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:
- most of the CEO contracts (80%) had 1 or 2-year covenants not to compete (CNCs)
- 89% of CNCs prohibited CEOs from working for a competitor, but only 25% prohibited CEOs from financing one
- almost 40% of CNCs barred CEOs from working anywhere where the company had operations
- 75% of CEO contracts barred them from soliciting companies’ employees, but only 50% barred CEOs from soliciting clients
- almost 90% of the contracts had a non-disclosure clause
- more than half of CNCs were triggered by any departure of the CEO, whether voluntary or not
- KEY: CEOs are more likely to have CNCs in their employment contracts if their contracts are being enforced in jurisdictions that permit strong CNC clauses, e.g., Texas.
- KEY: There is a significant trend toward greater usage of CNC clauses in CEO employment contracts
- KEY: Longer employment contracts (more than one year) are more likely to includes CNCs
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 Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.
Interesting–thanks Leiza!
Leiza: Thanks for this thought-provoking article. It would be most helpful if prospective employees would give careful consideration to any covenant not to complete in their employment agreement – prior to accepting employment.