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By: The Practical Guidance Employee Benefits and Executive Compensation Team
This Market Trends review provides an overview of restrictive covenant obligations contained in executive employment agreements and discusses recent market trends in publicly filed executive employment agreements from 2017 to the first half of 2021.
Specifically, it discusses non-competition clauses and employee non-solicitation and client/customer non-solicitation clauses. Such provisions prohibit executives from taking certain actions that are adverse to their employers’ interests. As indicated below, these have become common features of employment agreements and other compensatory agreements with executives.
The following analysis is based on publicly filed executive employment agreements covered by Market Standards—Employment Agreements, the searchable database from Practical Guidance of publicly filed employment agreements that enables users to search, compare, and analyze over 4,800 employment agreements using approximately 75 detailed deal points to filter search results. For more information on Market Standards, click here.
A traditional non-competition clause in the employment setting prohibits the employee from engaging in activities that would or would be likely to compete with the business activities of the employer. The scope of such provisions is sometimes limited to a designated geographical area and often is stipulated to last during the period of employment and for a specific period after the employment period terminates.
Non-compete Prevalence Data and Trends
Of the 4,860 agreements covered by Market Standards as of September 23, 2021, which date from 2017 to 2021, well over half (2,704) include a covenant not to compete that extends beyond the period of employment. In addition, 499 agreements refer to a separate agreement containing restrictive covenant provisions. If we assume that a majority of those separate agreements also contain non-competes, then we can estimate the total percentage of agreements having some kind of post-employment non-competition provision to be over 60%.
Based on the Market Standards data set, the relative prevalence of non-competes in this data set has not changed dramatically over the last three years, but the rate was somewhat higher in 2017.
Non-compete Drafting and Enforceability
In the United States, the enforceability of non-competes is largely a matter of state law (although increasingly federal anticompetitive measures have impacted non-competes in the context of corporate transactions). Under common law doctrines in many states, public policy concerns have led courts to subject challenged non-competes to balancing tests, weighing the employer’s justification for the restriction or the employer’s protectable interest against restraint-of-trade issues implicated, such as the employee’s ability to earn a living during the restricted period and anticompetitive effects. The protectable interests that states will recognize, the rules of construction that states will apply, and the required elements of a non-compete agreement will vary from one state to the next.
In addition, some states have enacted legislation to regulate the use of restrictive covenants or establish more specific parameters for their enforceability. California’s strong statutory restriction on non-competition clauses largely eliminates their use in the state (subject to certain exceptions, including non-competes entered into in connection with the sale of a business).1 About 30 states have statutes that regulate the practice in some manner. These laws change frequently, so it is important to keep up to date on jurisdictional developments. The table below summarizes legislative activity over the last 12 months.
2021 Bill Text ILL S.B. 672 amends the Illinois Freedom to Work Act to impose greater restrictions on non-competes, including prohibitions on non-competes and non-solicitation clauses with employees earning under applicable threshold amounts.
2021 Or. S.B. 169 amends the Oregon non-compete law
to change the voidability, duration, and minimum salary
2021 Nev. AB 47 amends certain provisions of the Nevada
non-compete statute affecting covered employees and employer
penalties among other things.
2021 S.D. HB 1154 prohibits non-compete agreements with
certain healthcare providers.
2019 D.C. B 494 generally prohibits employers from requiring or
requesting that D.C. employees execute a non-compete.
La. Rev. Stat. Ann. § 23:921 amends the Louisiana non-compete
law to include partners, shareholders, and LLC members as
individuals who may be subject to a non-compete agreement.
In general, broadly drafted non-competes place a heavier burden on the employer to justify the restrictions when attempting to enforce a non-compete, and narrowly tailored clauses reduce the risk that a court will strike down or modify the covenant. Among the general considerations for structuring a non-compete, you should consider:
For analyzing the reasonableness of a non-competition restriction, the duration and geographic scope are often among the most important factors. The 2,672 employment agreements covered by Market Standards as of September 23, 2021, that contain a non-compete having a post-employment restricted period indicate that the most common duration is 12 months (~62%). The second most common duration is 24 months (~23%). Based on the Market Standards data set, the duration of non-compete post-employment restricted periods appears to have remained remarkably steady over the past four years.
