An Empirical Analysis of Non-Competition Clauses and Other Restrictive Post-Employment Covenants

52 Pages Posted: 28 Feb 2014 Last revised: 6 Sep 2017

Randall S. Thomas

Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

Norman Bishara

The Stephen M. Ross School of Business at the University of Michigan

Kenneth J. Martin

New Mexico State University - Department of Finance & Business Law

Date Written: February 26, 2014

Abstract

Employment contracts for most employees are not publicly available, leaving researchers to speculate on whether they contain post-employment restrictions on employee mobility, and if so, what those provisions look like. Using a large sample of publicly available CEO employment contracts, we are able to examine these noncompetition covenants, including post-employment covenants not to compete (“CNCs” or “noncompetes”), non-solicitation agreements (“NSAs”), and non-disclosure agreements (“NDAs”). What we find confirms some long-held assumptions about restrictive covenants, but also uncovers some surprises.

We begin by discussing why employers use restrictive covenants and examining how the courts have treated them. We then analyze an extensive sample of CEO employment contracts drawn from a large random sample of 500 S&P 1500 companies. We find that 80% of these employment contracts contain CNCs, often with a broad geographic scope, and that these generally last only one to two years. Similarly, we find that NSAs routinely appear in these contracts, barring solicitation of the firm’s employees and customers or clients. We demonstrate that NDAs are prevalent and prohibit the CEOs from disclosing unspecified “confidential information.” In addition, we note that there is a strong “California effect,” whereby firms from that state are less likely to put CNCs in employment contracts.

Our research also uncovers several previously undocumented trends. First, we see a robust trend in these contracts of more and more restrictive covenants appearing over time and with greatly expanded enforcement rights for the firm. Second, we find clear path dependence for these clauses, with a prior CNC being a convincing predictor of their use in future employment contracts. Third, longer-term contracts are more likely to have CNC clauses than short-term contracts, most probably because the firm has more confidence in making investments in CEOs that are committed to staying for longer periods. We argue that this shows that for some firms the risk of harm from a departing executive may simply be more acute than with other firms.

Keywords: covenants not to compete, CNCs, noncompetes, employment, contracts, Chief Executive Officer, CEOs, competitive advantage, restrictive covenants, human capital, employees, employee mobility, employers

Suggested Citation

Thomas, Randall S. and Bishara, Norman and Martin, Kenneth J., An Empirical Analysis of Non-Competition Clauses and Other Restrictive Post-Employment Covenants (February 26, 2014). Vanderbilt Law Review, Vol. 68, No. 1, 2015; Vanderbilt Law and Economics Research Paper No. 14-11. Available at SSRN: https://ssrn.com/abstract=2401781 or http://dx.doi.org/10.2139/ssrn.2401781

Randall S. Thomas (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Norman D Bishara

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-6823 (Phone)

Kenneth J. Martin

New Mexico State University - Department of Finance & Business Law ( email )

College of Business Administration & Economics
Las Cruces, NM 88003
United States
505-646-3201 (Phone)
505-646-2820 (Fax)

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