NLRB General Counsel Memo Seeks Aggressive Enforcement Against Employee Non-Competes - Employee Rights/ Labour Relations

On May 30, 2023, the National Labor Relations Board's (the "NLRB's") General Counsel Jennifer Abruzzo (the "General Counsel") issued Memo General Counsel 23-08 (the "Memo"), expansively finding that non-competes with employees violate the National Labor Relations Act (the "Act"), except in limited circumstances. As foreshadowed in her memo on the NLRB's enforcement against overbroad non-disparagement and confidentiality clauses related to the McLaren Macomb decision, the General Counsel claims, without clear legal authority or other support, that offering, maintaining, or enforcing non-competes and non-solicits with employees violates Section 7 of the Act where they reasonably tend to chill employees from engaging in "concerted activities for the purpose of collective bargaining or other mutual aid or protection." The Memo lists a variety of rationales, including non-competes with low-wage workers, to justify the General Counsel's finding. The Memo, however, fails to articulate any clear examples of how non-competes interfere with traditional "concerted activities" protected by the Act, particularly in any manner to justify the sweeping scope of non-competes the Memo appears to find are unlawful. The Memo simply declares that non-competes are unlawful under the Act unless the employer can show that the non-compete is "narrowly tailored to special circumstances justifying the infringement of employee rights."

The Memo is another example of the General Counsel seeking to broadly expand the reach and influence of the Act beyond its traditional boundaries and into new areas not historically regulated by the NLRB. Whether such interpretation of the Act can withstand judicial scrutiny (particularly before federal courts) remains to be seen. The Memo also relies on some of the rationales from the Federal Trade Commission's ("FTC's") proposed rule seeking to ban nearly all non-competes with employees. The Memo and the FTC's proposed rule also add to the broader trend of jurisdictions across the United States, including Minnesota and Colorado, considering and passing legislation, significantly limiting and, in some cases, banning non-competes with employees.

For now, employers should review their non-compete practices and strategies in light of the Memo and broader trend against employee non-competes.

The Memo – Key Points

Non-competes Chill Employees' Section 7 Rights. The Memo broadly states that non-competes are unlawful when they "reasonably tend to chill employees" from engaging in protected Section 7 activity. The Memo identifies various ways that non-competes might interfere with employee Section 7 rights, including concerted threats or efforts to resign or seek employment to secure improved working conditions, soliciting co-workers to work for a competitor in conjunction with protected concerted activity, or seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer's workplace.
Employers Largely Lack Justifications for Non-Competes. The General Counsel also seems to discount many of the legitimate business interests of employers that courts often find justify enforcement of non-competes, including: (i) avoiding unfair competition from former employees, (ii) protecting an employer's business interests in retaining employees, or (iii) protecting special investments in training employees.
The Memo Appears to Cover Non-Solicits of Employees: The Memo does not actually define "non-compete agreements," but the General Counsel appears to be also seeking to invalidate agreements prohibiting employees from soliciting their co-workers. Indeed, the General Counsel says that agreements prohibiting employees from soliciting their former colleagues could violate Section 7 of the Act. The Memo is silent about whether it applies to agreements with employees prohibiting solicitation of customers.
Non-Competes Are Not Necessary to Protect Proprietary or Trade Secret Information. Although the Memo recognizes that employers have a legitimate business interest in protecting proprietary and trade secret information, the General Counsel states that such information can be protected without non-competes because other "narrowly tailored workplace agreements" can protect those interests. However, neither this Memo nor the General Counsel's memo on McLaren-Macomb provide any concrete examples of such enforceable workplace agreements.
Very Limited Use of Non-competes Permitted. The Memo provides very few examples of the types of non-competes that would not violate the Act. Specifically, the General Counsel notes that non-compete agreements do not automatically violate the Act if they:
- "Clearly restrict only individuals' managerial ownership interests in a competing business,"
- Only cover "true independent-contractor relationships," or
- Can be justified by "special circumstances."

Yet, the General Counsel declines to provide any clear examples of when such special circumstances would be met. The General Counsel, however, makes clear that she believes "special circumstances" would not likely exist for non-competes with low- or middle-wage workers who lack access to trade secrets or other protectable interests.

The Memo Directs NLRB Regions to Seek Cases Challenging Non-Competes. The Memo instructs the NLRBRegional offices to proactively look for unfair labor practice charges to pursue against overboard non-competes. The General Counsel also said that the Regions should seek make-whole relief for employees in situations where employees lost opportunities for other employment, "even absent additional conduct by the employer to enforce the non-compete provision."