You can also find data about geographic scope of non-competes in Market Standards. Of the database’s 2,704 agreements containing non-compete language, 851 (~31.5%) indicate a specific jurisdiction, area, or region; 1,033 (~38%) indicate coverage in areas where the employer does business; and 890 (~33%) indicate a worldwide scope or have no geographic limitation.
Following are several recent examples of non-compete clauses from publicly filed executive employment agreements found using Market Standards:
Travel + Leisure Co.; Wyndham Destinations, Inc(CFO)
Section VII.B.a. During the Restricted Period, the Executive will not make any statements or perform any acts intended to advance or which reasonably could have the effect ofadvancing the interest of any competitors of the Company or any of its affiliates or in any way injuring or intending to injure the interests of the Company or any of its affiliates. Duringthe Restricted Period, the Executive will not, without the express prior written consent of the Company which may be withheld in the Company’s sole and absolute discretion, engage in,or directly or indirectly (whether for compensation or otherwise), own or hold any proprietary interest in, manage, operate, or control, or join or participate in the ownership, management,operation or control of, or furnish any capital to or be connected in any manner with, any party or business which competes with the business of the Company or any of its affiliates,as such business or businesses may be conducted from time to time, either as a general or limited partner, proprietor, common or preferred shareholder, officer, director, agent,employee, consultant, trustee, affiliate, or otherwise. The Executive acknowledges that the Company’s and its affiliates’ businesses are conducted nationally and internationally andagrees that the provisions in the foregoing sentence will operate throughout the United States and the world.
Charter Communications Inc. (Senior Vice President)
Section 15.b.i. For purposes of this Section 15, the term “Restricted Period” shall mean the period commencing on the Effective Date and terminating on the second annual anniversary(or, in the case of Section 15(b)(iii), the first anniversary) of the Date of Termination; provided, that the “Restricted Period” also shall encompass any period of time from whicheveranniversary date is applicable until and ending on the last date Executive is to be paid any payment; and provided further, that the “Restricted Period” shall be tolled and extended forany period of time during which Executive is found to be in violation of the covenants set forth in this Section 15(b). In consideration of the acknowledgments by Executive, and inconsideration of the compensation and benefits to be paid or provided to Executive by the Company, Executive covenants and agrees that during the Restricted Period, Executive willnot, directly or indirectly, for Executive’s own benefit or for the benefit of any other person or entity other than the Company:
(i) in the United States or any other country or territory where the Company then conducts its business: engage in, operate, finance, control or be employed by a “Competitive Business”(as defined below); serve as an officer or director of a Competitive Business (regardless of where Executive then lives or conducts such activities); perform any work as an employee,consultant (other than as a member of a professional consultancy, law firm, accounting firm or similar professional enterprise that has been retained by the Competitive Businessand where Executive has no direct role in such professional consultancy and maintains the confidentiality of all information acquired by Executive during his employment withthe Company), contractor, or in any other capacity with, a Competitive Business; directly or indirectly invest or own any interest in a Competitive Business (regardless of whereExecutive then lives or conducts such activities); or directly or indirectly provide any services or advice to any business, person or entity who or which is engaged in a CompetitiveBusiness (other than as a member of a professional consultancy, law firm, accounting firm or similar professional enterprise that has been retained by the Competitive Businessand where Executive has no direct role in such professional consultancy and maintains the confidentiality of all information acquired by Executive during his employment withthe Company). A “Competitive Business” is any business, person or entity who or which, anywhere within that part of the United States, or that part of any other country or territory,where the Company conducts business, directly or indirectly through any entity controlling, controlled by or under common control with such business, offers, provides, markets orsells any service or product of a type that is offered or marketed by or competitive with a service or product offered or marketed by the Company at the time Executive’s employmentterminates or is being planned to be offered or marketed by