Not all leavers are equal: How rank and destination influence enforcement of restrictive covenants

Abstract

Restrictive covenants like non-competes, non-solicitations, and non-disclosures may pose barriers to spinout ventures and mobility to competitors. However, we know little about the enforceability of these agreements despite their widespread use and associated chilling effects. Examining 332 Canadian court decisions, we find a higher rate of enforcement in cases involving high rank leavers (i.e., managers and owners) versus low rank leavers (regular employees and contractors) especially those who form spinout ventures. Our key insight is that enforcement rates differ significantly across different types of leavers. Low rank leavers and their previous employers may overestimate the potential for enforcement, creating chilling effects (i.e., where employees think they are more restricted by their employment agreements than they really are) that can deter employee mobility and entrepreneurship.