An Empirical Analysis of Noncompetition Clauses and Other

1

VANDE RB ILT L AW R EVIEW

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VOLUME 68 JANUARY 2015 NUMBER 1

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ARTICLES

An Empirical Analysis of

Noncompetition Clauses

and Other Restrictive

Postemployment Covenants

Norman D. Bishara*

Kenneth J. Martin**

Randall S. Thomas***

Employment contracts for most employees are not publicly available,

leaving researchers to speculate about whether they contain postemployment

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 postemployment

covenants not to compete (“CNCs” or “noncompetes”), nonsolicitation

agreements (“NSAs”), and nondisclosure agreements (“NDAs”). What we found

* Associate Professor of Business Law and Business Ethics, Stephen M. Ross School of

Business, University of Michigan.

** Regents Professor of Finance, College of Business, New Mexico State University.

*** John Beasley II Professor of Law and Business, Vanderbilt Law School, Professor of

Management, Owen School of Business, Vanderbilt University.

The authors thank Erin O’Hara O’Connor, Robert Bird, Evan Starr, Keith Bishop, and

attendees at the Michigan Law School Law & Economics Workshop, especially Alicia Davis and

J.J. Prescott, for their helpful comments on earlier drafts. We also would like to thank John

Dotson, Mai Denawa, Kelsey Feucht, Mohsen Ghazi, Evelyn Liristis, Raine Richards, Rebecca

Targan, Thomas Wechsler, and Shen Zhang for their valuable research assistance.

2 VANDERBILT LAW REVIEW [Vol. 68:1:1

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, increasingly more and more restrictive covenants are appearing over

time, and they are appearing with increasingly expansive enforcement rights

for the firm.. Second, there is clear path dependence for these clauses, with a

prior CNC being a strong predictor of CNC use in future employment

contracts. Third, long-term contracts are more likely to have CNC clauses

than short-term contracts, probably because firms have 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 for other firms.

I. INTRODUCTION ...................................................................... 3

II. THE LAW AND USE OF RESTRICTIVE COVENANTS ................... 5

A. Noncompetition Clauses ........................................... 11

B. Nondisclosure Agreements and

Other Restrictions .................................................... 19

III. DATA COLLECTION, DESCRIPTION, AND METHODOLOGY ....... 24

IV. EMPIRICAL ANALYSIS .......................................................... 27

A. Why Do CEOs Have Competitive Restrictions in

Their Contracts?....................................................... 29

B. How Long Do These Competitive Restrictions Last

and What Do They Say? ........................................... 35

V. SUMMARY OF FINDINGS AND POLICY IMPLICATIONS ............. 48

VI. CONCLUSION ....................................................................... 51

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 3

I. INTRODUCTION

A departing key employee can seriously harm a firm by leaving

to work for the firm’s competitors or by providing these competitors

with the firm’s confidential business information. Firms, therefore,

have strong incentives to seek to impose broad covenants not to

compete and other postemployment restrictive covenants on these

employees. However, most employment contracts are not publicly

available, leaving researchers to speculate on the prevalence of these

restrictions and their contents. Fortunately, public companies must

disclose their CEOs’ employment contracts. This mandatory disclosure

permits us to examine them to determine how frequently, and how

broadly, employers use covenants not to compete (“CNCs” or

“noncompetes”), nonsolicitation agreements (“NSAs”), and

nondisclosure agreements (“NDAs”).

1

In this paper, we first discuss what is currently known about

the use and purpose of these restrictive covenants and why they

remain controversial. We then analyze 874 CEO employment

contracts initiated between 1996 and 2010 from a random sample of

500 S&P 1500 companies to develop the first comprehensive study of

the prevalence and details of restrictive covenants in public company

employment contracts. We find that 80% of these employment

contracts contain CNCs that commonly last one to two years.

Although 89% of the CNCs forbid CEOs from working for a competitor

during the term of the CNC, only 25% prohibit CEOs from financing

competitors. These covenants often have a broad geographic scope: for

example, 38% bar the CEO from working in any jurisdiction where the

company has operations.

We also find that NSAs and NDAs frequently show up in CEO

employment contracts. NSAs routinely appear in CEO contracts with

CNCs and typically restrict CEOs’ behavior for a period of one to two

years: 75.6% of these contracts bar solicitation of the firms’ employees,

1. We recognize that CEOs are the highest-level employees of these firms and that many

commentators have claimed that their contracts are skewed to favor the executive at the expense

of the employer, making it less likely that such postemployment restrictions will appear in their

contracts in comparison to those of other lower-level employees. If this is true, then our results

may understate the frequency and breadth of such restrictions imposed on other employees.

Some scholars have concluded that agency problems abound in the realm of executive

compensation with CEOs dominating boards when it comes to the terms of employment. See, e.g.,

LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF

EXECUTIVE COMPENSATION 23–44 (2004) (arguing that board and executive bargaining are not

conducted at arm’s length). But see John Core, Wayne Guay & Randall Thomas, Is U.S. CEO

Compensation Inefficient Pay Without Performance?, 103 MICH. L. REV. 1142, 1158–60 (2005)

(arguing against the managerial power theory of governance).

4 VANDERBILT LAW REVIEW [Vol. 68:1:1

and 50.8% proscribe the solicitation of customers or clients.

Additionally, this study reveals that NDAs are quite common as well:

87.1% of all contracts prohibit CEOs from disclosing unspecified

“confidential information.” Also, a host of other more detailed

prohibitions are quite common and frequently last an indefinite period

of time.

Interestingly, we also uncover strong evidence that employers

add an increasing number of restrictive covenants to new contracts

over time, so that today over 70% of CEO contracts contain three or

four restrictive covenants. Furthermore, more than half of these

covenants are triggered by any departure of the CEO from the firm,

whether voluntary or involuntary. Finally, companies negotiate the

express right to seek an injunction to enforce these provisions in

79.5% of the contracts. Plainly, firms are aggressively negotiating to

include these covenants in their CEOs’ employment agreements.

We also examine factors that indicate when CEOs will likely

have CNC provisions in their contracts. First, our analysis shows that

CEOs are more likely to have CNCs in their employment contracts if

their contracts are being enforced in jurisdictions that permit strong

CNC clauses. One important state that does not permit enforcement of

CNCs is California.

2

Accordingly, we find that CEO contracts in

California are much less likely to include noncompete clauses. Second,

there is a significant trend toward greater usage of CNC clauses in

CEO employment contracts. This suggests that employers are more

aware than ever of the importance of using CNC clauses and confirms

other scholars’ assumptions that, at least in the CEO context,

employers increasingly use these clauses. Third, there is strong path

dependence, or “stickiness,” in the use of CNC clauses: if a company

has used one in a prior employment contract, then it is much more

likely to insist on one in a later contract. Next, long-term employment

contracts are more likely to have CNC clauses than short-term

contracts. This is likely because firms have more human capital

investment in CEOs who are expected to stay for longer periods.

The Article proceeds as follows. In Part II, we contextualize the

role of restrictive employment covenants such as CNCs, NSAs, and

NDAs. Next, in Part III, we describe our data collection and study

methodology. Part IV presents the empirical portion of the Article,

where we analyze statistics on the presence, length, and scope of

CNCs, NSAs, and NDAs. Finally, Part V discusses our findings and

2. See infra notes 55–57 and accompanying text.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 5

their policy implications, and offers some brief concluding remarks

and recommendations for further research.

II. THE LAW AND USE OF RESTRICTIVE COVENANTS

Historically, ever since employers first began including

covenants not to compete in employee contracts when the guild system

began breaking down in early eighteenth-century London, competitive

restrictions in employment contracts have been contentious.

3

Restrictive covenants remain controversial today,

4

even as they have

seemingly proliferated among employers.

5

Despite this long history of

restrictive covenants in employment contracts, this area of law

continues to evolve: the last decade saw the advent of new or revised

state statutes

6

and proposed legislation

7

designed to refine how

3. See Harlan M. Blake, Employee Agreements Not to Compete, 73 HARV. L. REV. 625, 629–

31 (1960) (citing Mitchel v. Reynolds, (1711) 24 Eng. Rep. 347 (Q.B.); 1 P. Wms. 181) (providing

the leading historical account of the common-law origins and initial use of covenants not to

compete).

4. See Orly Lobel, Why Noncompetes May Give You the Least Desirable Employees, WALL

ST. J. BLOG (Jan. 22, 2014, 4:30 PM), available at http://blogs.wsj.com/accelerators/2014/01/22/

orly-lobel-why-non-competes-may-give-you-the-least-desirable-employees/ (asserting that

noncompetes have potentially corrosive effects, including the retention of the least valuable

employees). See generally ORLY LOBEL, TALENT WANTS TO BE FREE: WHY WE SHOULD LEARN TO

LOVE LEAKS, RAIDS, AND FREE RIDING 7 (2013) (arguing for unfettered and noncompete-free

policies to promote labor mobility; “We will discover that the default mentality of protectionism

is frequently archaic and misguided. Counterintuitively, the way to gain is often by allowing

tactical loss.”).

5. See Gillian Lester, Restrictive Covenants, Employee Training, and the Limits of

Transaction-Cost Analysis, 76 IND. L.J. 49, 49 (2001) (stating that noncompete agreements “are

an increasingly common feature of employment . . . .”); Viva R. Moffat, The Wrong Tool for the

Job: The IP Problem with Noncompetition Agreements, 52 WM. & MARY L. REV. 873, 876 (2010)

(“As the use of noncompetes has become more widespread, controversy over these agreements

has also increased.”); Katherine V.W. Stone, The New Psychological Contract: Implications for

the Changing Workplace for Labor and Employment Law, 48 UCLA L. REV. 519, 577 (2001)

(citing search of reported litigation, and noting: “The sheer volume of litigated cases between

employers and former employees involving trade secrets, covenants not to compete, and the duty

of loyalty has mushroomed in the past ten years.”); Peter J. Whitmore, A Statistical Analysis of

Noncompetition Clauses in Employment Contracts, 15 J. CORP. L. 483, 526–27 (1990) (finding

evidence of a rise in appellate decisions involving disputes involving noncompetes).

6. See COLO. REV. ST. ANN. § 8-2-113 (West 2012) (“Unlawful to intimidate worker—

agreement not to compete”); LA. REV. STAT. ANN. § 23:921 (2012) (“Restraint of business

prohibited; restraint on forum prohibited; competing business; contracts against engaging in;

provisions for”); OR. REV. STAT. § 653.295 (2012) (“Noncompetition agreements; bonus restriction

agreements”).

7. For example, in the last few years several states have seen the introduction of

legislation limiting the situations or types of workers permissibly covered by employee CNCs or

allowing for specific notice periods before a CNC can be requested from an employee. See H.

2293, 187th Gen. Ct. (Mass. 2011), available at http://www.massachusettsnoncompetelaw.com/

uploads/file/Noncompete%20Bill%20-%202011%20As%20Filed%201-20-2011.pdf, archived at

6 VANDERBILT LAW REVIEW [Vol. 68:1:1

employers use these clauses to restrict employees’ postemployment

mobility and choices.

Restrictions such as CNCs

8

are often criticized as contracts of

adhesion arising out of a perceived inequality in bargaining power

between employers and employees.

9

Professor Cynthia Estlund has

broadly stated this argument: “Most contract terms are offered by

employers on a take-it-or-leave-it basis, and are set under the shadow

of employment at will—the employer’s presumptive power to fire

employees for any reason at all, including refusal to accept the

employer’s proffered or modified terms of employment.”

10

In contrast,

http://perma.cc/C8TN-3XMC (proposing amendments to MASS. GEN. LAWS ch. 149, § 1 (2006));

see also S.B. 1771, 53d Leg., Reg. Sess. (Okla. 2012) (proposing amendments to OKLA. STAT. tit.

15, § 219A (2011), including sections on “noncompetition agreements” and “modifying

requirements for certain agreements”); H.B. 0016, 97th Gen. Assemb., Reg. Sess. (Ill. 2011)

(establishing criteria for the enforceability of noncompete covenants); S.B. 786, 96th Leg. (Mich.

2011), available at http://www.scribd.com/doc/127269020/Michigan-Non-Compete-Bill-SB-786,

archived at http://perma.cc/P7YA-BU2K (amending “Michigan antitrust reform act,” MICH.

COMP. LAWS § 445.774a (1987)).