the Company with Executive’s participation, or who or which in any case is preparing or planning to do so. To appropriatelytake account of the highly competitive nature of the Company’s business, the Parties agree that any business engaged in any of the activities set forth on Schedule 1 shall be deemedto be a “Competitive Business.” The provisions of this Section 15 shall not be construed or applied so as to prohibit Executive from owning not more than five percent (5%) of any classof securities that is publicly traded on any national or regional securities exchange, as long as Executive’s investment is passive and Executive does not lend or provide any services oradvice to such business or otherwise violate the terms of this Agreement in connection with such investment
Ceridian HCM, Inc(EVP, GC, CorporateSecretary)
Section 7.02. 7.02 Non-competition. During the terms of this Agreement, Employee will devote full time and energy to furthering Ceridian’s business and will not pursue any otherbusiness activity without Ceridian’s written consent. Unless the obligation is waived or limited by Ceridian in accordance this Section 7.02, Employee agrees that during his orher employment and for a period of time, as defined in Section 8.15, (“Restrictive Period”) following termination of employment with Ceridian for any reason, Employee will not directlyor indirectly, alone or as a partner, officer, director, shareholder or an employee, engage in any commercial activity on behalf of the following specified competitors of Ceridian (and/or their respective affiliates or subsidiaries), having acknowledged that all such entities provide products or services or are otherwise engaged in a competitive business with thebusiness carried out by Ceridian: Workday, Inc., Automatic Data Processing, Inc/ADP, LLC., Ultimate Software Group, Inc., Kronos Incorporated, Paycom Software Inc., SAP SE, OracleCorporation and Paylocity Corporation, in competition with Ceridian’s business as conductedas of the date of such termination of employment, in the United States or Canada. For purposes of this subsection, “shareholder” shall not include beneficial ownership of lessthan five percent (5%) of the combined voting power of all issued and outstanding voting securities of a publicly held corporation whose stock is traded on a major stock exchange.For the avoidance of doubt “Ceridian’s business” as used herein shall include business conducted by any Ceridian Affiliate and any partnership or joint venture in which Ceridian orits Affiliates is a partner or join venture, including in particular the provision of human capital management software and services.
Sharecare OperatingCompany, Inc.;Sharecare, Inc(President)
Section V.H. Executive agrees that while Executive is employed hereunder and for the Non-Compete Period following resignation or termination of Executive’s employment for anyreason, Executive will not participate as an owner, partner, officer, employee, director, or consultant for, any company or business competing with any line of business of the CompanyGroup in the Territory; provided, however, that nothing herein shall prevent Executive from investing as less than a five (5%) percent stockholder in the securities of any company listedon a national securities exchange or quoted on an automated quotation system. 1. The “Non-Compete Period” means the first anniversary of Executive’s termination of employment.2. The “Territory” means any place in the U.S. that the Company Group conducts the relevant competing line of business within the two (2)-year period preceding Executive’s terminationof employment. The obligations contained in this Section V(H) shall survive the termination of the Term of Employment and the termination Executive’s employment with the CompanyGroup and shall be fully enforceable thereafter.
Section 10.a. Noncompete. For a period beginning on the Employment Date and ending on the date you cease to provide services to the Company or any parent or subsidiary of theCompany (excluding services provided pursuant to Section 11 following your termination of employment) or, if later, the date through which severance is payable pursuant to Section7, you agree to not, directly or indirectly, engage in (whether as an employee, consultant, agent, proprietor, principal, partner, stockholder, corporate officer, director or otherwise),nor have any ownership interest in or participate in the financing, operation, management or control of, any person, firm, corporation or business that competes with Company (or anyparent or subsidiary of the Company); provided, however, that you shall not be prohibited from owning, solely as an investment, up to 1% of the stock of a publicly traded corporationor up to 5% of the equity of a non-publicly traded company. You may elect not to comply with the provisions of this Section 10(a) following your termination of employment. However,all continuing payments and benefits to which you would have been entitled pursuant to Section 7 will immediately cease.
