In Memorandum GC 23-08 (Memo), Jennifer A. Abruzzo, General Counsel of the National Labor Relations Board (NLRB), announced that her office would target for prosecution both union and nonunion employers for offering, maintaining or enforcing noncompete agreements. The Memo does not carry the force of law but signals the General Counsel’s prosecutorial intent.

There is, however, no reason to scrap all post-employment covenants.

IN DEPTH

BACKGROUND

Noncompetes have received substantial attention of late, much of it negative. This includes a proposed rule from the Federal Trade Commission and a slew of state laws, most recently in Minnesota, which just banned noncompetes in a new statute effective July 1, 2023.

Noncompete contracts ban working for a defined universe of “competing companies” for a certain period of time after leaving the employment. Nonsolicitation contracts are distinct types of agreements that ban soliciting either customers or coworkers for a certain period of time after leaving the employment.

As a matter of common law, post-employment agreements typically require three key elements to be enforceable: (1) a protectable business interest warranting post-employment protection; (2) a limitation that is reasonable in time given that interest; and (3) a limitation that is reasonable in scope (geographic and otherwise) given that interest.

ANALYSIS

The National Labor Relations Act (NLRA) became law in 1935. In the ensuing 88 years, that statute has not been applied to regulate noncompetes. So, the NLRB is late to the party on noncompetes and—perhaps as a result—the Memo criticizes noncompetes in general but proposes only hyper-limited regulation of those agreements.

First, the Memo stands entirely silent on nonsolicitation agreements, tacitly accepting without mentioning the current state of the law on those agreements. So, nonsolicitation agreements that are properly drafted to be enforceable under state law lie outside the realm of the NLRB’s current prosecutorial interests.

Second, the Memo accepts that noncompetes “narrowly tailored to special circumstances justifying the infringement on employee rights” are perfectly proper, citing “Restatement (Second) of Contracts § 188 cmt. b (1981) (post-employment restraint on competition ‘must usually be justified on the ground that the employer has a legitimate interest in restraining the employee from appropriating valuable trade information and customer relationships to which he has had access in the course of his employment’)” to illustrate and define what is proper.

This acceptance of the Restatement is huge because it cabins the scope of the NLRB’s interest to “overbroad non-compete” agreements. This is re-emphasized in the very next paragraph of the Memo where the General Counsel asserts that her prosecution targets are those noncompetes lacking a protectable business interest (i.e., those already unenforceable under state law):

It is unlikely an employer’s justification would be considered reasonable in common situations where overbroad non-compete provisions are imposed on low-wage or middle-wage workers who lack access to trade secrets or other protectible interests, or in states where non-compete provisions are unenforceable.

If it seems curious for the NLRB’s General Counsel to threaten to prosecute only noncompetes that cannot be enforced anywhere at all, that may be due to failing to read the General Counsel’s memos and Lewis Carroll’s Alice’s Adventures in Wonderland concurrently because both embrace parallel thinking in prosecutorial theories:

“Rule Forty-two. All persons more than a mile high to leave the court.” Everybody looked at Alice. “I’m not a mile high,” said Alice. “You are,” said the King. “Nearly two miles high,” added the Queen. “Well, I sha’n’t go, at any rate,” said Alice; “besides, that’s not a regular rule: you invented it just now.” “It’s the oldest rule in the book,” said the King. “Then it ought to be Number One,” said Alice.

Here, the General Counsel aims to broaden the scope of what constitutes an unfair labor practice under the NLRA by applying the General Counsel’s flexible theory of “chilling” employee rights. According to the Memo, noncompete provisions may chill employees’ exercise of their rights under Section 7 of the NLRA by inhibiting their ability to:

• Concertedly threaten to resign to demand better working conditions;
• Carry out those threats to resign or otherwise concertedly resigning to secure improved working conditions;
• Concertedly seek or accept employment with a local competitor to obtain better working conditions;
• Solicit their coworkers to go work for a local competitor as part of a broader course of protected concerted activity; or
• Seek employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.

But that “chill” is merely the first step in the proper analysis and oversimplifies the NLRA—a critical defect that the federal appellate courts will likely, in time, correct upon reviewing cases employing this new interpretation (if the NLRB actually adopts this theory being advocated by its General Counsel).

Rights under the NLRA are not unlimited, and so the required analysis must include balancing all countervailing employer interests. Textile Workers Union of Am. v. Darlington Mfg. Co., 380 U.S. 263, 269 (1965) (“[I]t is only when the interference with [Section] 7 rights outweighs the business justification for the employer’s action that [Section] 8(a)(1) is violated.”).

The Memo is yet another in a series that seeks to change business behavior merely by announcing that prosecutions may be coming. Such memos are not self-executing. And, apart from the internal flaws that make this a threat of limited force, there is also pending litigation challenging these memos on constitutional grounds. Associated Builders and Contractors of Michigan v. Abruzzo, No. 1:23-cv-00277 (W.D. Mich. Mar. 16, 2023), ECF No. 1.

NEXT STEPS

The Memo is applicable to noncompete agreements involving employees as that term is defined under the NLRA. Managers and supervisors are excluded from that definition but included are many high-paying positions, such as physicians or salespersons in nonsupervisory or nonmanagerial jobs. In addition, “true independent-contractor relationships” are also excluded.

While the Memo aspires to induce employers into abandoning all post-employment restrictions on their employees to avoid having to litigate charges before the NLRB, there are other and better options given the hyper-limited regulation of such agreements proposed by the Memo. Those better options include the following:

• Employers should ensure that post-employment covenants comply with any applicable state-specific requirements;
• Employers should determine which post-employment covenants (nonsolicits versus noncompetes versus confidentiality and nondisclosure agreements) are needed;
• Employers should ensure that post-employment covenants are reasonably tailored in time and scope (e.g., a hedge fund has a legitimate business interest in preventing a financial analyst from performing identical work for a rival hedge fund, but no such interest in preventing that analyst from working for a competitor as a janitor); and
• Employers should seek post-employment covenants only where there is a legally protectable interest in doing so (and should typically identify such interests in the written documents incorporating those post-employment covenants).

Post-employment covenants remain alive and well for those who understand the applicable laws.