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NLRB joins FTC in taking aim at non-competes

Employee noncompete agreement


NLRB joins FTC in taking aim at non-competes

Following the FTC’s Notice of Proposed Rulemaking seeking to ban non-competes earlier this year, another federal agency has joined the attack on non-competes.

On May 30, the NLRB’s General Counsel Jennifer Abruzzo issued a memo to all NLRB regional directors, officers-in-charge and resident officers stating that non-competes in employment agreements and severance agreements violate the National Labor Relations Act except in rare circumstances.

Specifically, Ms. Abruzzo claims that such covenants interfere with workers’ rights under Section 7 of the act, which protects employees’ right to self-organize, join labor organizations, bargain collectively, and “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Ms. Abruzzo thus concluded that non-competes typically violate Section 8(a)(1) of the act, which makes it an unfair labor practice for an employer to interfere with an employee’s Section 7 rights.

The memo’s (dubious) reasoning

Ms. Abruzzo’s rationale for her determination is similar to the FTC’s: the memo claims (with scant support, we would add) that non-competes “are overbroad,” and can be construed by employees as “deny[ing] them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”

While some non-competes used by employers may be overbroad, Ms. Abruzzo treats it as a foregone conclusion that all non-competes are overbroad — notably without citing to any support for this statement. And this determination ignores state law, which typically requires that a non-compete be no broader than necessary to protect an employer’s legitimate business interests.

Ms. Abruzzo also infers — again, without support — that non-competes chill protected activity, because employees who perceive that they cannot seek new employment may be discouraged from threatening to resign en masse (although the memo concedes that there is not a recognized Section 7 right to “concertedly resign from employment”), concertedly seeking to join a competitor and more.

While primarily focused on non-competes, the memo potentially spells trouble for other restrictive covenants as well, including non-solicits; Ms. Abruzzo claims that agreements prohibiting employees from soliciting their former colleagues could run afoul of Section 7 rights, as well. And while the memo does not explicitly mention non-disclosure agreements, query whether the NLRB would scrutinize such agreements as potentially chilling employees’ desires to seek new employment, too (similar to the FTC’s proposed “de facto” test to determine whether an agreement includes a supposedly unlawful non-compete).

Ms. Abruzzo acknowledges that non-competes may be permissible, if they are “narrowly tailored to special circumstances justifying the infringement on employee rights,” which does not include a covenant whose only purpose is the employer’s “desire to avoid competition.” But again, this ignores that courts have agreed for centuries that competition is permitted — unfair competition is not. While Ms. Abruzzo points to low-wage and “middle-wage” employees with no access to trade secrets being bound by overbroad non-competes, she conspicuously avoids discussing the dozen states that have enacted wage thresholds for non-competes and even non-solicits in some states, and the four state legislatures that have banned non-competes entirely (including most recently Minnesota).

As for the circumstances in which Ms. Abruzzo believes non-competes may be permissible? Like the FTC’s proposal, they are extremely limited. She only mentions restrictions on an individual’s “managerial or ownership interests” in a competing business, and “true independent-contractor relationships” (although she does concede that there may be other circumstances in which a narrowly tailored covenant is “justified by special circumstances,” but notably declines to give examples of such circumstances).

In the memo’s final paragraph, Ms. Abruzzo encourages NLRB employees to “seek make-whole relief” for employees who believe they have lost employment opportunities based on their employer’s non-compete, “even absent additional conduct by the employer to enforce the provision” (emphasis added).

Don’t panic — but do be prepared

While the foregoing sounds alarming, a few words of caution before abandoning the use of non-competes. Ms. Abruzzo’s interpretation of the act is not binding or precedential. Instead, cases seeking “make-whole relief” as urged by the memo will first be brought by Regional Directors, who issue complaints of unfair labor practices, and are then decided by Administrative Law Judges. An ALJ decision comes with a recommended order which can then be appealed to the full NLRB in Washington, D.C. If no exceptions are filed to the ALJ’s decision, the judge’s order becomes the order of the NLRB. But an ALJ’s decision is not binding legal precedent in other cases unless it has been adopted by the NLRB on review of exceptions.

Moreover, if adopted by the NLRB, the matter can then be appealed to the D.C. Court of Appeals or the Court of Appeals where the employer does business. In other words, it may be an uphill battle for the NLRB to successfully challenge and invalidate an employer’s use of non-competes.

And that is before you consider that — like the FTC — this is a new tactic without historical support. In the nearly 90 years since the NLRB was created and the act became law, this is the first time that the agency has declared that non-competes violate the act. In fact, prior NLRB cases have held that the conduct of employees acting in concert to become competitors or to undermine their employer’s relationship with other employees is not protected by the Act (see, e.g., National Express Corp., d/b/a ATC/Forsythe & Assocs., Inc., 341 NLRB 501 (2004); Clinton Corn Processing Co., 194 NLRB 184 (1971), and employers who terminate employees for engaging in such conduct do not violate the act. (See, e.g., Kenai Helicopters, 235 NLRB 931 (1978); Associated Advertising Specialists, Inc., 232 NLRB 50 (1977).)

In fact, the NLRB’s Division of Advice held in 2012 that a confidentiality and non-solicitation agreement (the latter of which, as noted above, is tackled in Ms. Abruzzo’s memo) did not violate the act, and in making this determination, noted that the agreement did not explicitly restrict an employee’s Section 7 rights, was not adopted in response to Section 7 activity, and employees would not reasonably construe the agreement to interfere with Section 7 rights. (Charles Schwab Corp., 28-CA-084931 (Sept. 14, 2012) (Adv. Mem.).)

While conceivably there may be some non-competes implemented in order to interfere with Section 7 rights, the vast majority are not, and we suspect the NLRB will face challenges demonstrating such an alleged motive.

Where to go from here?

It remains to be seen if the NLRB will in fact bring cases to invalidate non-competes, and if so, whether it will see any success given past decisions. That said, as always, employers should take measures to ensure that their agreements are narrowly tailored, compliant with relevant law and only applied to employees that pose a legitimate competitive threat.

In that vein, employers should consider the risk in even asking non-exempt, low-wage or mid-wage employees to execute agreements containing non-competes. Even if employers have no intent of enforcing non-competes against such employees, various state laws already prohibit merely entering into or maintaining non-competes with such employees, and some allow employees to recoup their attorneys’ fees from employers in declaratory judgment suits seeking to invalidate such covenants. Various enforcement agencies appear poised to target the use of such agreements as well, even without employers’ attempts to enforce them through litigation.

We encourage you to reach out to review and update your agreements and provide tips on implementing them with your workforce.

Dawn Mertineit is a partner in Seyfarth’s Commercial Litigation group and a member of the Trade Secrets, Computer Fraud and Non-Competes practice. She is based in the firm’s Boston office can be reached at [email protected].

Jesse Coleman is a partner in Seyfarth’s Commercial Litigation group and a member of the Trade Secrets, Computer Fraud and Non-Competes practice. He is based in Houston can be reached at [email protected].

Katherine Perrelli co-chairs Seyfarth’s national Trade Secrets, Computer Fraud & Non-Competes group and chairs the ABA Committee on Trade Secrets and Interference with Contracts. She is a partner based in Boston, and can be reached at [email protected].

A version of this article first appeared on Seyfarth’s website. Reprinted with permission. © 2023

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