There are two main types of non-solicitation provisions:
As was the case for non-competes, state jurisdictions differ in their treatment of employee and client/customer non-solicitation agreements.
Employee non-solicits are generally accepted as a legitimate way for employers to maintain stability in their workforce and, because they do not directly restrict the former employee’s ability to compete or otherwise pursue his or business interests, most courts are more likely to consider them valid and enforceable contractual terms. On the other hand, client/customer non-solicits generally implicate restraint-of-trade concerns and are much more likely to be scrutinized similar to non-competes in many jurisdictions, applying common law balancing tests, examining compliance with applicable statutes, and assessing the reasonableness of the restriction.
So, for example, although California’s Supreme Court has held that client/customer non-solicits violate the statutory prohibition on non-competition provisions, California courts have upheld employee non-solicits. Note, though, that some states, including Illinois, Indiana, Missouri, Oklahoma, and Wisconsin, at least nominally evaluate employee non-solicits similarly to client/customer non-solicits.
Thus, employers generally will want to address the same considerations for non-solicits as they do for non-competes when evaluating their enforceability in light of the applicable jurisdiction, including the justification for the restrictions being used to demonstrate the employer’s legitimate protectable interest in imposing the restriction and the scope of the restriction, including the activities prohibited and the time, geographic, and other limitations of the covenant.
Of the 4,860 Market Standards executive employment agreements analyzed, approximately 64% (3,108) have an employee non-solicit and 51% (2,474) have a client/customer non-solicit that, in each case, extends beyond the period of employment. If we take into consideration the additional 499 agreements that refer to a separate agreement containing restrictive covenant provisions, it is likely that the actual percentages of such arrangements among this data set are considerably higher.
The fact that employee non-solicits are notably more common than client/customer non-solicits is not surprising given the fact that they are more likely to be considered valid contractual obligations in most jurisdictions.
The relative prevalence of non-solicits in this data set has not changed dramatically over the last three years, but the rate for both types of non-solicits was somewhat higher in 2017. That mirrors the trend for non-competition clauses noted above.
As for non-competes, the duration of a non-solicitation period can be an important factor for assessing reasonability and enforceability. Of the 3,108 employment agreements having an employee non-solicit and 2,474 agreements having a client/customer non-solicit covered by Market Standards as of September 23, 2021, the most prevalent post-employment restricted periods for each type are the same as for the non-competes found in the data set (and roughly to the same degree). Here again 12 months is most common (~60%), and 24 months is second-most frequent (~25%). Also similar to the non-compete data discussed earlier, these data do not show a consistent trend over the last four years for either longer or shorter restricted periods for non-solicitation provisions.
Of the 2,474 Market Standards agreements containing client/customer non-solicit language, 185 (~7.5%) impose a geographic limitation naming a specific jurisdiction, area, or region; 222 (~9%) indicate coverage in areas where the employer does business; and 1,542 (~62%) indicate a worldwide scope or have no geographic limitation. In addition, 505 (~20%) agreements limit the restriction to clients/customers with whom the executive worked or about whom the executive had confidential information.