8. In this Article, we focus on postemployment restrictions that limit employee mobility

and competitive behavior. We do not discuss covenants not to compete that restrict the activities

of a former owner of a business where such restrictions are intended to protect the goodwill of a

business following a sale. The latter species of noncompete agreement are less controversial in

that they are perhaps less subject to abuse and are clearly tailored to protect a legitimate

business interest such that they are even permissible in California where employee noncompetes

are virtually banned. See, e.g., Alliant Ins. Servs., Inc. v. Gaddy, 72 Cal. Rptr. 3d 259, 266–68

(2008) (discussing the sale of business goodwill exception to California’s ban on noncompetes and

enforcing a state-wide contractual prohibition on the seller’s insurance brokerage activities).

9. Professor Rachel Arnow-Richman asserts that disparate bargaining positions make it

“inappropriate to view noncompete terms as the product of reasoned reflection or as dispositive of

the parties' rights and obligations.” Rachel S. Arnow-Richman, Bargaining for Loyalty in the

Information Age: A Reconsideration of the Role of Substantive Fairness in Enforcing Employee

Noncompetes, 80 OR. L. REV. 1163, 1215 (2001). She argues that “[e]ven if a particular employee

possesses valuable human capital that is in demand in the relevant market, . . . there are

[substantive and procedural] reasons to distrust the quality of the bargain he or she reaches with

the employer.” Id. at 1214. These concerns include employees being asked to sign a noncompete

on their first day to continue their employment, the lack of employee bargaining power, and

limited information about the future implications of the noncompete. Id.

10. Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and Non-

Compete Covenants as a Hybrid Form of Employment Law, 155 U. PA. L. REV. 379, 384–85

(2006).

Professor Estlund adds that:

Skepticism about the bargaining power of employees has contributed to courts'

willingness to intervene in the employment contract to redress abuses that offend

public policy—for example, a discharge for refusing to violate the law or for exercising

an employment-related right (e.g., filing a workers' compensation claim). Still, most

terms of the employment relationship are governed not by external law or public

policy but by the express or implied agreement of the parties.

Id. at 385. See also Christopher T. Wonnell, The Contractual Disempowerment of Employees, 46

STAN. L. REV. 87, 106 (1993) (“Employers often use these covenants to indirectly induce

employees not to quit, and free labor proponents criticize these covenants on this ground.”).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 7

Professor Christopher Wonnell has argued for more judicial support

for employees’ right to bind themselves by contract,

11

albeit while

recognizing the potential drawbacks of employee noncompete

contracts.

12

Nonsolicitation agreements, which we group as a subcategory

of CNCs, can come in various forms, such as temporary prohibitions

on recruiting former coworkers (sometimes called poaching)

13

or

approaching former clients.

14

In either case, the resulting agreement

is designed to limit what would otherwise be permissible competitive

behavior. Some scholars have deemed NSAs problematic because they

can be both anticompetitive and limit the freedom of association of the

former employee.

15

Similarly, NDAs that restrict the use and transfer

of knowledge in a business context are potentially anticompetitive,

implicate issues of freedom of speech, and raise concerns “that many

contracts between private parties can be highly coercive or

unconscionable.”

16

Courts scrutinize all of these contractual

11. Wonnell, supra note 10, at 89:

The involuntary servitude argument does not wholly lack merit; indeed, the concerns

that drive it are compelling in many contexts, and make it difficult to find a morally

acceptable way to make employee promises binding. Still, the substantial economic

harm to workers from their wholesale disempowerment justifies a critical exploration

of the absence of contract remedies.

12. Id. at 106:

An employment contract, in comparison [to a noncompete agreement], may often be

less harsh. It represents a promise to refrain from competition only as long as the

employer remains willing to provide employment and imposes duties only during

employment. A reasonable person might be willing to enter into a binding

employment contract but refuse to enter into a covenant not to compete.

13. See Jin-Hyuk Kim, Employee Poaching, Predatory Hiring, and Covenants Not to

Compete 24 (2007) (unpublished manuscript), available at https://editorialexpress.com/cgi-

bin/conference/download.cgi?db_name=IIOC2008&paper_id=16,archived at http://perma.cc/

FA2Q-BSKP (discussing instances, in light of noncompetes, in which a firm’s behavior in

poaching workers from its competitors can be either acceptable competition or a predatory act).

14. See David L. Johnson, The Parameters of “Solicitation” in an Era of Non-Solicitation

Covenants, 28 A.B.A. J. LAB. & EMP. L. 99, 99 (2012) (discussing the enforcement implications of

nonsolicitation provisions).

15. Id.

16. Daniel J. Solove & Neil M. Richards, Rethinking Free Speech and Civil Liability, 109

COLUM. L. REV. 1650, 1701 (2009) (adding that their approach to setting boundaries “between

First Amendment law and contract law for private-sector speech restrictions” would not “prevent

courts from invalidating such contracts based on duress, unconscionability, or contravention of

public policy [and that] free speech effects of contracts could certainly be a valid public policy

reason to render them unenforceable”; however, “[t]his would be an issue for contract law, not

the First Amendment”).

8 VANDERBILT LAW REVIEW [Vol. 68:1:1

restrictions on employee mobility because of their tendency to restrict

otherwise lawful competition.

17

Whatever the merits of these claims in the context of rank-and-

file employees, such concerns are largely absent for CEOs who accept

restrictive covenants in their employment contracts.

18

This is because

CEOs enjoy substantial bargaining power and are routinely

represented by legal counsel when they negotiate their employment

contracts.

19

It is also true that in the last decades companies have

increased CEOs’ compensation relative to other employees.

20

In fact,

in the context of CEO employment contracts, the disparity in

bargaining power argument against allowing restrictive employment

covenants is turned upside down if one believes some commentators’

claims that CEOs virtually dictate contract terms that are most

favorable to them.

21

These commentators suggest that CEOs dominate

their firms’ boards of directors in high-stakes negotiations on issues

17. See e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1222–23 (N.Y. 1999) (discussing

the state’s approach to noncompete enforcement and the hesitancy to expand noncompete

coverage).

18. Joann S. Lublin, Companies Loosen the Handcuffs on Non-Competes: Companies Are

Making It Easier for Senior Managers to Jump Ship, Though It Can Be Costly, WALL ST. J. (Aug.

12, 2013 11:12 AM), available at http://online.wsj.com/news/articles/

SB10001424127887324085304579008592336383078 (discussing how some senior executives are

able to negotiate with their former firms to avoid enforcement of a post-employment

noncompete).

19. Stewart J. Schwab & Randall S. Thomas, An Empirical Analysis of CEO Employment

Contracts: What Do Top Executives Bargain for?, 63 WASH. & LEE L. REV. 231, 236–41 (2006).

20. See LYNN STOUT, THE SHAREHOLDER VALUE MYTH: HOW PUTTING SHAREHOLDERS

FIRST HARMS INVESTORS, CORPORATIONS, AND THE PUBLIC 20–21 (2012) (discussing how, since

1991, CEO pay outpaced average worker pay by a ratio of 140 times, with that ratio rising to

about 500 times average worker pay by 2003); see also Jennifer Liberto, CEO Pay Is 380 Times

Average Worker's—AFL-CIO, CNNMONEY (Apr. 19, 2012 1:12PM), http://money.cnn.com/2012/

04/19/news/economy/ceo-pay/index.htm, archived at http://perma.cc/W38G-7FU3 (citing recent

labor union statistics that the average CEO at a top firm now earns a pay package that is 380

times that of the average worker and noting the CEO pay differential in 1980 was at 42 times

the average worker salary).

21. For a leading articulation of the managerial power perspective, see generally BEBCHUK

& FRIED, supra note 1, at 61–79.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 9

such as managerial compensation

22

and the terms of their employment

relationships.

23

What exactly firms are trying to protect by using CNCs has

been the subject of several theories by leading legal scholars.

24

One

theory is that CNCs are an important tool for creating incentives for

employers to invest in key employee training and skills because the

security of a tailored CNC gives the employer a limited quasi-property

right in that human capital.

25

In a similar vein, CNCs could be

conceptualized as conditional waivers of employee rights that

recognize that employers also have interests that can be protected at

the expense of employee freedoms, as long as they are truly legitimate

22. See DAVID LARCKER & BRIAN TAYAN, CORPORATE GOVERNANCE MATTERS: A CLOSER

LOOK AT ORGANIZATIONAL CHOICES AND THEIR CONSEQUENCES 237 (2011):

Because of potential imbalances between supply and demand and the difficulty in

evaluating the quality of candidates, it is not always easy for boards to identify the

appropriate executive or the market wage necessary to attract [a qualified CEO].

Moreover, some board members might provide insufficient oversight (because of a lack

of independence, insufficient engagement, or a lack of power relative to the CEO)

during the compensation-setting process. These factors have the potential to distort

executive compensation packages, in terms of both size and structure.

23. The potentially fraught contracting process between CEOs and their firms and some of

its problems have been described as follows:

While contracting clearly is a significant source of governance rules for corporations,

the contracting process is very costly. Take, for example, the issue of executive

compensation. Many economists are of the view that the broadening gap between

CEO and rank-and-file pay reflects a failure of corporate-governance practices to

maintain a proper relationship between compensation and performance. The specific

executive compensation arrangements that we actually observe, however, simply

reflect the result of a bargaining process between shareholders’ elected

representatives and managers. It would be possible for companies, especially

companies selling shares to the public for the first time, to design more modest

compensation packages. At a minimum, it would be possible for directors to have at

least a basic understanding of the compensation arrangements they are reaching with

top executives. In recent years, it has turned out that directors of corporate giants like

Disney and United Health did not even comprehend how much their companies might

be on the hook for the multimillion arrangements they reached with top corporate

officers.

JONATHAN R. MACEY, CORPORATE GOVERNANCE: PROMISES KEPT, PROMISES BROKEN 23–24

(2008).

24. See the noncompete agreement discussion infra Part II.A.

25. Eric A. Posner, Alexander Triantis & George G. Triantis, Covenants Not to Compete

from an Incomplete Contracts Perspective 2–3 (Univ. of Chi. Law & Econ., Working Paper No.

137, 2001), available at http://papers.ssrn.com/paper.taf?abstract_id=285805, archived at

http://perma.cc/ YD5Z-XCGY (discussing the two objectives of ex post (labor mobility) and ex ante

(human capital investment) negotiations). For a more general framework, see Gary S. Becker,

Investment in Human Capital: A Theoretical Analysis, 70 J. POL. ECON. 9, 10–11 (1962). See also

Paul H. Rubin & Peter Shedd, Human Capital and Covenants Not to Compete, 10 J. LEGAL STUD.

93, 93 (1981) (relating Becker’s general and specific human capital distinction to covenant not to

compete law).

10 VANDERBILT LAW REVIEW [Vol. 68:1:1

interests.

26

These and other perspectives such as freedom of contract,

27

or even viewing CNCs as a business strategy tool for both “proprietary

protection and strategic coercion,”

28

offer potentially useful

explanations for the presence of CNC clauses and other restrictive

covenants in CEO employment contracts.

Despite the heated discussion of the pros and cons of restrictive

employment covenants by academics, practitioners, and state

legislatures, there are few empirical studies examining these

agreements to provide evidence and guidance for businesses,

employees, or policymakers.

29

Specifically, we are the first to track the

prevalence of these clauses by examining the terms of actual

employment contracts.

The existing empirical studies on restrictive covenants in the

management and economics literature are important to the discussion

of CNCs and human capital investment.

30

However, these previous

studies have used the availability of CNC enforcement in a given

jurisdiction as a surrogate for the likely presence of a CNC for certain

types of employees

31

or for a limited number of technology regions.

32

In

26. Estlund, supra note 10, at 415–20; see also infra Part II.A (discussing the legitimate

interests prong of the usual common-law analysis).

27. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS ch. 8, topic 1, intro. note (1981)

(stating the general proposition that “parties may contract as they wish, and courts will enforce

their agreements without passing on their substance”).

28. Larry A. DiMatteo, Strategic Contracting: Contract Law as a Source of Competitive

Advantage, 47 AM. BUS. L.J. 727, 765 (2010) (“The often litigated covenant not to compete in the

employment setting serves two strategic purposes: proprietary protection and strategic

coercion.”). Professor DiMatteo further argues that the first purpose for the employer

noncompete enforcement “relates to the employer’s proprietary property that has been disclosed

to the employee and that the employer seeks to protect” while the second purpose “seeks to deter

employee movement to a competitor.” Id. He adds that the first intent:

[I]s best served by drafting a covenant that is likely to be enforced by the

courts . . . [such that an] employer shows that there is some proprietary interest—

trade secrets, know-how, client contacts, access to key employees, specialized training,

databases, and compilations—that are susceptible to being harmed if used or

disclosed to a new employer.”

Id. For the second purpose he finds that it is an employer’s attempt to overreach and assert

control of the employee. Id.

29. Notably, one of the authors’ previous research collected and analyzed some data on

CEO noncompetes; however, that study focused on other aspects of the executives’ contracts. See

Schwab & Thomas, supra note 19, at 254–57.