Employer Takeaways

Although the Memo signals the NLRB will be prioritizing and seeking cases challenging overbroad non-competes with employees, the Memo is not binding or precedential. The Memo also goes against prior interpretations in NLRB decisions and advice memorandums that non-competes and non-solicits do not restrict employee Section 7 rights.

While it remains to be seen whether the NLRB will actually pursue such cases or whether the NLRB's views in the Memo will survive legal challenge, employers should review their non-compete strategies and agreements in light of the Memo.Depending on the employer's risk tolerance, preferences, and business needs and considering the specific employees subject to non-competes or non-solicits, employers may want to consider limiting their use of non-competes or taking a more surgical approach to narrowing such provisions in agreements with employees. As employers think through the right approach for their organization, they should keep the following points in mind.

Supervisory Employees and Independent Contractors Are Not Covered by the Act. The Act does not cover supervisory employees or properly classified independent contractors. Under the NLRA, supervisors generally include any employees having the authority to hire, fire, discharge, direct, and exercise other responsibilities relating to employees. The Memo lacks sufficient grounds by which the NLRB would be able to justify invalidating non-competes with an employer's supervisors, managers, executives, directors, and properly classified independent contractors.
The NLRB's Enforcement of Non-Competes Will Likely Be Challenged. The Memo is another example of the General Counsel's expansive reading of the Act. If the NLRB takes affirmative steps towards invalidating non-competes or non-solicits based on the rationales in the Memo, trade and other business associations will likely look for cases to oppose the NLRB on behalf of their members or exert political or policy influence in efforts to try to abate enforcement.
Courts Continue to Find Non-Competes Provide Important Protection Against Unfair Competition. The General Counsel's view that an employer's "desire to avoid competition from a former employee is not a legitimate business interest that could support" enforcing an employee non-compete is contrary to the view of many state and federal courts that find non-competes are a necessary tool to protect against unfair competition and other legitimate business interests. Although nondisclosure agreements and federal and state trade secret laws provide some protections of employer confidential information and trade secrets, it can be difficult to detect misuse of such information at competitors, and not all confidential information qualifies for trade secret protection. Indeed, non-competes offer businesses one of the most powerful and cleanest tools for preventing unfair competition by former employees. Courts have even noted the powerful nature of non-competes. See, e.g., First Interstate Bancsystem, Inc. v. Hubert, 2022 U.S. Dist. LEXIS 127748, 615 F.Supp.3d 1270, 2022 WL 2763407 (July 15, 2022) (finding that if an employer "wished to preclude [employees] from leaving to compete by taking employment with [a competitor], [the employer] could have proposed an enforceable non-compete agreement").
Proceed Cautiously Before Enforcing Non-Competes. Although the NLRB's authority to regulate non-competes is questionable, the General Counsel clearly believes the NLRB should evaluate both new and existing non-competes that may have resulted in employees losing employment opportunities or losing the ability to take certain employment actions in fear of violating such non-competes.
Evaluate Non-Compete Strategies and Consider Potential Risk Mitigation Measures. Employers continuing to use non-competes should review this Memo to see if there might be ways to limit such provisions to narrow them in a manner that still meets their business objectives while reducing potential risks and increasing odds of surviving any legal challenges. For example, employers may consider including narrower temporal limitations, limiting the definition of competitive activity/business, and/or only applying such non-competes to protect proprietary or trade secret information.
Consider Discontinuing Non-Competes with Low-Wage, Middle-Wage, or Non-Exempt Workers: Employers should also evaluate their non-compete and non-solicit strategies with non-exempt and lower/middle-wage workers. Not only has the General Counsel signaled that there is a stronger likelihood of the NLRB pursuing enforcement against non-competes and non-solicits with those types of workers, but many states have laws banning or limiting non-competes with those workers. Employers also face increased risk in this area since some states prohibiting non-competes with those workers have administrative enforcement schemes and private rights of action that allow for recovery of attorney fees for violations.

While there remains significant uncertainty about the NLRB's legal authority for challenging employee non-competes, the federal government is clearly seeking ways to close ranks on non-competes. In addition to the Memo and the FTC's proposal to ban employee non-competes, employers should be mindful of the continuing trend of state legislatures and regulators seeking to ban or narrow the scope of non-compete agreements.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.