Earlier this year, three law professors* published an analysis of non-compete and non-solicitation restraints in a sample of 874 CEO employment agreements. You can find the entire article here. This is the first empirical study of non-compete restraints.
The professors drew their agreements from a random sample of 500 S&P 1500 companies who are required by law to disclose to the public the terms of their CEO contracts. Here’s a summary of their findings:
TAKEAWAY: In 2015, non-compete agreements for higher level executives, including CEOs, are the norm rather than an exception. The longer the CEO or a high-level executive works for a company, the more they learn about the business and its proprietary processes, inventions and strategic data that can be used to form a competing business. Therefore, a lot of times a reasonable non-compete restraint is justified and even necessary to protect the company. CEOs, of course, have a lot of negotiating power when it comes to the exact parameters of such restraints and the appropriate amount of compensation that will justify their sitting on the sidelines for a year or two after their departure from the company.
If an employment contract is governed by Texas law, both the company and the CEO should approach the negotiations with the understanding that non-compete agreements in Texas are governed by the Covenants Not to Compete Act, which allows companies to put reasonable non-compete restraints on employees if they are tied to a legitimate business interest. Thus, for example, for a CEO of a company that has world-wide operations, a 2-year world-wide non-compete might be reasonable under the Act and might be enforced by Texas courts. Knowing that before beginning contract negotiations should help parties assess the appropriate parameters of the restraints and the corresponding compensation package.
* Norman D. Bishara, Associate Professor of Business Law and Business Ethics, Stephen M. Ross School of Business, University of Michigan; Kenneth J. Martin, Regents Professor of Finance, College of Business, New Mexico State University; and Randall S. Thomas, John Beasley II Professor of Law and Business, Vanderbilt Law School, Professor of Management, Owen School of Business, Vanderbilt University.
Leiza litigates non-compete and trade secrets lawsuits on behalf of EMPLOYERS and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need advice regarding your non-compete agreement, contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@GodwinLewis.com or (214) 939-4458.