30. See, e.g., Mark J. Garmaise, Ties that Truly Bind: Non-Competition Agreements,

Executive Compensation, and Firm Investment, 27 J.L. ECON. & ORG. 376, 376–79 (2009).

31. See, e.g., Matt Marx, Deborah Strumsky & Lee Fleming, Mobility, Skills, and the

Michigan Non-Compete Experiment, 55 MGMT. SCI. 875 (2009) (examining patent-holding

employees in Michigan during a natural experiment related to a temporary repeal of CNC

enforcement).

32. See, e.g., Bruce Fallick, Charles A. Fleischman & James B. Rebitzer, Job-Hopping in

Silicon Valley: Some Evidence Concerning the Micro-Foundations of a High-Technology Cluster,

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 11

contrast, our large study utilizes a state-by-state enforcement index

and includes many executives across all U.S. jurisdictions and many

industries over a long period, thus providing a more comprehensive

and accurate picture of restrictive covenant use.

A. Noncompetition Clauses

Employers seek to restrict the postemployment activities of

their employees—regardless of their rank and status—in several

ways. When a worker is still employed by a particular firm, the

employee has default fiduciary duties that guard against unfair

competition with the employer.

33

These fiduciary duties, which

continue to evolve,

34

are found throughout corporate law and include

the duty of care

35

and, most crucially, the duty of loyalty.

36

Specifically, the duty of loyalty helps ensure that employees will serve

the firm’s interests and refrain from harmful competition with it

during their employment.

37

However, once they are terminated—for

whatever reason—these duties end, and the departing employee is

generally free to engage in any lawful competition.

38

The employee’s

valuable knowledge, skills, and relationships walk out the door when

the employee leaves and begins to compete with his or her former

88 REV. ECON. & STAT. 472, 475–81 (2006) (comparing several high-tech regional economies);

Matt Marx, The Firm Strikes Back: Non-Compete Agreements and the Mobility of Technical

Professionals, 76 AM. SOC. REV. 695, 700 (2011) (relying on interviews of a small sample of high-

tech workers).

33. See Dana M. Muir & Cindy A. Schipani, The Challenge of Company Stock Transactions

for Directors’ Duties of Loyalty, 43 HARV. J. ON LEGIS. 437, 444–57 (2006) (focusing on an

executive’s duty of loyalty to the firm).

34. See Andrew Gold, The New Concept of Loyalty in Corporate Law, 43 U.C. DAVIS L. REV.

457, 461–64 (2009) (arguing that legal definitions of a duty of loyalty draw upon a common social

understanding of loyalty, and discussing the historical expansion of fiduciary duties in U.S.

corporate law to include the duty of good faith).

35. See Julian Velasco, How Many Fiduciaries Are There in Corporate Law, 83 S. CAL. L.

REV. 1231, 1233 (2010) (discussing the fairness evaluation in corporate governance–related

duties).

36. See Melvin Eisenberg, The Duty of Good Faith in Corporate Law, 31 DEL. J. CORP. L. 1,

3 (2006) (reiterating that the three core fiduciary duties of corporate directors and officers are

the duties of loyalty, care, and good faith).

37. Muir & Schipani, supra note 33, at 444–57.

38. Wendi S. Lazar & Gary R. Siniscalco, Confidentiality, Trade Secrets, and Other Duties

and Restrictive Covenants in a Global Economy, in RESTRICTIVE COVENANTS AND TRADE SECRETS

IN EMPLOYMENT LAW: AN INTERNATIONAL SURVEY 19 (Wendi S. Lazar & Gary R. Siniscalco eds.,

2010) (“In many U.S. states, in addition to the common law recognition of the duty of loyalty that

prevents employees from ‘raiding’ employers’ clients during employment, nonsolicitation

provisions post employment will generally be upheld as long as they are reasonable and

necessary to protect an employer’s legitimate business interest.” (case citations omitted)).

12 VANDERBILT LAW REVIEW [Vol. 68:1:1

firm, to the consternation of an employer that believes it owns the

very knowledge, skills, and relationships at issue.

39

The employer’s goal for restrictive postemployment covenants

is to control the activities of a former employee after the usual

employee-employer relationship ends, effectively retaining exclusive

use of the information and competitive advantage by contract.

40

In this

way, the company may temporarily maintain the status quo that

existed prior to the employee’s departure and avoid potentially serious

losses.

41

In the case of a CEO, there is a far greater risk of harm

associated with losing that key employee to a competitor, which

increases an employer’s incentive to insist on postemployment

restrictions. This is because CEOs typically help create or have

knowledge of and unfettered access to all of a firm’s trade secrets,

supplier and customer information, strategic plans, strengths, and

weaknesses.

42

There are several typical contract mechanisms employers use

to restrict or penalize an employee’s postemployment competition.

These include general prohibitions on competition in the form of

classic CNCs, NSAs related to pursuing clients and recruiting other

employees, NDAs,

43

repayment and forfeiture agreements,

44

and even

39. See Norman D. Bishara & David Orozco, Using the Resource-Based Theory to Determine

Covenant Not to Compete Legitimacy, 87 IND. L.J. 979, 982–83 (2012) (acknowledging the

potential “knowledge ownership dispute” between an employer and departing employee); see also

Marx, supra note 32, at 697, explaining employee knowledge mobility as follows:

Inseparability of skills from individuals suggests that workers can use skills

developed at (or prior to) one organization or firm when moving to another. Such

reasoning underlies the notion that modern careers are not organizationally

circumscribed but boundaryless: workers move from firm to firm, carrying their

accumulated experience with them.

(citations omitted).

40. For a description of the use of contracts as a corporate governance mechanism and the

gap-filling role of the underlying law related to fiduciary duties, see MACEY, supra note 23, at

22–23, where he explains:

The purpose of the various laws of business organizations is to facilitate the

contracting process, not to displace the actual contracts reached by the parties.

Business organizations need law, including fiduciary duties, because it simply is not

possible for those who organize business to identify all of the potential problems and

conflicts that inevitably will arise in a business. Specific issues and transactions

invariably will present themselves that could not have been identified ex ante.

Fiduciary duties exist to provide a framework for dealing with those issues.

41. See Norman D. Bishara & Michelle Westermann-Behaylo, The Law and Ethics of

Restrictions on an Employee’s Post-Employment Mobility, 49 AM. BUS. L.J. 1, 2–3 (2012)

(highlighting the problems and benefits of employee restrictive covenants).

42. See, e.g., Lucian A. Bebchuk, Jesse M. Fried & David I. Walker, Managerial Power and

Rent Extraction in the Design of Executive Compensation, 69 U. CHI. L. REV. 751, 762–63 (2002).

43. See Terry Morehead Dworkin & Elletta Sangrey Callahan, Buying Silence, 36 AM. BUS.

L.J. 151, 169–71 (1998) (discussing noncompete enforcement in the context of other restrictive

covenants that restrict employee disclosure, including confidentiality agreements).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 13

“garden leave” clauses.

45

This Section focuses on noncompete clauses,

which are the broadest restrictive covenants. Employers craft CNCs to

stop departing employees from competing with them in any manner.

Thus, where permissible under a state’s law and within the bounds of

public policy,

46

many employers will insist that their employees accept

noncompete clauses in their employment contracts.

47

In effect, the

CNC allows the firm to control information and skills through the

equity mechanism of an injunction prohibiting the employee from

going to work with another employer.

48

Courts interpret these clauses with some suspicion because of

their anticompetitive nature

49

and likely adverse effects on the

44. See, e.g., Int’l Bus. Machs. Corp. v. Visentin, No. 11 Civ. 399 (LAP), 2011 U.S. Dist.

LEXIS 15342, at *7–24 (S.D.N.Y. Feb. 16, 2011), aff’d, 437 Fed. App’x 53 (2d Cir. 2011) (denying

former employer IBM’s request to enforce an executive’s noncompete after he was hired by

competitor Hewlett-Packard).

45. The concept of garden leave is an alternative to a traditional CNC. The employee

agrees to provide a relatively long notice-of-termination period, during which the individual

remains an employee with all of the attendant fiduciary duties, is essentially paid not to come to

work, and, accordingly, is prohibited from taking other employment with a competitor. See Bob

Hepple, The Duty of Employee Loyalty in English Law, 20 COMP. LAB. L. & POL’Y J. 205, 214

(1999):

[The employer] “pay[s] the employee’s salary during this period without requiring the

employee to come into work . . . on the assumption that the employee will have to stay

home and work in the garden, but will be financially secure until the period of notice

expires and he or she is then free to work for the competitor.

For a discussion of recent coverage of the garden leave concept in the academic literature, see

Bishara & Westermann-Behaylo, supra note 41, at 25–27. See also Greg T. Lembrich, Note,

Garden Leave: A Possible Solution to the Uncertain Enforceability of Restrictive Employment

Covenants, 102 COLUM. L. REV. 2291, 2292 (2002) (“Garden leave may provide a solution to the

prevailing uncertainty regarding the enforceability of restrictive covenants in the United

States . . . however, American courts have not ruled on the legitimacy of garden leave

provisions.”).

46. See, e.g., Geoffrey P. Miller, Bargains Bicoastal: New Light on Contract Theory, 31

CARDOZO L. REV. 1475, 1499 (2010) (comparing New York and California’s treatments of

contracts against public policy, noting that both “place limits on covenants not to compete and

related clauses, but California is significantly more willing to reject agreements on this ground”).

47. See, e.g., Gillian Lester & Elizabeth Ryan, Choice of Law and Employee Restrictive

Covenants: An American Perspective, 31 COMP. LAB. L. & POL'Y J. 389, 389 (2009) (discussing a

rise in noncompete litigation in the face of greater employee mobility and increased use of

technology in the workplace, and concluding that greater movement of workers “is partly the

result of technological change facilitating individual movement and communication, but also a

result of corresponding changes in corporate organization to establish offices and interests in

multiple jurisdictions” and that “[w]ith these developments, there has been a rise in litigation

surrounding the enforcement of employee covenants not to compete when the parties or issues

involved have connections to multiple jurisdictions”).

48. For a discussion of the use of noncompetes to inhibit employee mobility, see Bishara &

Westermann-Behaylo, supra note 41, at 2–3.

49. See, e.g., CORBIN ON CONTRACTS, § 80.15 (2013) (“Many courts are more suspect of

restraints accompanying employment contracts than they are of restraints accompanying the

14 VANDERBILT LAW REVIEW [Vol. 68:1:1

employee’s further employment prospects.

50

However, these terms will

generally be judicially evaluated using a balancing test that weighs

the firm’s protectable business interest,

51

the purpose of the

restriction, the scope (in time and geography) of the restriction, and

the potential harm to the employee and the public.

52

Stated more

formally, a typical articulation of the common-law reasonableness test

is as follows:

(1) the employer must have a legally protected interest; (2) the restrictive covenant must

be no wider in scope and duration than is reasonably necessary to protect the employer’s

interest; (3) the covenant cannot impose an undue hardship on the employee; and (4) the

covenant cannot violate public policy.

53

Despite their long history, these restrictions remain

contentious among courts and policymakers, as well as with

scholars.

54

Perhaps the most active discussion regarding the propriety

of CNCs relates to the well-known academic argument that the

economic growth of Silicon Valley was made possible in part because

of California’s ban on noncompetes.

55

The state’s longstanding, strong

sale of business and so these courts apply a stricter scrutiny to covenants accompanying

employment agreements.”).

50. See, e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (hesitating to

enforce a restrictive covenant because of the anticompetitive nature of such restrictions).

51. The Illinois Supreme Court reiterated the importance of the “protection of a legitimate

business interest” prong in Reliable Fire Equip. Co. v. Arredondo, 965 N.E.2d 393, 396 (Ill. 2011).

There, the court concluded that:

Under some circumstances, “a promise to refrain from competition is a natural and

reasonable means of protecting a legitimate interest of the promisee.” Restatement of

Contracts, 2d, § 188 cmt. b (1981). In the case of a postemployment restraint, where

the employer-promisee exacts from the employee a promise not to compete after

termination of the employment, the restraint is usually justified on the ground that

the employer has a legitimate business interest in restraining the employee from

appropriating the employer's (1) confidential trade information, or (2) customer

relationships. Id. cmts. b, g.

Id. at 401 (citing Blake, supra note 3, at 651–74); see also Reed, Roberts Assocs., Inc. v.

Strauman, 353 N.E.2d 590, 593 (N.Y. 1976) (acknowledging "the legitimate interest an employer

has in safeguarding that which his business made successful and to protect himself against

deliberate surreptitious commercial piracy").