Following are several recent examples of employee and client/customer non-compete clauses from publicly filed executive employment agreements found using Market Standards:
Exhibit A: Section 2. Nonsolicitation of Customers, Clients or Vendors. During the period of Employee’s relationship with the Company and for a period of twelve (12) months aftertermination of such relationship (for any reason), Employee shall not directly or indirectly either for him/herself or for any other person, partnership, legal entity, or enterprise, solicitor transact business, or attempt to solicit or transact business with, any of the individuals or entities actually known to Employee to be the Company’s customers, clients, vendors orpartners, or prospective customers, clients, vendors or partners, in all cases, about which Employee learned Confidential Information (as defined above) or which Employee had someinvolvement or knowledge related to the Business of the Company.Exhibit A: Section 3. Nonsolicitation of Employees and Contractors. During the period of Employee’s relationship with the Company and for a period of twelve (12) months aftertermination of such relationship (for any reason), Employee will not directly or indirectly either for him/herself or for any other person, partnership, legal entity, or enterprise:(i) solicit, in person or through supervision or control of others, an employee, advisor, consultant or contractor of the Company for the purpose of inducing or encouragingthe employee, advisor, consultant or contractor to leave his or her relationship with the Company or to change an existing business relationship with the Company or to change anexisting business relationship to the detriment of the Company, (ii) hire away an employee, advisor, consultant or contractor of the Company; or (iii) help another person or entityhire away a Company employee, advisor, consultant or contractor. Notwithstanding the foregoing, the placement of general advertisements offering employment, other servicerelationships or activities that are not specifically targeted toward employees, advisors, consultants or contractors of the Company shall not be deemed to be a breach of thisSection 3.
NXP USA, Inc.(GC, EVP)
Section 8. Non-Competition and Non-Solicitation. . . . During the Restricted Period, you also shall not, directly or indirectly: (i) persuade or attempt to persuade any customer or client,or any potential customer or client to which you have (or an employee who reports to you has or had) made a presentation or with respect to which you had access to confidential orproprietary information, (A) not to hire, engage or purchase products or services from the Company or its affiliates or (B) to hire, engage or purchase products or services from anotherentity or person in connection with a Competing Business within the Restricted Territory; or (ii) solicit for employment or hire (or solicit for engagement as an independent contractor or engage as an independent contractor) any employee (or independent contractor) of the Company or its affiliates (or any person who was employed (or engaged) by the Company orits affiliates within the 12-month period prior to such solicitation, hiring or engagement, as applicable (or, if following the termination of your employment, the 12-month period prior tosuch termination), or otherwise encourage any employee of, or independent contractor with, the Company or its affiliates to terminate his or her employment with or engagement by theCompany or its affiliates or accept employment or a consulting relationship with any entity or person other than the Company or its affiliates.
The Walt DisneyCompany(SVP)
Section 7.d. Non-Solicitation of Employees. During the Employment Period and, subject to the provisions of applicable law, during the one-year period following any termination ofExecutive’s employment, Executive shall not, except in the course of carrying out Executive’s duties hereunder, directly or indirectly induce any employee of the Company or any of itssubsidiaries to terminate employment with such entity, and shall not directly or indirectly, either individually or as owner, agent, employee, consultant or otherwise, (i) solicit, encourageor induce the employment or engagement of, or entice from the employment of the Company or any of its subsidiaries, or (ii) direct, arrange, participate or assist in any such solicitation,encouragement, inducement or enticement of, any person who is or was employed by the Company or any subsidiary of either (other than Executive’s personal assistant) unless suchperson shall have ceased to be employed by such entity for a period of at least six (6) months.
Bausch HealthCompanies Inc.(EVP, CFO)
Section 13.a. Covenants Not to Solicit or to Interfere. To protect the Confidential Information, Company Intellectual Property (as defined below) and other trade secrets ofthe Company and its affiliates, Executive agrees, during the Employment Term and for a period of twelve (12) months after Executive’s cessation of employment with the Company(the “Restricted Period”), not to solicit, hire or participate in or assist in any way in the solicitation or hire of any employees of the Company or any of its subsidiaries (or any personwho was an employee of the Company or any of its subsidiaries during the six-month period preceding such action). For purposes of this covenant, “solicit” or “solicitation” means directlyor indirectly influencing or attempting to influence employees of the Company or any of its subsidiaries to become employed with any other person, partnership, firm, corporation orother entity.
