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Covenants Not To Compete – By The Numbers

In a recently published article, three professors undertook an empirical analysis of noncompetition and other restrictive postemployment covenants in public company Chief Executive Officer contracts.  Norman D. Bishara, Kenneth J. Martin, and Randall S. Thomas, An Empirical Analysis of Noncompetition Clauses and Other Restrictive Postemployment Covenants, 68 Van. L. Rev. 1 (2015).  Readers should be cognizant of California’s inveterate hostility to post-employment non-compete covenants unless they fall within very narrow statutory exceptions.  See California’s Hostility To Non-Compete Agreements Does Not Vitiate Forum Selection Clause, No Surprises Here – California Court Won’t Enforce Non-Compete, TRO Issued Enjoining Breach Of Non-Compete Agreement Clauses, The Point Of An Unenforceable Noncompete May Be Very Sharp Indeed, Covenants Not To Compete – Fourth DCA Considers A New Fine Question (Or Two), and Court Says “No Way” To No-Hire.

The professors looked at a sample of 874 net usable explicit CEO agreements.  In this sample, 162 of the contracts were with firms headquartered in California.  They found that only 62.4% of these contracts included non-compete provisions while 84% of the contracts from firms primarily located outside of California had non-compete clauses.  Regarding this finding, the authors observe “While this is consistent with our expectations, it is comforting to know that companies and their lawyers pay attention to legal doctrine.”  However, I’m surprised to learn that more than one-half of the California headquartered companies included such provisions in their CEO employment agreements – especially in light of Walia v. Aetna, Inc., 93 Cal. App. 4th 1213 (2001) (upholding an award of punitive damages).

As the first in-depth look at the prevalence of non-competes in CEO employment agreements, the professors’ article provides interesting background for practitioners and fodder for future academic debates.

P.S. – The authors were also kind enough to thank me for providing comments on their draft article (see page 1).

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