52. See generally Blake, supra note 3, at 631 (explaining the public policy concerns

underlying the common-law origin of covenants not to compete).

53. Deutsche Post Global Mail, Ltd. v. Conrad, 116 F. App’x 435, 438–39 (4th Cir. 2004)

(applying Maryland noncompete law and policy and declining to enforce an overbroad

international restriction).

54. See, e.g., Moffat, supra note 5, at 876.

55. See generally Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial

Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 577

(1999) (proposing that California’s ban on employee noncompetes and the resulting ease of

employee mobility is part of an advantageous legal framework that has made Silicon Valley’s

economy and high levels of technological innovation possible).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 15

public policy of protecting worker freedom of mobility,

56

its statutory

ban on contractual restrictions on employee mobility,

57

and the rise of

the tech economy in the state have led to a burst of recent scholarship

that attempts to test the effect, if any, of noncompete enforcement on

various business outcomes—in other words, a so-called “California

effect.”

58

Scholars widely assume that, outside of California, firms

often use postemployment restrictive covenants for employees,

59

and

recent research demonstrates that the majority of U.S. jurisdictions

will allow some level of CNC enforcement.

60

Nonetheless, very little is understood about the actual

deployment of CNCs and other postemployment restrictions on

employee activities in modern business relationships. The extant legal

literature focuses on litigated cases and emerging policy responses to

contractual restrictions.

61

In particular, legal researchers have studied

the various uses and alleged abuses of noncompete clauses.

62

This

literature includes discussions of the general and specific human

capital investment aspects of noncompetes,

63

as well as how that

understanding might be applied to a maximization of the positive

spillovers of allowing CNCs in some employment situations and not

56. The California Supreme Court has most recently reiterated the state’s strong public

policy against postemployment CNCs in Edwards v. Arthur Andersen, LLP, 189 P.3d 285, 293

(Cal. 2008).

57. California’s anti–employee CNC statute is CAL. BUS. & PROF. CODE § 16600 (West

2014) (“Except as provided in this chapter, every contract by which anyone is restrained from

engaging in a lawful profession, trade, or business of any kind is to that extent void.”). For a

detailed discussion of the serendipitous historical origins of California’s ban on employee

noncompetes see Gilson, supra note 55, at 613–20.

58. See, e.g., Garmaise, supra note 30, at 376 (assessing the effects of tough noncompetition

enforcement regimes on executive compensation and stability); Marx, et al., supra note 31, at

879–87 (examining the effects of a temporary repeal of covenant not to compete enforcement on

patent-holding employees in Michigan); supra Part I (discussing this developing area of

empirical research).

59. See, e.g., Lester, supra note 5, at 49 (finding that CNCs “are an increasingly common

feature of employment”); see also Whitmore, supra note 5, at 494 n.67 (presenting evidence of a

growth trend in appellate decisions involving CNCs, but not directly measuring the actual

inclusion of CNCs in employee contracts).

60. See generally Norman D. Bishara, Fifty Ways to Leave Your Employer: Relative

Enforcement of Covenant Not to Compete Agreements, Trends, and Implications for Employee

Mobility Policy, 13 U. PA. J. BUS. L. 753, 757 (2011) (observing that the majority of states permit

enforcement of some form of noncompetes).

61. See, e.g., Michael J. Garrison & John T. Wendt, The Evolving Law of Employee

Noncompete Agreements: Recent Trends and an Alternative Policy Approach, 45 AM. BUS. L.J.

107, 164 (2008) (commenting on the policy implications arising out of the litigation of employee

noncompete agreements).

62. See, e.g., Arnow-Richman, supra note 9, at 1214–15.

63. See Rubin & Shedd, supra note 25, at 93 (suggesting a distinction between general and

specific human capital in covenant not to compete law).

16 VANDERBILT LAW REVIEW [Vol. 68:1:1

others.

64

Studies have also shown that the evolution of state

enforcement of noncompetes is trending toward greater enforcement.

65

Are restrictive covenants for CEOs somehow different than

those for other employees? The CEO is an often-discussed figure that

is sometimes reviled and sometimes revered, depending on the

observer’s perspective. Much of the popular debate—as well as the

policy and scholarly debates

66

—surrounds the issue of executive

compensation.

67

Generally, the legal literature focuses on managerial

agency costs

68

and board capture,

69

the fiduciary duties of the officers

and directors,

70

and executive compensation in the United States

71

64. Norman D. Bishara, Covenants Not to Compete in a Knowledge Economy: Balancing

Innovation from Employee Mobility with Legal Protection for Human Capital Investment, 27

BERKELEY J. EMP. & LAB. L. 287, 294 (2006).

65. See Garrison & Wendt, supra note 61, at 164. However, Professors Garrison and Wendt

also discuss how courts have seemingly scrutinized noncompete clauses more heavily in the last

decades. Id.

66. Richard A. Posner, Are American CEOs Overpaid, and, if So, What if Anything Should

Be Done About It?, 58 DUKE L.J. 1013, 1013 (2006).

67. Adam Davidson, C.E.O.’s Don’t Need to Earn Less. They Need to Sweat More, N.Y.

TIMES MAG., June 2, 2013, at 14 (describing how CEOs are difficult “to rein in” and “are often

rewarded when they don’t succeed but are not usually penalized enough when they do a

lackluster job”). The author also refers to how boards of directors share a similar problem, and

adds that:

Lucian Bebchuk, a professor at Harvard Law School and perhaps the leading

academic voice for corporate reform, told me that the problem isn’t (just) greed. It’s

the boards of directors . . . [which] are supposed to represent the stockholders’

interests . . . [but] . . . most public firms, where C.E.O.’s can have considerable

influence over board appointments, neuter those interests. They are structured so

that a board tends to side with its chief.

Id.

68. See, e.g., Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate

Takeovers, 31 DEL. J. CORP. L. 769, 835 (2006) (discussing an example of inadequate board

oversight of a CEO and self-interest from the case of Mills Acquisition Co. v. Macmillan, Inc., 559

A.2d 1261 (Del. 1989)).

69. Posner, supra note 66, at 1018. In his initial critique of CEO oversight, Judge Posner

concludes that:

Of all the employees of a corporation, the CEO poses the greatest challenge to the

control issue. His performance is especially difficult to evaluate because of the

uncertainty that surrounds success in business. And his only “supervisor” is the board

of directors because management's advantages in proxy fights prevent shareholders

from influencing the compensation policies adopted by the board—and the board, as

we shall see, is an unreliable agent of the principal (the shareholders). Even if the

literature on performance-based evaluation of corporate executives yielded a reliable

method of evaluating the performance of CEOs of large corporations, boards of

directors would be unlikely to force it on the CEO.

Id.

70. See, e.g., Muir & Schipani, supra note 33, at 444–57 (focusing on the duty of loyalty to

the firm); Randall S. Thomas & Harwell Wells, Executive Compensation in the Courts: Board

Capture, Optimal Contracting, and Officers’ Fiduciary Duties, 95 MINN. L. REV. 846, 849 (2011)

(noting that “recent Delaware court decisions have given new life to officers’ fiduciary duties”) ;

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 17

and other countries.

72

However, the actual duties and competitive

restrictions contained in CEO contracts are less understood.

73

Nonetheless, a CEO’s central role in a public company must be

appreciated to understand the importance of his or her employment

contract to the firm. As the top officer of the firm, the CEO reports

only to the board of directors and oversees the rest of the company’s

employees.

74

The CEO is a highly valuable employee and possesses

sought-after skills that set him or her apart in a very competitive

marketplace for managerial talent.

75

This unique position at the top of

the firm’s governance structure allows the CEO access to all of the

firm’s proprietary information, trade secrets, customer and supplier

relationships, product cost structures, research and development

information, and strategic plans.

76

While other key employees have

knowledge of important corporate information, only the CEO will have

unfettered access to nearly every aspect of the business and its

strategic direction. As a result, the CEO is the employee who can most

harm the company if he or she leaves the firm to work for a

competitor. Accordingly, CEO and other executive employment

contracts may contain a variety of sophisticated restrictive covenants

designed to warn the executive about the consequences of any

see also LARCKER & TAYAN, supra note 22, at 78–89 (explaining various legal obligations,

particularly the fiduciary duties of the board and executives).

71. BEBCHUK & FRIED, supra note 1, at 23–44; see also David I. Walker, The Challenge of

Improving the Long-Term Focus of Executive Pay, 51 B.C. L. REV. 435, 436–37 (2010) (describing

the debates around executive pay and the portfolio of possible regulatory proposals).

72. See Randall S. Thomas, Explaining the International CEO Pay Gap: Board Capture or

Market Driven?, 57 VAND. L. REV. 1171, 1189–1260 (2004) (discussing various theories related to

the justifications for CEO pay differentials across borders). For another comparative study of

CEO contract provisions, see Jennifer G. Hill, Ronald W. Masulis & Randall S. Thomas,

Comparing CEO Employment Contract Provisions: Differences Between Australia and the United

States, 64 VAND. L. REV. 559, 594 tbl. 2 (2011).

73. The notable exception is Schwab & Thomas, supra note 19, at 254–57.

74. See MACEY, supra note 23, at 51–53, 59–60.

75. See Bebchuk, Fried & Walker, supra note 42, at 762:

A successful CEO of a large public company undoubtedly possesses a rare combination

of skills and instincts. The CEO must manage an organization with a large number of

employees, provide the strategic direction for the firm, and decide when or whether

the company should acquire other firms or be acquired. Individuals who possess the

necessary attributes might be scarce and competition among firms, particularly for

rising stars, might be intense. Of course, compensation is not the only factor in

attracting and retaining talent at the very top of the corporate pyramid, but it is an

important one.

(footnote omitted).

76. See, e.g., Posner, supra note 66, at 1015–20.

18 VANDERBILT LAW REVIEW [Vol. 68:1:1

disloyalty during employment and to provide recourse for the firm

should the CEO ever leave and wish to compete against it.

77

How valuable to firms are restrictive covenants in CEO

employment agreements? One recent high-profile example illustrates

how a company may incur great expense to ensure it faces no

competition from a departing executive. In this situation, General

Electric’s (“GE”) vice-chairman retired after nearly thirty years of

service to the company and received a combined retirement and

severance package from the company.

78

The executive’s combined

package included an $89,000 per month payment for ten years, as well

as stock options, a bonus, and other forthcoming pension benefits

worth an estimated $28.3 million dollars. The compensation

recognized both recognized the executive’s retirement and that he

bargained for “an agreement not to join a GE competitor anywhere in

the world for three years.”

79

A GE spokeswoman explained that the

executive’s “retirement terms reflect his senior position, long service,

and significant contribution to GE as well as our interest in receiving

strong noncompete and nonsolicitation agreement protections.”

80

Thus, while it is difficult to break out the value of the competitive

restrictions from the overall value of the executive’s retirement

package, GE seems to have attached substantial value to controlling

its information and human capital investments in the executive

following his departure.

Overall, there are two realities about CEOs that we would

expect to drive how and how often their employers negotiate CNCs.

First, the CEO has greater bargaining power in the employment

relationship than most employees. Because a CEO could likely reject

any less-than-serious efforts by the company to impose a standard

CNC clause, we would expect substantial variation in the presence, or

absence, of these clauses in CEO contracts. On the other hand, the

77. For an example of a high-profile matter involving a former CEO and board member’s

noncompete dispute with a successor entity, see David Armstrong, What Does a Noncompete Pact

Truly Bar? Nasty Row Sorts It Out—Iron Mountain Fires an Official, Then Uses Sleuths to See if

He’s Becoming Its Rival, WALL ST. J., Jun. 14, 2004, at A1 (discussing allegations that the former

executive took steps to start a competing entity while still a board member and during a

noncompete period after being fired from his position), available at http://online.wsj.com/news/

articles/SB108716323273035767. While this case ended in an arbitration award in favor of the

former executive, the facts of the rancorous dispute are also recalled in a related lawsuit. See

Iron Mountain Inc. v. Carr, NO. 05-10890-RCL, 2006 U.S. Dist. LEXIS 98655, at *6–11 (D. Mass.

Mar. 13, 2006).

78. Kate Linebaugh & Joann S. Lublin, For Retiring GE Executive, $89,000 a Month Not to

Work, WALL ST. J., Aug. 2, 2012, at B1.

79. Id.

80. Id.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 19

company is more likely to bargain for a CNC in a CEO contract than

in other employment contracts because the company fears greater

economic harm from postemployment competition by a CEO than by

other employees. With the CEO’s bargaining power pitted against the

company’s enhanced desire for restrictive clauses, we would also

expect to find significant contractual tradeoffs between CEOs and

firms over the clauses’ contents.