In addition, to protect the Confidential Information, Company Intellectual Property and other trade secrets of the Company and its affiliates, Executive agrees, during the EmploymentTerm and the Restricted Period, not to (x) solicit any client or customer to receive services or to purchase any good or services in competition with those provided by the Companyor any of its subsidiaries or (y) interfere or attempt to interfere in any material respect with the relationship between the Company or any of its subsidiaries on one hand and any client,customer, supplier, investor, financing source or capital market intermediary on the other hand. For purposes of this covenant, “solicit” or “solicitation” means directly or indirectlyinfluencing or attempting to influence clients or customers of the Company or any of its affiliates to accept the services or goods of any other person, partnership, firm, corporationor other entity in competition with those provided by the Company or any of its affiliates. Executive agrees that the covenants contained in this Section 13(a) are reasonable anddesirable to protect the Confidential Information and Company Intellectual Property of the Company and its affiliates; provided that solicitation through general advertising or theprovision of references shall not constitute a breach of such obligations.
Dollar GeneralCorporation(Chief AccountingOfficer)
Sections 18 and 19.Non-Interference with Employees. Through employment and thereafter through the Restricted Period, Employee will not, either directly or indirectly, alone or in conjunction withany other person or Entity: actively recruit, solicit, attempt to solicit, induce or attempt to induce any person who is an exempt employee of the Company or any of its subsidiaries oraffiliates (or has been within the last six (6) months) to leave or cease such employment for any reason whatsoever.
Non-Interference with Business Relationships.a. Employee acknowledges that, in the course of employment, Employee will learn about the Company’s and, if applicable, the Subsidiary’s business, services, materials, programs andproducts and the manner in which they are developed, marketed, serviced and provided. Employee knows and acknowledges that the Company and, if applicable, the Subsidiaryhas invested considerable time and money in developing its product sales and real estate development programs and relationships, vendor and other service provider relationships and agreements, store layouts and fixtures, and marketing techniques and that those things are unique and original. Employee further acknowledges that the Company and, if applicable,the Subsidiary has a strong business reason to keep secret information relating to Company’s or, if applicable, the Subsidiary’s business concepts, ideas, programs, plans and processes, soas not to aid Company’s competitors. Accordingly, Employee acknowledges and agrees that the protection outlined in (b) below is necessary and reasonable.
b. During the Restricted Period, Employee will not, on Employee’s own behalf or on behalf of any other person or Entity, solicit, contact, call upon, or communicate with any personor entity or any representative of any person or entity who has a business relationship with the Company and, if applicable, the Subsidiary and with whom Employee had contact whileemployed, if such contact or communication would likely interfere with the Company’s or, if applicable, the Subsidiary’s business relationships or result in an unfair competitiveadvantage over the Company or, if applicable, the Subsidiary.
To find this article in Practical Guidance, follow this research path:
RESEARCH PATH: Employee Benefits & Executive Compensation > Trends & Insights > Practice Notes
For a collection of non-jurisdictional and state-specific practical guidance on drafting, negotiating, and litigating restrictive covenants, see
> RESTRICTIVE COVENANTS RESOURCE KIT
For a discussion of antitrust risks involved in non-compete agreements, see
> ANTITRUST CONCERNS IN NO-POACHING, WAGE-FIXING, AND NON-COMPETE AGREEMENTS
For information on recent legal developments at the federal, state, and local levels in the labor and employment area, see
> LABOR & EMPLOYMENT KEY LEGAL DEVELOPMENT TRACKER
For an overview on state laws concerning non-competition agreements, see
> NON-COMPETES AND TRADE SECRET PROTECTION STATE PRACTICE NOTES CHART
For a list of state law expert forms for employment restrictive covenants and non-compete agreements, see
> NON-COMPETES AND TRADE SECRET PROTECTION STATE EXPERT FORMS CHART
For assistance in drafting non-solicitation agreements, see
> CUSTOMER AND EMPLOYEE NON-SOLICITATION AGREEMENTS: KEY NEGOTIATION, DRAFTING, AND LEGAL ISSUES