May 31, 2023

Most Noncompete Agreements with Covered Employees Violate the National Labor Relations Act According to Recent Guidance

On May 30, 2023, the General Counsel of the National Labor Relations Board ("NLRB" or "the Board") joined an increasing number of government authorities to cast doubt on the enforceability of certain noncompetition agreements. Noncompetition agreements restrict an employee's ability to work for a competitor or in an industry or field after leaving an employer. The agreements have long been used by employers to protect their trade secrets, confidential information, customer relationships, or goodwill from being used by former employees or competitors. However, with increasing frequency, particularly over the past year, various state legislatures, federal agencies, and courts have weighed in on legality and/or enforceability of noncompetition agreements, either restricting the permissible scope of such provisions or otherwise criticizing their use. The NLRB’s General Counsel is the latest of these authorities to do so.

The Recent Assault on the Viability of Certain Noncompetition Agreements

In the past few years, several states – including Colorado, Illinois, Minnesota, Oregon, and Washington – and the District of Columbia have enacted laws that limit or ban the use of noncompetition agreements outright or with respect to certain categories of workers, such as low-wage earners, independent contractors, interns, or workers who are laid off or terminated without cause. Other states, such as California and Massachusetts, had already outlawed or severely limited the use of noncompetition agreements with workers in those states. Depending on applicable state law, employers may also be required to disclose the existence and terms of noncompetition agreements before hiring, provide adequate consideration or compensation for signing them, or narrow their scope and duration. Even in states where noncompetition agreements remain enforceable, the agreements must be narrowly tailored and reasonably necessary to protect legitimate business interests.

On the federal side, on January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule banning noncompetition agreements in most circumstances (the “Proposed Rule”) following President Biden’s executive order on July 9, 2021, that encouraged the FTC to exercise statutory authority to curtail the unfair use of noncompete clauses and other restrictive covenants. Business advocacy groups on both sides of the issue battled it out through the extended comment period and the fate of the Proposed Rule is still uncertain.

On May 30, 2023, the NLRB jumped into the fray with both feet when its General Counsel issued a memorandum entitled “Non-Compete Agreements that Violate the National Labor Relations Act” ("the Memorandum"). The General Counsel is the chief prosecutor of unfair labor practice charges for the NLRB and the supervisor of the NLRB's regional offices.

The Memorandum reflects the General Counsel's position on noncompetition provisions in employment and severance agreements and instructs the NLRB’s regional offices to identify cases where use of such provisions potentially violates the National Labor Relations Act (“NLRA” or the “Act”) in light of the that position. The Memorandum is not legally binding on the NLRB's board members or other decision-makers, including judges, but it is likely to have persuasive value and, at minimum, lead to an increased number of unfair labor practice charges brought against employers for their use of noncompetition agreements in certain contexts. Prudent employers across the country should reassess their approach to noncompetition agreements in light of the myriad legal developments, including the Memorandum.

The General Counsel’s Position on Noncompetition Agreements

The key takeaway in the Memorandum is the General Counsel’s apparent hostile tone towards noncompetition agreements, as she states that “such agreements interfere with employees’ exercise of rights under Section 7 of the [NLRA]” such that, “[e]xcept in limited circumstances, I believe the proffer, maintenance, and enforcement of such agreements violate Section 8(a)(1) of the [NLRA].”

In the past, the NLRB’s position on noncompetition agreements has been based on balancing the employer's legitimate business interests and the employee's statutory rights. The NLRB has recognized that some noncompetition agreements may be lawful and enforceable if they are narrowly tailored, reasonable in scope and duration, and do not prevent employees from exercising their NLRA rights. The NLRB has upheld noncompetition agreements that only applied to a specific geographic area, a limited period of time, or a narrow range of activities or products that directly competed with the employer's core business. On the other hand, the NLRB has also nullified noncompetition agreements that it considered to be overly broad, vague, or coercive, and that effectively prohibited employees from working in any capacity or industry, or from joining or supporting a union or other labor organization.

The Memorandum reflects the General Counsel’s view that “[n]on-compete provisions are overbroad…when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities….”  Such provisions tend to “chill” employees in the exercise of rights under Section 7 (Section 7) of the NLRA, according to the Memorandum, since the provisions could reasonably be construed by employers to deny them the ability to quit or change jobs. Specifically, the Memorandum explains that overly broad noncompetition provisions may chill specific types of concerted activity protected by Section 7 including employees: threatening to resign to demand better working conditions, seeking or accepting employment with a local competitor to obtain better working conditions, and engaging in protected activity with other workers at an employer’s workplace. The General Counsel’s theory is that employees may be less likely to exercise these rights if they are limited in their ability to seek employment elsewhere through a noncompetition agreement. Through the Memorandum, the General Counsel urges the NLRB to determine that any employer that uses “overly broad” noncompetition provisions in employment agreements or severance agreements is committing an unfair labor practice “unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.”

The Practical Impact of the Memorandum

Despite the power of the NLRB, the tone of the Memorandum, and the detailed examples of the harms inflicted by overly broad noncompetes, the impact of the Memorandum may be somewhat limited from a practical standpoint.

As an initial matter, while the NLRA's coverage extends to most private sector employers and employees in the United States, regardless of the size of the business or the industry, Section 7 protections do not extend to supervisors or managers, as defined by the NLRA. Supervisors are those who have the authority to hire, fire, discipline, or direct other employees, or to effectively recommend such actions. Managers are those who formulate and effectuate management policies by expressing and making operative the decisions of their employer. Because the Act does not protect these employees, the Memorandum should not impact an employer’s use of noncompetition agreements with them. Nonetheless, whether an employee is deemed a supervisor or manager requires a detailed analysis that may be best conducted by employment counsel.

Second, the Memorandum explicitly acknowledges that “not all non-compete agreements necessarily violate the NLRA.” It notes that noncompetition provisions that only prohibit managerial or ownership interests in a competing business or provisions entered into in the context of a “true independent-contractor relationship” would not violate the Act. Additionally, it recognizes that “there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.” It is not clear based on the Memorandum alone what the General Counsel believes would constitute such “special circumstances.” A company’s legitimate business interest in protecting proprietary or trade secret information may be such a justification, but the Memorandum reflects an intention to focus closely on the circumstances of each employment relationship subject to a noncompetition agreement in determining whether to issue an unfair labor practice complaint.

There is no question that employers that require low-wage or middle-wage workers who lack access to trade secrets or other protectable interests to enter into noncompetition agreements are at risk of facing unfair labor practice charges.  The NLRB will seek “make whole” relief for covered employees who can demonstrate that an unlawful noncompete resulted in lost opportunities for other employment.

While the extent to which the Memorandum influences Board members and other decision-makers is not yet clear, including the extent to which a noncompetition provision’s protection of an employer’s proprietary or trade secret information may justify the infringement of an employee’s Section 7 rights, employers who disregard the Memorandum and continue a “one size fits all” approach to noncompetition provisions for all workers may face unfair labor practice charges.

Next Steps

The law relating to noncompetition agreements continues to evolve on multiple levels. Employers should consult with employment counsel about their reliance on noncompete agreements to protect their business interests in light of recent legal developments, including the Memorandum. Goodwin Procter LLP’s employment team is available to assist.