81

B. Nondisclosure Agreements and Other Restrictions

In many employment contracts, the new employee may also

find that along with a noncompete, the firm wants him or her to agree

to other restrictions during and after the employment relationship.

These promises are often related to confidentiality and nondisclosure

of proprietary information, soliciting other employees to leave and

compete, and working with or for former clients.

82

Other mechanisms

that serve as disincentives to leaving a firm for new employment

opportunities with a competitor include agreements related to

contingent compensation and benefits

83

and, more recently, garden

leave provisions. In addition, in all states, a duly protected and

eligible business secret

84

will give rise to trade secret protection, and,

81. See Capital One Fin. Corp. v. Kanas, 871 F. Supp. 2d 520, 533–34 (E.D. Va. 2012). In

Kanas, two former bank executives had their CNCs enforced, in part because the court felt

confident that concerns of equity and fairness in the bargaining process were not a bar to

enforcement with these high-level employees. Id. at 538. The court discussed this issue as

follows:

Defendants were executives of a publically traded company, responsible for growing

North Fork from a small town bank to a corporate behemoth which they would sell to

Capital One for $13.2 billion and net the Defendants upwards of $150 million. Beyond

[Defendants’] business sophistication, they also received the advice of counsel while

negotiating the Separation Agreement. Like their clients, the Defendants’ counsel was

at the pinnacle of sophistication. Counsel hailed from a preeminent law firm and

specialized in executive compensation. Finally, there is no debate that the

Defendants, unlike the typical employee, stood “on equal footing at the bargaining

table” with their employer.

Id. at 530 (citation omitted).

82. See e.g., Stone, supra note 5, at 578.

83. See Abigail Shechtman Nicandri, Comment, The Growing Disfavor of Non-Compete

Agreements in the New Economy and Alternative Approaches for Protecting Employers’

Proprietary Information and Trade Secrets, 13 U. PA. J. BUS. L. 1003, 1003–04 (2011) (cataloging

the alternatives to CNCs as the doctrine of inevitable disclosure, the Uniform Trade Secrets Act,

the Computer Fraud and Abuse Act, garden leave agreements, forfeiture-for-competition and the

employee-choice doctrine, “no-poach” agreements, and no-fault poaching truces or “fair-poaching”

agreements).

84. See, for example, M–I LLC v. Stelly, 733 F. Supp. 2d 759, 772–73 (S.D. Tex. 2010),

where the court describes the Uniform Trade Secrets Act application in Texas law concerning the

elements of a misappropriation of trade secrets claim, where a plaintiff must show:

20 VANDERBILT LAW REVIEW [Vol. 68:1:1

in a handful of states, the doctrine of inevitable disclosure may

provide further employer protection.

85

Employers often reinforce these

two default protections by including contractual language that the

employee must overtly acknowledge.

Of these possible restrictive covenants and mobility

disincentives beyond a CNC, perhaps the most important one is the

nondisclosure agreement, also called a confidentiality agreement. Like

CNCs, it is assumed that these secrecy clauses are widely and

increasingly used in employment contracts of all types.

86

Unlike a

CNC, a standalone NDA does not necessarily restrict an employee’s

mobility options. The employee can still move to a competitor, but the

information remains exclusively with the last employer and cannot be

disclosed or, theoretically, ever used despite being embedded in the

employee’s memory.

87

Moreover, the relative ease of securing and enforcing an NDA

brings additional advantages over a CNC, which tends to be more

controversial even when CNCs are generally enforceable in a given

jurisdiction.

88

Professors Dworkin and Callahan discuss the

advantages of NDAs for employers at length, finding that NDAs, in

contrast to CNCs, “are enforceable even in states in which anti-

(1) a trade secret existed, (2) the trade secret was acquired through a breach of a

confidential relationship or discovered by improper means, and (3) the defendant used

the trade secret without authorization from the plaintiff. A trade secret is defined as a

“formula, pattern, device or compilation of information used in a business, which gives

the owner an opportunity to obtain an advantage over his competitors who do not

know or use it.”

(citations and internal quotation marks omitted).

85. See, e.g., Alan Hyde, Should Noncompetes Be Enforced?: New Empirical Evidence

Reveals the Economic Harm of Non-Compete Covenants, REGULATION, Winter 2010–2011, at 6, 7–

9 (adapted from Alan Hyde, Intellectual Property Justifications for Restricting Employee Mobility:

A Critical Appraisal in Light of the Economic Evidence, in RESEARCH HANDBOOK ON THE LAW

AND ECONOMICS OF LABOR AND EMPLOYMENT LAW 357 (Michael L. Wachter & Cynthia L.

Estlund eds., 2012).

86. See Dworkin & Callahan, supra note 43, at 152–53 (noting that as these clauses seem

to be increasingly used there is also a movement toward more employee disclosure through

encouraging appropriate whistleblowing); see also James C. Bruno & David C. Hissong,

Enforcement of Non-Disclosure Agreements: Does MCLA 445.1901 and Related Case Law Apply

in Other States?, MICH. B.J., Jan. 2002, at 58, 58 (explaining how, pursuant to the Michigan

Uniform Trade Secrets Act, “Michigan companies often propose NDAs that have no time,

geographic, or scope limitations because Michigan law generally permits the complete

prohibition on the disclosure of a party’s trade secrets by a third party”), available at

http://www.michbar.org/ journal/pdf/ pdf4article375.pdf., archived at http://perma.cc/8A3J-JA7J.

87. See Bishara & Westermann-Behaylo, supra note 41, at 13.

88. Dworkin & Callahan, supra note 43, at 156–58 (discussing the options for employers to

protect their valuable information and concluding “the law well equips an employer who seeks to

keep information about its affairs secure”).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 21

competition clauses are prohibited.”

89

Moreover, they find that

“[c]oncerns regarding restraint of trade are much less directly

implicated in this context; restrictions on access to information, rather

than employee movement, are involved . . . [t]hus, the policy in favor

of freedom of contract is given precedence.”

90

Confidentiality

agreements are also relatively easy to enforce in comparison to

noncompetes, and NDAs have other advantages, such as being “an

unambiguous declaration that the employer views firm matters as

confidential” and an additional basis for a breach of contract claim.

91

NDAs are permissible even in states like California where

employee noncompete agreements are banned or difficult to enforce.

92

As a practical matter, state common law will prohibit an employee

from disclosing an employer’s confidential information, even without a

written NDA between the parties.

93

Like in the case of CNC

enforcement, states require that the restrictions in an NDA are

reasonable in scope and tailored to protect legitimate business

interests.

94

In practice, restrictive covenants and their various

prohibitions can also be jumbled together within a contract,

essentially making the confidentiality agreements part of an

employee’s general noncompete terms.

95

Beyond determining if the

contemplated confidential information addressed by the NDA is

covered by a state’s trade-secret protections (in other words, if it is a

trade secret pursuant to a state’s version of the Uniform Trade Secrets

Act), some states will specifically evaluate NDAs under a CNC-like

89. Id. at 156–57.

90. Id. (citations omitted).

91. Id. at 157.

92. See Bruno & Hissong, supra note 86, at 58 (discussing California’s “strong public policy

against [CNCs]” but enforcement of NDAs).

93. See, e.g., Laro Maint. Corp. v. Culkin, 700 N.Y.S.2d 490, 491–92 (App. Div. 1999); Royal

Carbo Corp. v. Flameguard, Inc., 645 N.Y.S.2d 18, 19 (App. Div. 1996) (discussing New York’s

common law on employee confidentiality and fair competition, including after the termination of

employment). In addition, third parties, such as attorneys or other professionals, may have some

liability for aiding an employee’s breach of an NDA. See Maura I. Strassberg, An Ethical Rabbit

Hole: Model Rule 4.4, Intentional Interference with Former Employee Non-Disclosure Agreements

and the Threat of Disqualification, Part II, 90 NEB. L. REV. 141, 182–83 (2011) (examining the

issue of attorney disqualification in instances where counsel participates in the breach of a

confidentiality agreement).

94. See, e.g., Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 762–63 (Iowa 1999)

(considering whether the NDA was “reasonably necessary for the protection of the employer’s

business” or “unreasonably restrictive of the employee’s rights”).

95. See, e.g., Thiesing v. Detsply Int’l, Inc., 748 F. Supp. 2d 932, 951–52 (E.D. Wisc. 2010)

(modifying the terms and definition of confidential information included in employee restrictive

covenants to make the noncompete enforceable).

22 VANDERBILT LAW REVIEW [Vol. 68:1:1

reasonableness test,

96

albeit with less concern on limiting the scope of

the restriction.

97

Nonetheless, NDAs are a useful contractual safeguard (much

like CNCs) for an employer’s confidential information, ostensibly

supplementing noncontractual safeguards like existing state-level

trade-secret protections and fiduciary duties to maintain

confidentiality. In one sense, NDAs are useful from a human capital

investment perspective because, like CNCs, they can encourage

information sharing between principals and their agents.

98

These

agreements also need not have a stated time limit to be enforced in

96. See, e.g., Revere, 595 N.W.2d at 761–63. In Revere, the Iowa Supreme Court examined a

confidentiality clause in an employment agreement as an issue of first impression and

consequently reviewed other states’ approaches on the issue of NDAs. Id. at 761. The court

concluded that:

[T]he following test should be applied in determining whether a nondisclosure-

confidential or invention assignment agreement is enforceable:

(1) Is the restriction prohibiting disclosure reasonably necessary for the protection of

the employer’s business;

(2) is the restriction unreasonably restrictive of the employee’s rights; and

(3) is the restriction prejudicial to the public interest?

Id. at 762.

Further, the court noted that “[t]his test is obviously the same as that used to determine the

enforceability of a noncompete agreement.” Id. Nonetheless, “the absence of restrictions

concerning time or geographic location do not render a nondisclosure-confidentiality, [sic]

agreement presumptively unenforceable . . . because the inquiry whether the nondisclosure

agreement unreasonably restricts the employee’s rights would address the breadth of the

restrictions regarding disclosure.” Id.

97. See, for example, Coady v. Harpo, Inc., 719 N.E.2d 244, 250–51 (Ill. App. Ct. 1999),

where the court enforced an NDA with an unlimited scope because it did not significantly hinder

the employment activities of a former senior associate producer for the Oprah Winfrey Show. The

court rejected arguments that the NDA was too broad in these circumstances because it “remains

effective for all time and with no geographical boundaries”; the court stated that, “[w]hether for

better or for worse, interest in a celebrity figure and his or her attendant business and personal

ventures somehow seems to continue endlessly, even long after death, and often, as in the

present case, extends over an international domain.” Id. The court further distinguished the

NDA enforcement from other restrictive covenants:

Unlike the traditional line of restrictive covenant cases, the confidentiality agreement

at issue in the instant case does not impose any of the typical restrictions commonly

adjudicated in restrictive covenant cases. Defendant does not seek to restrain

plaintiff’s future career. Plaintiff is free to choose her future occupation, the locale in

which she may choose to work, and the time when she can commence her new career.

Defendant does not object to plaintiff becoming a journalist, competing with defendant

in the same venue and in any locale, including Chicago, and in beginning her new

venture immediately. The confidentiality agreement does not restrict commerce and

does not restrict plaintiff's ability to work in any chosen career field, at any time.

Instead, the 1995 confidentiality agreement restricts plaintiff’s ability to disseminate

confidential information that she obtained or learned while in defendant’s employ.

Id. at 250.

98. See Dworkin & Callahan, supra note 43, at 157 (describing advantages of confidentiality

agreements relative to “non-contractual safeguards”).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 23

many states,

99

but if the clause is not time limited, then some states

will find the confidentiality agreement unenforceable with regard to

information that is not otherwise a protectable trade secret.

100

In

effect, employers use NDAs to attempt to extend an employee’s duty of

confidentiality related to information that would not otherwise be

protected trade secrets. Examples of confidential information that

might not qualify for trade secret protection include the names of a

firm’s customers that are not otherwise publically available, suppliers,

and strategic plans.

101

It is understandable that a firm would want to protect its

competitive advantage by limiting the use of its valuable business

information by a former employee who moves to a competitor. NDAs

are nonetheless subject to criticism. For example, some scholars argue

that NDAs can be antithetical to good public policy when an employer

uses the contract terms as a pretext to silence otherwise valid whistle-

blowing activity.

102

Others have suggested that increased workplace

transparency can be a new source of protection for employees.

103

These

same scholars, by implication, disfavor the secrecy that comes with

NDAs.

