Memorandum
To: Catherine Du Bois
Supervising Attorney
From: Shannon Herman
Date: November 14, 2021
Re: BCKO Brewery – Potential Claims
Questions Presented
Under Colorado Revised Statutes § 8-2-113, which generally disfavors non-compete agreements unless the employee is seen as an executive or manager, can Isabel Santos, who brewed the beer, supervised other employees, and made business decisions be considered an executive or manager, invoking the noncompetition clause?
Under Colorado law, did Isabel’s actions interfere with a prospective contract between BKCO and MicroWorld when she made statements in regard to BKCO’s conduct and professionalism?
Brief Answer
Yes, Isabel was both an executive and a manager under Colorado non-compete law. This is because she was the mastermind behind the product, had special training from a beer expert, was in charge of the brews and brew house, had relationships with the distributors, and made decisions on behalf of BKCO.
No. Isabel Santos cannot be held liable for interference with a prospective business relationship under Colorado law. BKCO’s mismanagement was the cause of the failure for the contract to be formed, not Isabel’s derogatory statements, and there was only the mere hope of a contract being formed, and thus there was no contract to interfere with.
Statement of Facts
BKCO came to the office to determine if Isabel tortiously interfered with a contract with MicroWorld and if its non-compete clause against Isabel could be enforceable.
Ryan, Emma, and Isabel took over a brewery in Colorado, which they named BKCO. Isabel had become a highly-skilled brewer due to her time working with Jeppe Jeppesen, an expert brewer in Brooklyn. Emma and Ryan invested money into the brewery and formed an LLC that then hired Isabel as an employee. Emma and Ryan had Isabel sign a non-compete clause in the employee comtract.
BKCO’s IPA brew Spring Fling won a big prize at a beer competition that brought BKCO a lot of attention. MicroWorld, a large distributor, offered to distribute Spring Fling as a limited time special. Isabel, the creator of Spring Fling, had been in talks with MicroWorld about the potential for a long-term contract to follow the limited time special.
There are copies of email chains where it seems Isabel spoke poorly of BKCO to MicroWorld. Additionally, Isabel made claims about BKCO and the company’s lack of professionalism and called BKCO amateurs in a local newspaper. However, there were also incidents of failed deliveries on the part of BKCO that may have been the actual cause of MicroWorld no longer having an interest in a long-term contract. When Ivan and Isabel discussed the potential for a long term contract, after BKCO failed one delivery, Ivan asssued Isabel that as long as that did not happen again, there would not be an issue with the contract. However, BKCO failed yet another delivery that Ivan stated negatively impacted MicroWorld and made it difficult for MicroWorld to work with BKCO.
During the time that Isabel gained notoriety in the brewery world and began receiving other job offers, she left BCKO to join Hinterland Brewery. After Isabel left, MicroWorld told BKCO that they did not want to pursue a long-term contract.
Discussion
Under Colorado law, the non-compete clause could be enforceable because Isabel acted in both the capacity of an executive and a manager. BKCO does not have a viable claim for tortious interference with a business contract against Isabel because there was only a mere hope of a long-term contract being formed.
- Isabel was an executive and manager and therefore is not bound by Colorado’s noncompetition clause.
Isabel is both an executive and a manager, but for distinct reasons. Isabel is an executive because she is the heart of the business and a manager because she supervised employees and made independent business decisions.
Under Colorado law, a non-compete clause is void under most circumstances. However, a non-compete clause is permissible when the former employee was an executive or manager Colo. Rev. Stat. Ann. § 8-2-113 (2)(d). An executive is an employee who is the heart of the business. Harrison v. Albright, 577 P.2d 302, 304 (Colo. App. 1977). A manager is an employee who has decision-making power within a supervisory role. DISH Network Corp. v. Altomari, 224 P.3d 362, 366 (Colo. App. 2009).
The two terms in the clause are executive and manager, and when a statute has two different terms, we must assume the legislative intent was to define them separately. DISH, 224 P.3d at 366.
The court has considered an employee an executive when they are the heart of the business and the employee possesses unique skills and knowledge crucial to the operation of the business. Harrison, 577 P.2d at 304. In Harrison, the defendant was held to be an executive because he was the only one within the company who had specific expertise in the trade in which the business was centered that they could not successfully operate without him. Mrs. Harrison did not have the skills of an electrical contractor that the defendant had. She was acting like a business owner who invested money into the company in exchange for the defendant’s promise not to be in competition with the business. Id.
An employee is considered a manager when they have decision-making power, autonomy over their day-to-day tasks, and supervise other employees. DISH, 224 P.3d at 36). In DISH, the court held the defendant was a manager because the defendant controlled and supervised more than fifty people. Id.
Isabel is an executive because she was the heart of the business. Isabel’s expertise was in part due to her experience working for esteemed brewer Jeppe, where she learned high-level and exclusive training that she applied to her brews at BKCO. Isabel’s specific knowledge and contributions to the success of BKCO made her the heart of the business and therefore, an executive. Isabel was so vital to BKCO that when she left, her role needed to be filled with two new employees. Much like Harrison where the defendant was the only qualified electrical contractor who could run the company, Isabel was the only qualified brewer who could brew the beers. Harrison, 577 P.2d at 304.
Isabel enjoyed a great deal of autonomy and authority within her supervisory role when she worked at BKCO, and thus Isabel was a manager at BKCO. Similar to DISH, where the employee made autonomous business decisions within a supervisory role, Isabel supervised other employees and planned her own daily tasks. DISH, 224 P.3d at 36. Additionally, Isabel was the main point of contact with the distributors and therefore had authority and power within BKCO.
