Using the Resource-Based Theory to Determine Covenant Not to Compete Legitimacy
The Stephen M. Ross School of Business at the University of Michigan
Florida State University - College of Business
April 1, 2012
Indiana Law Journal, Vol. 87, 2012
Ross School of Business Paper No. 1157
This paper addresses the legitimacy of competing interests involved in the enforcement of covenants not to compete (“noncompetes”). To date, the courts and legislatures have not relied on a principled theoretical framework to identify and assess the competing interests between firms and individuals in this setting. This paper fills the research void by providing a theoretical framework that identifies the legitimacy of these competing claims. The framework integrates managerial research involving the resource-based theory of the firm and the knowledge-based perspective of competitive advantage with the legal analysis and enforcement of noncompete terms. A descriptive framework of the parties’ competing interests provides four discrete scenarios, which formalizes the types of legitimate interests a court must balance when asked to enforce noncompetes. From this descriptive account, a prescriptive analysis is advocated that uses an ownership approach to assess the legitimacy of an employer’s claim to knowledge covered by a noncompete.
Number of Pages in PDF File: 54
Keywords: covenant not to compete, noncompete, resource-based theory, resource-based view, restrictive covenants, human capital law and policy, employment law, employment contracts
JEL Classification: J2, K1, K12, K2, L2, M1, M12, M5, M51, M55, O15Accepted Paper Series
Date posted: August 1, 2011 ; Last revised: April 4, 2012
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