Many questions remain about the use and propriety of CNCs

and NDAs: Are these restrictions on otherwise lawful free competition

essential instruments for the protection and encouragement of an

employer’s investment in the human capital of its employees and the

protection of its hard-earned competitive advantage? Or, in contrast,

are these agreements legal cover for an employer’s abusive

overreaching through contracts of adhesion that seriously curtail

employees’ freedom of choice and mobility, as well as harm

competition, innovation, and entrepreneurial activity? If these

restrictive covenants have a place in managing the employment

99. See, e.g., Coady, 719 N.E.2d at 250–51 (recognizing that a confidentiality agreement

scheduled to remain effective indefinitely was reasonable and enforceable).

100. See, e.g., Atl. Bread Co. Int’l v. Lupton-Smith, 663 S.E.2d 743, 748 (2008), aff’d, 679

S.E.2d 722 (2009) (explaining Georgia’s approach to open-ended time limitations in

confidentiality agreements).

101. See, e.g., Coady, 719 N.E.2d at 250:

Postemployment restrictive covenants typically involve agreements by a past

employee not to compete with the business of her former employer, not to solicit

clients or customers of her former employer, and not to disseminate trade secrets of

her former employer. The covenants in these typical cases are carefully scrutinized

because Illinois courts abhor restraints on trade.

102. See Dworkin & Callahan, supra note 43, at 179–86 (discussing the public policy and

practical reasons not to enforce an NDA in certain circumstances).

103. See Cynthia Estlund, Just the Facts: The Case for Workplace Transparency, 63 STAN. L.

REV. 351, 364–66 (2010) (theorizing that mandatory disclosure of terms and conditions of

employment provide additional protection beyond that of traditional employment contracts).

24 VANDERBILT LAW REVIEW [Vol. 68:1:1

relationship, human capital investment, and business knowledge

diffusion, should only certain types of key employees be allowed to

bargain away their future freedom of mobility? When these

restrictions are present, what do they tell us about a firm’s valuable

information and fear of competition?

Since employment contracts are not generally publicly

available, researchers have been unable to examine these issues

empirically. Taking advantage of the public availability of CEO

employment contracts filed with the Securities and Exchange

Commission, we turn next to an empirical analysis of their contents to

inform the debate.

III. DATA COLLECTION, DESCRIPTION, AND METHODOLOGY

To create our sample, we began by randomly selecting a sample

of 500 S&P 1500 public corporations. These companies are subject to

the federal securities laws’ periodic disclosure requirements and are

required to disclose any employment contracts that they have entered

into with their CEOs.

104

As shown in Table 1 below, our initial sample

of 500 firms had 2,109 potential CEO contracts over the time period

running from January 1, 1996 to December 31, 2010.

105

By potential

CEO contracts, we mean that the sample companies had named CEOs

in their disclosures that could have had, and in most cases did have,

written employment contracts with their employers.

Each named CEO is counted as having at least one potential

contract with the firm. There are more potential contracts than firms

because over this fifteen-year period some firms had several CEOs and

each CEO may or may not have had a contract with the firm.

106

Furthermore, for CEOs that had contracts, some had an initial

contract with their firm (“Initial Contract”), subsequently entered into

a second contract amending the Initial Contract (“Contract

Amendment”), and then later entered into a further contract that

restated (and sometimes made additional amendments to) the terms

of their Initial Contract (“Restated Contract”). Our initial sample

counts each of these as a separate contract.

104. Randall Thomas, Erin O’Hara & Kenneth Martin, Arbitration Clauses in CEO

Employment Contracts: An Empirical and Theoretical Analysis, 63 VAND. L. REV. 959, 977

(2010).

105. We use the SEC’s EDGAR database for corporate disclosures as our basic source for all

of these contracts. Beginning January 1, 1996, all registered U.S. corporations have been

required to make electronic disclosures using the EDGAR database.

106. In a small number of cases, firms changed names during the sample period, but we

continued to treat these successor firms as the original firms.

26 VANDERBILT LAW REVIEW [Vol. 68:1:1

study explicit contracts because these observable agreements are the

only ones that we can code. By their nature, these written agreements

provide evidence of the negotiations between the firms and CEOs that

we are studying. In theory, we could treat the implicit contracts in the

sample as lacking a CNC or any other restriction.

110

However, the

reasons that the parties did not memorialize the contract in writing

are potentially so varied that relating that choice to some cognizable

statement about the CEO’s freedom to engage in postemployment

competition seems unsupportable in the absence of other evidence.

111

We also chose to eliminate the Contract Amendments from the

sample. These documents are amendments to an existing employment

contract and do not restate the prior contract. They, almost

universally, are very short documents that contain relatively minor

changes to an existing contract, such as changing the specified base

salary of the CEO. There were no Contract Amendments in our

sample that affected the presence or absence of a CNC clause, so we

decided that they did not add any pertinent information to our

study.

112

Next, we excluded from our sample all those contracts that

companies stated they had entered into but that we could not find

attached to any of the companies’ securities filings.

113

Where

companies disclosed the existence of a contract, we searched every

filing within a two-year period after the date of the contract for

contracts entered into after the effective date for mandatory EDGAR

filings (January 1, 1996). Thus, we believe that most of the 75 cases

where we did not find a contract are likely the result of the company

failing to file the contract as required by law.

114

In any event, the

1636–37. Our more inclusive sample finds that approximately 41% of CEO contracts across our

entire period have explicit usable contracts. Moreover, Gillan, et al. find that approximately 64%

of their explicit contracts had a CNC. Id. at 1639. This rate is lower than the rates that we report

in Table 2. See infra Table 2.

110. Moreover, the absence of any evidence of a written employment agreement for a term is

not necessarily dispositive of the absence of a noncompete. See, e.g., Tracy L. Staidl, The

Enforceability of Noncompetition Agreements when Employment Is At-Will: Reformulating the

Analysis, 2 EMP. RTS. & EMP. POL’Y J. 95, 101–08 (1998) (explaining the requirement of adequate

consideration to support a CNC in many states).

111. We intend to analyze the reasons why some companies use explicit contracts while

others prefer implicit contracts in later work.

112. This approach is consistent with two of the authors’ prior work. See Thomas, O’Hara, &

Martin, supra note 104, at 978.

113. For future researchers’ interest, we note that companies are not required to attach

these contracts to any particular filing. Therefore, finding them can be a time-consuming and

difficult process. Most companies disclosed them as attachments to their Forms 10-K, but we also

routinely found them as exhibits to a host of other securities filings.

114. To address this problem, the SEC should clarify its disclosure rules on this issue to

specify where companies attach these contracts. Logically, they should be attached as an exhibit

to the companies’ Form 10-K filings.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 27

difficulty in finding these contracts seems a likely explanation for why

few researchers have previously mined these sorts of documents for

clues about the contractual relationships between executives and their

employers.

Finally, in thirteen instances we were unable to locate the

named company in the Compustat database, which we used to supply

several important pieces of information about the sample companies.

Accordingly, we excluded those contracts. This left us with a sample of

874 Initial Contracts and Restated Contracts for our analysis.

We next hand coded each of the contracts.

115

We first identified

the contracting parties and other aspects of the general employment

contract, such as the contract’s date of execution and its length. Next,

we coded the agreements for the terms related to prohibitions on

competition during and after employment. We also coded provisions

relating to nonsolicitation of employees and clients, as well as all

nondisclosure provisions. These are discussed further in Part IV

below.

IV. EMPIRICAL ANALYSIS

Our empirical analysis started with a description of the

contracts and the other variables that we compiled for our sample.

Table 2 shows the year that each CEO contract was entered into for

the 874 contracts. The table shows the total number of sample

contracts per year, the number of initial versus restated contracts, and

the number and percentage of contracts per year that contain CNC

clauses.

116

115. The full coding manual we developed as a framework for this research is on file with

the authors.

116. For a unique glimpse of the use of otherwise private contracts of a range of employees

at a major public company, the discovery record of executive CNC disputes sheds light on IBM’s

“Noncompetition Program.” See Int’l Bus. Machs. Corp. v. Visentin, No. 11 Civ. 399 (LAP), 2011

U.S. Dist. LEXIS 15342, at *4–5 (S.D.N.Y. Feb. 16, 2011), aff’d, 437 Fed. App’x 53 (2d Cir. 2011).

Pretrial transcripts reveal the size and scope of CNCs and recoupment provisions common at

that prominent company:

IBM requires over 1700 employees to sign noncompetition agreements. More than 300

IBM employees are required to sign a form noncompetition agreement identical to the

one signed by Defendant. IBM did not negotiate the terms of these agreements, and

historically the agreements were not modified. IBM's noncompetition program works

in tandem with a “clawback” mechanism. If an employee violates the noncompetition

agreement, IBM can choose to invoke the clawback mechanism and cancel all of that

employee’s unvested and unexercised equity grants. IBM can also require employees

to repay IBM for the equity options the employee has exercised and redeemed within

the last two years.

Id. (citations omitted).

30 VANDERBILT LAW REVIEW [Vol. 68:1:1

competitor and soliciting other managers in violation of his

multilayered restrictive covenants.

123

The court record reveals that the

firm paid a large signing bonus of $100,000 in consideration of the

agreements and that Estee Lauder asks all its employees to sign

similar restrictions.

124

These records show that “the evidence

demonstrates that restrictive covenants are common in the prestige

cosmetics industry.”

125

In this case, the court found that a twelve-

month noncompete was reasonable and that “the risk of Batra’s loss of

livelihood [was] entirely mitigated by the fact that Estee Lauder

[would] continue to pay Batra his salary of $375,000 per year for the

duration of the ‘sitting out’ period” and because he was also permitted

to receive compensation from noncompeting employment during that

period.

126

We begin by examining whether a prior CEO’s contract with

the company, or the current CEO’s prior contract, included a CNC

clause and how that relates to the inclusion of a CNC clause in a later

contract. We undertake this analysis to determine all of the factors

that may influence the company’s decision to include a noncompete

clause in a subsequent CEO employment contract. One important

reason may be path dependence: that is, that the company has

included a CNC clause in prior CEO or other executive contracts

127

—

or even all employees’ contracts

128

—and therefore, the company

subsequently includes such a clause in the new agreement.

129

123. Id. at 162–65.

124. Id. at 162. In explaining the facts of the case, the court summed up the underlying

compensation in support of the employee’s contract terms:

At the commencement of his employment, Batra [the senior executive] signed an

employment agreement with Estee Lauder, which contained confidentiality, non-

solicitation, non-competition provisions. In return for signing the agreement (which

all Estee Lauder employees are required to sign) Batra received a $100,000 signing

bonus. In addition, Batra was provided with a compensation package of $300,000 per

year, benefits, an automobile allowance, stock options, and bonus eligibility. On July

1, 2004, Batra's base salary was increased to $325,000. In July, 2005, in conjunction

with his new responsibilities for [a subsidiary], Estee Lauder increased Batra's base

salary to $375,000.

Id. (emphasis added) (citations to transcripts omitted).

125. Id. at 182.

126. Id.

127. For example, some companies have a blanket policy that all senior managers or high-

level executives must agree to restrictive covenants. See, e.g., Int’l Bus. Machs. Corp. v. Visentin,

No. 11 Civ. 399 (LAP), 2011 U.S. Dist. LEXIS 15342, at *5 (S.D.N.Y. Feb. 16, 2011), aff’d, 437

Fed. App’x 53 (2d Cir. 2011) (describing IBM’s noncompetition program).

128. In one reported example, a large international firm asks all of its employees—even

when the employee is based in California—to sign a restrictive covenant. Batra, 430 F. Supp. 2d

at 162.

129. As an example of why this would happen, one can imagine that if the company’s

counsel drafts the initial version of the new contract, he or she would simply mark up the prior

32 VANDERBILT LAW REVIEW [Vol. 68:1:1

hypothesis that the presence of a CNC in an earlier contract will lead

to a CNC showing up in a subsequent contract at the same firm.

We next considered whether a contract’s term is a significant

predictor of a CNC.

133

We hypothesized that contracts binding the

parties for a longer period of time are more likely to include CNC

clauses. Our reasoning is that the longer the CEO is expected to be

with the firm, the more valuable knowledge that he or she will have

acquired. This knowledge would be potentially harmful to the

employer if the CEO were to go to work for a competing firm, hence

the need for greater protection in the form of a CNC clause.

Table 5 breaks out the distribution of the length of the CEO

contracts separately for the full sample of contracts and then for the

subsample of contracts that contain a CNC clause. We include rows for

contracts where the contract length is not mentioned or the

relationship is at will, or is for an indefinite period (142 contracts);

134

the contract expires when the CEO is terminated (59 contracts); the

contract’s length is tied to the CEO reaching retirement age or retiring

(6 contracts); or where the contract states it is for a definite term but

the length is actually unspecified (1 contract). We then grouped

contracts with stated terms by their lengths in years. We selected year

intervals to create a manageable number of rows.

chi-square test statistic is smaller than a critical level, say .10, then we reject the null hypothesis

of independence between the classifications at that level of significance. WILLIAM MENDENHALL

& JAMES E. REINMUTH, STATISTICS FOR MANAGEMENT AND ECONOMICS 471–85 (2d ed. 1974).

