other party.” Hemmann Mgmt. Servs. v. Mediacell, Inc., 176 P.3d 856, 859 (Colo. App. 2007). While Colorado courts have long held under general contract law that a material breach of a contract by one party can preclude performance by the other party, this is the first reported decision by the Colorado Court of Appeals in the employment context. In light of that, employers are reminded to uphold their obligations in their employment agreements, or risk invalidating any restrictive covenants found within.