Using the Resource-Based Theory to Determine Covenant Not to Compete Legitimacy

Abstract

This paper addresses the legitimacy of competing interests involved in the enforcement of covenants not to compete (“noncompetes”). To date, the courts and legislatures have not relied on a principled theoretical framework to identify and assess the competing interests between firms and individuals in this setting. This paper fills the research void by providing a theoretical framework that identifies the legitimacy of these competing claims. The framework integrates managerial research involving the resource-based theory of the firm and the knowledge-based perspective of competitive advantage with the legal analysis and enforcement of noncompete terms. A descriptive framework of the parties’ competing interests provides four discrete scenarios, which formalizes the types of legitimate interests a court must balance when asked to enforce noncompetes. From this descriptive account, a prescriptive analysis is advocated that uses an ownership approach to assess the legitimacy of an employer’s claim to knowledge covered by a noncompete.