133. We recognize that the interpretation of contract length can be uncertain because

contracts that are for even a lengthy term may be accompanied by liberal termination provisions

elsewhere in the employment contract that give an employer wide discretion to end the

employment at nearly any moment. See, e.g., Schwab & Thomas, supra note 19, at 246–48. On

the other hand, contracts with no term or a relatively short term can still continue indefinitely in

the sense that the parties are free to continue the employment relationship going forward. It is

also the case that CEO contracts of any length are often renewed multiple times. Nonetheless, in

the context of CEOs, the stated length of a contract is still credible evidence of the parties’ intent

at the conclusion of negotiations. We, therefore, use the stated length of the contract—or a lack

of a stated term—as a useful variable to understand what the parties value and are willing to

accept with regard to the CEO’s expected tenure at the firm.

134. In each of these cases, the contract has an effective length of zero so we group them

together.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 35

Rather than just focusing on one state’s lack of enforceability of

CNC clauses, we also used a broader measure, an “enforceability

index,” developed by one of the authors.

140

The index weights various

factors that impact how strictly an individual state will enforce a CNC

clause in an employment contract.

141

In untabulated results,

142

we

found that the mean of the enforceability index for the subsamples of

contracts with CNC clauses is 307.6 (median = 350), while the

contracts without CNC clauses have a mean enforceability value of

241.9 (median = 310). The t-statistic for the difference in means is

5.70, which is highly significant (at less than the .0001 level).

However, the test for a difference in the medians is not statistically

significant. In sum, these statistics provide some, but not definitive,

evidence that the level of enforceability is an important factor in the

presence of a CNC clause in a CEO’s employment contract.

B. How Long Do These Competitive Restrictions Last and What Do

They Say?

We turn next to the question of how long CNCs and the other

competitive restrictions last and what their provisions say. To better

understand how these clauses are constructed and what they tell us,

we categorized the scope of CNCs and other restrictive covenants,

such as nondisclosure agreements in employment contracts, in two

broad ways. First, we grouped these restrictions by the

postemployment activities they prohibit, such as working for a

competitor or soliciting coworkers to also leave the firm. Second, we

collected information on how the contracts define these prohibitions,

such as the length of the restriction on competition and the geographic

area concerned. In addition, we gathered data on what events or

activities trigger the firm’s right to enforce the restriction, and what

enforcement mechanisms and penalties the firms negotiated into the

contract.

Table 7 presents data on the length of the CNC restrictions in

the contracts. The main problem with these data is that, while many

contracts are not triggered by a specified reason for termination, a

significant number of contracts have different provisions for different

types of terminations, such as a termination by the firm for cause or

140. For a detailed description of this state-by-state enforcement index, see Bishara, supra

note 60, at 772–79.

141. We determined the enforcement index for each CEO contract by that contract’s state

choice-of-law variable. If the contract was missing such a clause, then we used the contract’s

choice-of-forum clause. If that was also missing, then we used the company’s primary location.

142. For further information about untabulated results, please contact the authors.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 37

More broadly, CNCs prohibit working for a competitor. In 89% of

the agreements with CNCs, the CNCs forbid the CEO from working for

either broad types of competing firms, specific firms, or just

“competitors.” Perhaps because many CEOs are close to the end of their

careers and may want to use their expertise after their roles end, 54%

of contracts specifically prohibit entering a consulting agreement with a

competitor, even though consulting may already be covered by the

general prohibitions on working for a competitor. Typically, when a trial

court is asked to enforce a noncompete clause, a broad prohibition on

“competition” concerning a protectable interest is not unreasonable per

se.

144

Rather, the court determines whether the terms of the restriction

are narrowly tailored to serve the employer’s legitimate protectable

business interest and, on balance, whether enforcing the restriction is

impermissibly harmful to the employee or injurious to the public.

145

Noncompete clauses have evolved to prohibit specific actions in

addition to the broad, general restrictions against all forms of

competition. Noncompetes are generally assumed to prohibit

“poaching” a firm’s employees and clients.

146

The harm from

poaching

147

arises in several ways. The primary fear is that when the

CEO leaves, he or she will skim the top talent from the firm. In that

case, the former CEO might hire away the most valuable employees

and effectively transfer that human capital and valuable knowledge to

a competitor.

148

Even where that competitor is a startup, the valuable

employees give the new company an impressive edge in attaining a

competitive advantage.

149

In the case of a prohibition on the

144. See, e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999) (holding that a

restrictive employment covenant is subject to scrutiny, but not unreasonable per se).

145. Id.

146. In addition to the contractually agreed-upon restrictions on otherwise lawful

competition contained in a CNC, it is common for an aggrieved employer to assert tortious

interference with contractual relations against a competitor or former employee involved in the

recruiting of the firm’s employees who are under employment contracts, NDAs, or CNCs of their

own. See, e.g., MCS Servs., Inc. v. Jones, No. WMN–10–1042, 2010 WL 3895380, at *5 (D. Md.

Oct. 1, 2010). The Jones court identified the five elements a plaintiff must demonstrate to

support a claim for tortious interference with contract: (1) the existence of a contract between the

first employer and the employee; (2) the new employer’s knowledge of that contract; (3) the new

employer’s “intentional interference with that contract”; (4) the employee’s breach of that

contract; and (5) damages accruing to the former employer. Id. In addition, “the contract

breached must be valid and the interference must have been wrongful and without ju stification.”

Id. (citations omitted). See also Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751, 764–66

(Iowa 1999) (approving a claim for tortious interference with an employment agreement

containing various restrictive covenants).

147. Soliciting the business and services of former coworkers and clients is disparagingly

known as “poaching.” See Kim, supra note 13, at 2.

148. Id.

149. See, e.g., Bishara & Westermann-Behaylo, supra note 41, at 2, 8.

38 VANDERBILT LAW REVIEW [Vol. 68:1:1

solicitation of a firm’s customers or clients, the protected interest is

even clearer: customers and clients are revenue sources, and those

relationships, often cultivated at great expense over many years, can

serve as a source of competitive advantage.

150

Accordingly, to explore the use of these specific CNC terms, we

coded a subset of restrictions related to the solicitation of current

employees to leave the firm and the solicitation of clients and

customers.

151

Our results support assumptions about the widespread

use of these two prohibitions on soliciting other employees and

customers. We found, in untabulated results, that 75.6% of CNCs

prohibit soliciting employees. Some clauses specified exceptions, such

as permission for the CEOs to hire away their personal assistants.

152

Even though customer and client solicitation seemingly has a

more direct potential impact on a firm’s finances, in untabulated

results, we found that only 50.8% of CNCs prohibit it.

153

This

discrepancy seems to indicate that the estimated harm to the business

from a departing CEO subsequently hiring away other valuable

employees is greater than the prospect of a former CEO luring away

customers and clients.

For either type of nonsolicitation clause to be enforceable, the

contract must limit its scope to a reasonable length of time.

154

Some

states’ noncompete statutes explicitly provide ranges of reasonable

lengths for specific professions.

155

Courts reviewing CNCs apply the

traditional reasonableness test on a case-by-case basis, giving a court

the discretion to decide the reasonable scope of each restriction.

156

150. See generally Sharon F. Matusik & Charles W.L. Hill, The Utilization of Contingent

Work, Knowledge Creation, and Competitive Advantage, 23 ACAD. MGMT. REV. 680, 691–95 (1998)

(concerning human resources management as a source of competitive advantage).

151. For a recent discussion of the boundaries of solicitation of former clients and customers

by a departing employee or the new employer, see Bessemer Trust Co. v. Branin, 949 N.E.2d 462,

469–71 (2011).

152. In the remaining 24.5% of the contracts with a CNC clause, there is no nonsolicitation

clause related to approaching or hiring other employees.

153. In the remaining 49.2% of contracts with CNC clauses, there is no nonsolicitation

clause related to soliciting customers or clients.

154. See Johnson, supra note 14 and accompanying text.

155. For example, the State of Tennessee has a detailed framework of noncompete

legislation that specifically discusses restrictive covenants for physicians and limits the

restriction to a period of two years. TENN. CODE ANN. § 63-6-204 (2014); id. §§ 63-1-148, 63-6-603,

68-11-205 (2012).

156. See, for example, EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 312 (S.D.N.Y. 1999),

an oft-cited case representing an early application of the traditional reasonableness test to the

restrictive covenants in the digital world in which the court considered how some high-tech

knowledge will quickly become obsolete, and thus, the reasonableness of any restriction to

protect such information will be judged in that context.

40 VANDERBILT LAW REVIEW [Vol. 68:1:1

comply with the underlying noncompete enforcement principles

applied to these contracts.

Table 9 provides data on the geographic scope of CNCs. Over

40% of these clauses are silent about their geographic scope;

presumably, the parties to these contracts rely on preexisting

common-law rules to set geographic limits. Generally speaking, courts

will uphold geographic limitations if they are “reasonable” in scope.

160

Additionally, in some circumstances, courts will uphold CNCs even

when the geographic scope is worldwide.

161

Table 9 shows that if a CNC provides a geographic scope, that

scope most frequently comprises any locations where the employer

operates (38.3% of contracts). Most courts will uphold CNCs that are

limited to areas where the employer operates so long as they are also

reasonable in time.

162

The remaining categories are much broader:

about 10% of covenants cover the entire United States, another 5.3%

purport to bar the employee from working anywhere in the world, and

the remaining 4.3% are limited to an area smaller than the entire

United States, but broader than the employer’s places of business.

While courts have previously enforced relatively short global

competition prohibitions,

163

very broad geographic prohibitions that do

not legitimately protect employer interests can be overly burdensome

to employees without protecting legitimate employer interests.

164

nature of [the] industry, its lack of geographical borders, and [the departing employee’s] former

cutting-edge position”).

160. See, e.g., Coady v. Harpo, Inc., 719 N.E.2d 244, 250 (Ill. App. Ct. 1999) (addressing the

reasonableness requirement for restrictive covenant enforcement).

161. See id.

162. See Susanna K. Gibbons, Non-Compete Covenant Held Enforceable Despite Broad

Geographic Scope, NAT’L L. REV. (Aug. 18, 2009), http://www.natlawreview.com/article/non-

compete-covenant-held-enforceable-despite-broad-geographic-scop, archived at http://perma.cc/

8GX8-D42U (discussing a court decision upholding a covenant not to compete because its six-

month period was “relatively short”).

163. See Court Upholds Covenant Not to Compete, FINDLAW (Mar. 26, 2008),

http://corporate.findlaw.com/business-operations/court-upholds-covenant-not-to-compete.html,

archived at http://perma.cc/577Y-XXNX (discussing court decision upholding noncompete

covenant effective for six months).

164. See, e.g., Schlack, 71 F. Supp. 2d at 313 (noting that an employer’s “wish[ ] to insulate

himself from competition” should not overcome the “public policy which militate[s] against

sanctioning” job loss); see also Wayne S. Moskowitz, Enforceable Covenants Not to Compete,

FINDLAW (Mar. 26, 2008), http://corporate.findlaw.com/business-operations/enforceable-

covenants-not-to-compete.html, archived at http://perma.cc/HL8J-TVWA (noting that, in

determining enforceability of noncompete covenants, courts consider “whether the covenant is

too broad and [thus] unduly burdensome” on an employee).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 43

Next, we looked in greater depth at the specific restrictions in

the NDAs for more evidence of what firms value in terms of the

information they seek to withhold from outsiders. As expected, these

agreements cover a variety of topics, with the choice of what to include

likely related to the type of industry and what information the

employer specifically considers valuable.

170

As with the NDA length variable, we found, in untabulated

results, that the majority of firms will seek the broadest possible

restrictions. This goal is evidenced by the 80% of NDAs that attempt

to expansively cover “all confidential information” available to the

CEO. The NDAs also often cover trade secrets and formulas (54.9% in

this sample), which presumably would already qualify for protection

under most jurisdictions’ trade secret laws. The inclusion of this

somewhat redundant protection could be seen as proof that the firm

highly values both the information and an employee’s

acknowledgment that such information is protected. Nonetheless, the

term is not so prevalent as to necessarily be a potentially meaningless

boilerplate term.

Additionally, specific categories of prohibited disclosures that

appear regularly in the agreements are customer lists (37.2% of

agreements); proprietary processes, including confidential production

methods and business plans (54.6% of agreements); marketing plans

and strategies (43.5% of agreements); and inventions (17.9% of

agreements).

