United States: NLRB Joins Efforts To Curtail Enforcement Of Non-Compete Agreements

On May 30, 2023, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued a memorandum asserting that the "proffer, maintenance, and enforcement" of most non-compete provisions in employment contracts violate the National Labor Relations Act (NLRA). This memorandum follows on the heels of other recent efforts to curtail non-compete provisions, including the Federal Trade Commission's proposed rule that-if enacted and thereafter successful in promised court challenges-would retroactively ban nearly all such provisions in employment agreements; a bipartisan Senate bill that would ban most non-compete provisions going forward; and a slew of recent state legislation making non-compete provisions more difficult for employers to enforce. Although the memorandum does not, on its own, impact or alter the laws relating to non-compete provisions, it does convey the enforcement priorities of the general counsel's office and the approach it will take to prosecute cases-an approach that, if adopted by the NLRB, would significantly limit the enforceability of non-compete provisions nationwide for non-managerial, non-supervisory employees.

The Memorandum

In the memorandum, Abruzzo contends that non-compete agreements, "[e]xcept in limited circumstances," amount to an unfair labor practice in violation of Section 8(a)(1) of the NLRA, which prohibits employers from interfering with employees' rights under Section 7 of that act. These rights include the "right[s] to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection." According to Abruzzo, most non-compete provisions impermissibly "chill" employees' exercise of their Section 7 rights by limiting their ability to quit or change jobs, thereby diminishing their bargaining power and capacity to engage in "concerted activities" to improve their working conditions.

The memorandum does not specifically define "non-compete agreements," other than to indicate that the effect of such agreements is to "prohibit employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment." Based on this language, it appears that non-compete agreements would generally not include other types of post-employment restrictive employment covenants-such as non-disclosure agreements and client, customer or employee non-solicitation agreements-because these covenants do not typically prohibit employees from accepting certain types of jobs or operating certain types of businesses after the end of their employment. In a prior memorandum, however, the general counsel identified "no solicitation" and "no poaching" clauses as among the types of clauses that she views as "problematic" in "some severance agreements."

Notably, Abruzzo acknowledges that "not all non-compete agreements necessarily violate the NLRA" - a "narrowly tailored" non-compete agreement would be permissible, but only if it is "justified by special circumstances." The memorandum largely punts on the question of what "special circumstances" would qualify, merely noting that "a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense." And, in Abruzzo's opinion, "special circumstances" would unlikely exist when a non-compete is imposed (1) on low- or middle-wage workers who lack access to trade secrets or other protectable interests; or (2) in states where non-competes are unenforceable. The memorandum does provide some generic examples, however, of situations where non-compete provisions would likely not violate the NLRA. These include: (1) when the provisions "clearly restrict only individuals' managerial or ownership interests in a competing business"; (2) when they pertain to "true independent-contractor relationships"; and (3) when they are narrowly tailored to protect proprietary or trade secret information.

Implications

The memorandum is not binding on the NLRB and lacks the force of law. Nevertheless, it signals that non-compete agreements will be an enforcement priority for the NLRB general counsel's office moving forward. The memorandum specifically directs NLRB regional directors to refer cases involving "arguably unlawful" non-compete agreements to the NLRB's Division of Advice for further consideration. If the NLRB ultimately chooses to adopt the position set forth in the general counsel's memo, it would substantially limit the enforceability of non-compete provisions nationwide for non-managerial, non-supervisory employees.

Regardless of whether the Board adopts the general counsel's position and the success of any challenges to it, employers need to keep in mind that many state and local jurisdictions currently have restrictions on and requirements for non-compete provisions and other post-employment restrictive covenants.

For More Information

If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, William R. Heaston, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.