Isabel’s specific knowledge that made her the heart of the business and her supervisory role made her both an executive and manager during her time at BKCO. Therefore, Isabel is bound by the non-competition clause.
- The allegation that Isabel prevented the formation of a contract between BKCO and MicroWorld will fail because BKCO cannot show that Isabel’s derogatory conduct, and not BKCO’s failed deliveries, caused MicroWorld to no longer be interested in a long-term contract, and there was no more than a mere hope of a contract forming.
Tortious interference requires showing that the interference was intentional, improper, and prevented the formation of a contract. Amoco Oil Co. v. Ervin, 908 P.2d 493, 500 (Colo. 1995). It has already been determined that Isabel acted intentionally and improperly. Therefore, it will be assessed if Isabel prevented the formation of a contract.
Isabel’s conduct did not prevent the formation of a long-term contract between BKCO and MicroWorld because she did not cause BKCO to fail to make deliveries on time, and there was a condition that a contract would be formed if BKCO made the following delivery on time. BKCO did not make the following delivery on time, thus the contract was not formed.
In order to prove that an employee prevented the formation of a contract, there must be more than a mere hope of the formation of a contract and spreading derogatory information can be conduct that constitutes interference if there are not other factors that were more likely the cause of the interference. Klein v. Grynberg, 44 F.3d 1497, 1506 (10th Cir. 1995); Hertz v. Luzenac Grp., 576 F.3d 1103, 1119 (10th Cir. 2009); Montgomery Ward & Co. v. Andrews, 736 P.2d 40, 47 (Colo. App. 1987).
To prove that there is more than a mere hope that a contract would form between two parties, the plaintiff must show that there was a reasonable likelihood for a contract to be formed beyond mere speculation. Klein, 44 F.3d at 1506. In Klein, there was no evidence that the investors wanted to follow through with a contract. The investors did not make any contact with Klein. There was no ongoing relationship that would indicate a reasonable likelihood of a contract. Id.
A plaintiff needs to establish that there was more than a mere hope of a contract forming in order to succeed in a cause of action for tortious interference. In Hertz, the plaintiff could not establish proof of more than a mere hope of a contract forming. Hertz, 576 F.3d at 1120. In Hertz, the court looked at email exchanges between the company and prospective third party to determine whether the communications suggested a reasonable likelihood of the formation of a contract. Id. The emails revealed that the third party needed more time to evaluate the profitability of their product, and would not be considering a contract at this time. Id. Thus, the court held that there was not a reasonable likelihood of a contract forming beyond a mere hope. Id.
However, if there is not more than a mere hope of a contract being formed, the court will find that there was no prevention due to conduct of spreading derogatory information that could constitute interference where there is a reasonable likelihood of a contract forming. Montgomery Ward, 736 P.2d at 47. If there is direct evidence to prove that the derogatory conduct was the reason that there was no formation of a contract, the court will hold that this amounts to the prevention of a prospective contract .Id. In Montgomery, two sales managers were sent to speak with a prospective buyer on behalf of the defendant. Id. During the meeting, the salesman stated that the potential buyers could not afford to buy the agency and that the agency was losing money. Id. The potential buyer later gave testimony in court stating the foregoing statements made by the salesmen were a large reason that she pulled out of the contract. Id. The court held the sales manager’s conduct interfered with a prospective contract. Id.
There was no more than a mere hope or a long-term contract between Microworld and BKCO. Ivan specified in his emails to Isabel the terms for a long-term contract, specifically, that BKCO cannot make another delivery mistake. However, BKCO did make a second delivery mistake, and Ivan stated that this made it hard for MicroWorld to work with BKCO and a serious issue in the beer industry. This demonstrated that there was a progression away from a long-term contract between MicroWorld and BKCO, such that BKCO did not have a reasonable likelihood of a contract forming. Similar to Hertz, in the emails Isabel sent during her time at BKCO and MicroWorld, MicroWorld made it clear that the company had yet to decide if they would take on BKCO as long-term distributors. Hertz, 576 F.3d at 1120. Since there was no more than a mere hope on the part of MicroWorld to pursue a long-term contract, much like in Klein, there was no prevention of a contract because a contract did not exist in the first place. Klein v. Grynberg, 44 F.3d 1497.
Although Isabel certainly made derogatory statements, BKCO cannot prove with reasonable certainty that Isabel’s statements, and not BKCO’s own mismanagement that caused MicroWorld to cease talks regarding a long-term contract. Unlike the third party in Montgomery, where the defendant’s conduct of spreading derogatory information was the only factor preventing the formation of a contract, here BKCO’s own mismanagement more likely led to the prevention of a contract. Montgomery Ward, 736 P.2d at 47. This was shown through Ivan’s emails where he was upset after BKCO’s errors, and this was likely the main reason that he did not move forward with the contract.
Isabel’s statements about BKCO did not prevent the formation of a contract since BKCO’s failed deliveries did not meet Ivan’s terms and there was not more than a mere hope of a formation of a contract.
Conclusion
Isabel was an executive and manager at BKCO, which would likely make the non-compete clause enforceable. Isabel’s conduct was the type that may have interfered with a prospective contract, however, since there was not more than a mere hope a contract would form, and BKCO made multiple delivery errors, her conduct does not satisfy the requirements for tortious interference.
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