171

As with the redundant protection for trade secrets,

these terms appear often, but not so often as to indicate that they are

merely pro forma boilerplate that the CEOs blindly accept. Rather, the

inclusion of these terms is likely driven by the nature of the valuable

information that adds to the firm’s competitive advantage. Thus, the

terms provide evidence of what the firm values enough to bargain for

in the contract and the postemployment advantage a CEO is willing to

give up in exchange for his or her privilege and lucrative leadership

role.

In Table 11, we present data on the triggers contained in CNC

clauses. We see that, far and away, the most common trigger is any

termination by either party (56.8% of all contracts with CNCs). This is

obviously very broad and will mean that, irrespective of the reason the

170. See, e.g., Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 424–25 (3d Cir. 2010)

(discussing two-year, multi-layered, post-employment contractual restrictions related to the

pyrotechnic industry).

171. There were a wide variety of other restrictions of a miscellaneous nature in 63.2% of

the contracts.

46 VANDERBILT LAW REVIEW [Vol. 68:1:1

However, the most important remedy from the company’s

perspective is its ability to get an injunction to stop the alleged violation

of the CNC.

175

Here we found that almost 80% of the sample contracts

expressly provide that the company can seek such an injunction.

176

Including a provision for equitable relief is both logical and potentially

curious. This is because seeking an injunction prohibiting the former

employee’s competitive actions, as agreed upon in the contract, is the

normal initial default remedy for a breach and is a means of stopping

any irreparable harm from the departing employee.

177

In other words,

the employer can always seek an injunction without the prior

contractual consent. Essentially, the plaintiff-employer will argue that

equitable relief is needed to stop the competitive harm because eventual

money damages upon a full adjudication of the case will be

inadequate.

178

Nonetheless, the explicit provisions are likely included as

a means of evidencing the employee’s acknowledgment that an

injunction is an appropriate remedy for a breach because of the

difficulty in calculating the damage caused by the competition.

179

In Table 13, we bring together some of the results of the

previous tables to determine how often companies impose multiple

restrictions on their CEOs. For each CEO, we count whether he or she

has a CNC clause, a nonsolicitation clause relating to customers or

clients, a nonsolicitation clause relating to employees, and an NDA. For

example, a CEO that has all four in his or her contract would be

counted as having four restrictions.

175. For a recent case discussing the movant’s burden to support a preliminary injunction in

a noncompete litigation, see Hyde v. KLS Prof’l Advisors Grp., LLC, 500 Fed. App’x 24, 26 (2d

Cir. 2012) (vacating a district court’s entry of a preliminary injunction).

176. Seeking a preliminary injunction remains the preferred method for halting an alleged

irreparable harm in violation of a CNC. See, e.g., Synergy Advanced Pharms., Inc. v. Capebio,

LLC, No. 10 Civ. 1736(SAS), 2010 U.S. Dist. LEXIS 53252, at *18 (S.D.N.Y. June 1, 2010)

(declining ultimately to issue an injunction after the CNC time period has expired, despite

finding prior violations of the agreement).

177. See, e.g., Quaker Chem. Corp. v. Varga, 509 F. Supp. 2d 469, 478–79 (E.D. Pa. 2007).

The court issued an injunction to enforce a noncompete covenant, noting that it is an

acknowledged “extraordinary remedy.” Id. at 478, 484. In doing so, the court restated the four

preliminary factors that must be balanced:

(1) whether the movant has shown a reasonable probability of success on the merits;

(2) whether the movant will be irreparably injured by denial of the relief; (3) whether

granting preliminary relief will result in even greater harm to the nonmoving party;

and (4) whether granting the preliminary relief will be in the public interest.

Id. at 477.

178. See id. at 478–79.

179. See id.

48 VANDERBILT LAW REVIEW [Vol. 68:1:1

V. SUMMARY OF FINDINGS AND POLICY IMPLICATIONS

To briefly summarize, our main findings are as follows: In 80%

of CEO employment contracts from 1996-2010, we found CNCs. These

restrictive covenants commonly last one to two years. For CEOs with

CNCs, 89% are forbidden from working for a competitor during the

term of the CNC, while 25% of contracts prohibit CEOs from financing

competitors. These covenants often have a broad geographic scope.

NSAs routinely appear in CEO contracts with 75.6% of these

contracts barring solicitation of the firm’s employees and 50.8%

proscribing solicitation of customers or clients, each for a period of one

to two years. We discover that NDAs are quite common as well: 87.1%

of all contracts stop CEOs from disclosing confidential information. It

is also common for NDAs to include a host of other more detailed

prohibitions, often for an indefinite period of time.

Furthermore, more than half of all restrictive covenants are

triggered by any departure of the CEO from the firm, whether

voluntary or involuntary. If triggered, 79.5% of the contracts give

companies the express right to seek injunctions to enforce these

provisions. Finally, we found strong evidence that more and more

restrictive covenants are appearing in these contracts over time, so

that, today, over 70% contain three or four such covenants.

We also empirically examined factors that predict when CEOs

are likely to have CNC provisions or other restrictive covenants, such

as NDAs, in their contracts. Our findings show that CEOs are less

likely to have CNCs in their employment contracts if the contracts are

being enforced in jurisdictions that do not permit strong CNC clauses.

For example, contracts that are likely to be enforced in California,

because a firm is headquartered there, are much less likely to include

noncompete clauses, as California state courts will not enforce the

provisions.

182

While this is consistent with our expectations, it is

comforting to know that companies and their lawyers pay attention to

legal doctrine.

Further, we find a statistically significant trend toward more

noncompete clauses in CEO employment contracts over time. In part,

this may reflect many jurisdictions’ increased tendency to enforce

182. Nonetheless, there are a significant number (about 65%) of California firms that still

have CNCs in their CEO contracts when it is highly likely that both parties realize these clauses

are not enforceable. The reasons why unenforceable terms may persist in these contracts are

beyond the scope of this Article. However, possible explanations are that these clauses are

costless to include in this context, and, therefore, the firms’ lawyers include CNCs in case

California law changes in the future or perhaps because having a CNC might be seen as a signal

to other stakeholders, such as shareholders.

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 49

these provisions.

183

However, it also suggests that employers are more

aware than ever of the importance of using CNC clauses to protect

against the loss of firm-specific investments and knowledge, thus

lending some support to a rationalist, law-and-economics justification

for CNCs—at least in the context of executives with relatively strong

bargaining power.

Our study is also the first to provide reliable evidence to

confirm widely held assumptions in the academic literature

184

and

from practitioners

185

that noncompetes are being used more often in

recent years. Unlike previous empirical papers that used the mere

possibility of CNC enforceability regardless of the likelihood of

enforcement, which is an imprecise variable, we demonstrate that this

trend exists with evidence tied to the actual presence of these clauses

in employee contracts.

Next, we demonstrate strong path dependence in the use of

CNC clauses. Our results show that when companies use a

noncompete clause in a CEO employment contract, they are much

more likely to insist on including a noncompete in subsequent CEO

employment contracts. Notably, this effect has not been picked up in

any of the earlier literature on CNC clauses. In addition, this finding

sheds light on the contract negotiation process between firms, who are

the repeat players in these negotiations, and their top employees.

Fourth, our analysis shows that longer-term CEO contracts are

more likely to have CNC clauses than short-term CEO contracts. This

is likely because the companies have more firm-specific investments in

CEOs that stay for longer periods. This finding also fits with some

researchers’ predictions when discussing noncompetes in the context

of human capital investments.

186

There are some potential policy implications to be drawn from

what we have learned. First, this information may be useful to

informing the debate over CEO dominance and executive

compensation because it provides additional evidence that CEOs are

183. See generally Bishara, supra note 60, at 780.

184. See Lester, supra note 5, at 49; Moffat, supra note 5, at 876; Stone, supra note 5, at

577; Whitmore, supra note 5 and accompanying text.

185. See, e.g., Steven Greenhouse, Noncompete Clauses Increasingly Pop Up in Array of

Jobs, N.Y. TIMES, June 9, 2014, at B1 (citing one practitioner who sees an increase in

noncompete litigation and noted that “[c]ompanies are spending money, hiring lawyers, to go

after people—just to put the fear of death in them”); see also Lublin, supra note 18 (discussing a

Beck Reed Riden LLP study, which found that the “number of published U.S. court decisions

involving non-compete agreements has risen 61% since 2002 to 760 last year . . . [and the]

increase largely reflects the increased usage of non-compete arrangements among lower-level

staffers—along with employees’ greater mobility and access to sensitive information”).

186. See, e.g., Rubin & Shedd, supra note 25, at 99.

50 VANDERBILT LAW REVIEW [Vol. 68:1:1

willing to give up a future right of free mobility and because it goes

against claims that CEOs ride roughshod over board decisionmaking

related to CEO contract terms. Second, because our study is focused

on CEOs and not average employees, who may be subject to employer

overreaching and abuse, our findings provide future researchers with

a glimpse into what competitive restrictions firms value enough to pay

for at a premium. Third, our findings on the prevalence of CEO

noncompetes and the connection to profitability may provide certain

stakeholders, such as investors and analysts, with another piece of

information about how firms interact with their single most

influential employees and where the bargaining balance lies between

CEO dominance and board-of-directors influence. Also, future

researchers could use our findings about CEOs as a starting point to

investigate to what extent executive employment terms match or

influence the restrictions on other employees throughout the firm.

Finally, of particular note is our finding that long-term

contracts are more likely to have noncompete clauses than short-term

contracts. This is probably because firms are likely to invest more in

CEOs who they believe will stay for relatively longer periods. This

suggests that a firm that negotiates and enters into a longer-term

employment relationship with a CEO will invest in this individual in

part due to the added protection that a CNC provides for those

investments. Thus, this situation is consistent with a law-and-

economics justification for CNCs to facilitate investment in human

capital that can perhaps lead to more stable executive leadership,

which can also have an influence on firm profitability.

Overall, this evidence, in addition to our findings that CNC

enforceability in a jurisdiction is correlated with the presence of a

CNC, provides more information to state policymakers who are in the

process of reviewing their noncompete enforcement policies. This is

because our research demonstrates that there is value to allowing

CNCs between executives and firms, despite the remaining fairness

concerns with enforcing noncompetes for average employees with less

bargaining power. Specifically, this research tends to support the

recent state laws that treat employees with high-level supervisory or

other management roles as a unique category of employees under

CNC policy.

187

Our findings also support the intuition of the

legislators who are currently proposing statutes that render CNCs

187. This is consistent with, for instance, the Colorado restrictive covenant statute, which

allows noncompete enforcement for executive-level employees, but not other workers. See COLO.

REV. STAT. ANN. § 8-2-113 (West 2012).

2015] EMPIRICAL ANALYSIS OF NONCOMPETES 51

enforceable against executive-level or high-earning employees only,

188

instead of simply imposing a California-like ban on all employee

noncompetes.

VI. CONCLUSION

The heated debate among scholars, legal practitioners, and

policymakers over the impact and proper role, if any, of employee

restrictive covenants is likely to persist for some time. Addressing

these concerns systematically is important because human capital

management is increasingly crucial to securing and maintaining a

competitive advantage in a globalized knowledge economy. Thus,

developing empirical research in the area of restrictive covenants is

key to informing this debate.

Our study is an important step toward understanding the

prevalence and deployment of CNCs, NDAs, and NSAs by employers

over a significant length of time. By closely examining a large set of

highly negotiated employment contracts, we have provided previously

unavailable evidence of how employers are using restrictive covenants

to impede the postemployment mobility of key employees. This

evidence shows that there is an increase in the use and methodical

layering of restrictive covenants for these employees over time and

that the underlying legal rules have an impact on the use of these

agreements. Our findings also illuminate the complex give-and-take

bargaining environment for firms and their most powerful employees,

where curtailing postemployment competition is a high priority for the

employers. The growing prevalence of a portfolio of restrictions for

executives also provides support for arguments that CEOs do not

simply dominate their boards in the realm of employment contracting.

Further, this detailed picture of restrictive covenants in CEO

contracts is a useful contribution to the discussion about how to enable

or curtail employers’ use of restrictive covenants generally. Our study

is a starting point for further research and can serve as a model for

the scope and depth of inquiry required to develop a full

understanding of how these controversial agreements impact other

types of workers throughout individual firms and across the entire

economy.

188. See, e.g., H. 2293, 187th Gen. Ct. (Mass. 2011), available at http://

www.massachusettsnoncompetelaw.com/uploads/file/Noncompete%20Bill%20-%202011%20As%2

0Filed%201-20-2011.pdf, archived at http://perma.cc/C8TN-3XMC.