Employee Mobility: Leaver Vulnerability to Enforcement of Restrictive Covenants

Prior research suggests that the turnover of higher-ranking employees poses a greater threat to parent firms. This is expected especially when high-ranking leavers start a spinout company, rather than go to work for an established competitor. In this study, we examine the enforcement of restrictive covenants as recorded in 306 Canadian court decisions involving spinouts or mobility to competitors. Our analysis results point to a higher rate of enforcement of restrictive covenants in cases involving leavers in higher-ranking roles, especially when they leave to form spinouts as opposed to going to work for a competitor. Restrictive covenants are more potent enforcement tools when leavers threaten to replicate parent firm complementary assets; that is, when higher-ranking leavers form spinouts.