A recent study by three business and law school professors analyzed a random sample of 1,000 CEO employment contracts for 500 American companies over a seventeen year time span. The study determined how often the contracts included non-competes, whether the use of non-competes has increased over time, whether the use of non-competes is correlated to profitability, what industries are more likely to use the restrictions to protect their information and competitive advantage, and whether the use of non-competes is related to the enforceability of restrictive covenants in the company’s jurisdiction. The findings are interesting for attorney practitioners and may be useful for in-house corporate attorneys.
After analyzing their data, the authors concluded that there was a “statistically significant trend toward more non-compete clauses in CEO contracts over time” and that the data suggest that employers are “more aware than ever of the importance of using [non-compete] clauses to protect against the loss of firm specific investments and knowledge[.]” The finding is apparently the “first reliable evidence to confirm widely held assumptions in the academic and practitioner literature that non-competes are being used more in recent years.” The data also showed that if a company uses a non-compete once in a CEO contract, it was much more likely to include one in subsequent CEO contracts. Over the entire time period, 79% of all CEO contracts reviewed contained a non-compete. The use of non-competes increased in the mid-2000’s, peaking in 2008 when 88.9% of CEO contracts contained them, and dropping back to 78.7% in 2010. The sample pool included contracts from jurisdictions like California where restrictive covenants are generally not enforced. Not surprisingly, according to a multivariate regression analysis, CEOs were less likely to have non-competes in their employment contracts if they were being enforced in jurisdictions that did not permit such restrictions. Interestingly, the study also showed that approximately 65% of California firms did have non-competes in their CEO contracts, despite their unenforceability.
The authors also concluded that long term contracts are more likely to include non-competes than short term contracts, which also makes sense. Finally, there was some correlation between use of non-competes and profitability as more profitable companies were more likely to use them. The working paper is entitled, “When do CEOs Have Covenants Not to Compete in Their Employment Contracts” and the authors are Norman Bishara from the Stephen M. Ross School of Business at the University of Michigan, Kenneth J. Martin from New Mexico State University and Randall S. Thomas from Vanderbilt Law School and the Owen School of Business, Vanderbilt University. The paper is currently under submission for law review publication. It was discussed on November 20, 2012 on the Harvard Law School Forum on Corporate Governance and Financial Regulation and is available on the Social Science Research Network Site.