NLRB Attack on Non-Compete Agreements Takes Shape

A recent case and advisory memorandum shed light on the NLRB’s campaign against non-compete agreements, showing that the Board may consider the mere use or existence of such agreements as unlawful under federal labor law. 

Background: The Board first signaled its intent to crack down on non-compete agreements in a memo by General Counsel Jennifer Abruzzo released this past summer. The memo articulated the General Counsel’s view that non-compete agreements violate federal labor law “except in limited circumstances,” where such agreements are “narrowly tailored to address special circumstances.” The memo made clear the General Counsel’s belief that non-compete agreements generally violate employee rights under the NLRA. Left unclear was how non-compete agreements could be sufficiently “narrowly tailored” to be lawful in the eyes of the General Counsel. 

Moving forward: In the months since the memo’s release, it has been a waiting game to see how the Board would begin to apply General Counsel Abruzzo’s approach – if at all – to cases involving non-compete agreements. Two recent developments shed light on the Board’s potential path forward.

Use of non-competes per se illegal: A recent settlement reached between the NLRB and a medical spa company included a provision invalidating the company’s use of non-compete agreements in employment contracts. The original complaint claimed that the company’s non-compete agreements – which used fairly standard language – restricted employee rights to concerted activity and were, therefore, unlawful. The settlement agreement includes admission of the claims invalidating the use of non-competes, marking one of the first instances in which the resolution of a Board case has included making the mere existence of a non-compete agreement unlawful. 

...But more limited restrictive covenants may survive? In comparison, a recent advisory memo on a separate case potentially provides a different, albeit extremely narrow path forward for employers. In that case, the employer utilized a limited non-solicitation agreement (that was described as a “non-compete”) and prohibited employees solely from soliciting the employer’s existing customers for a year. The advisory memo found the provision to be lawful because (1) it did not prohibit employees from working for competitors, and (2) there was not a “limited pool of customers in the industry that the [non-solicitation provision] effectively foreclosed other employment opportunities.” In essence, the advisory memo found that the non-solicitation agreement was so narrow in scope that it “did not prevent an employee from accessing other employment opportunities.”  

The bottom line: These two cases illustrate the most likely path forward for the Board regarding restrictive covenants. Standard broad non-compete agreements are likely to draw the Board’s ire, while more limited restrictive covenants that are narrow in scope may survive scrutiny. 

Outlook: Following in the footsteps of the FTC and a growing number of states, the NLRB is beginning to step up its attacks on non-compete agreements following General Counsel Abruzzo’s war declaration this past summer. Employers should continue to take a hard look at their use of non-compete agreements. If such agreements are needed, they should be narrowly tailored to avoid running afoul of federal labor law. Given the continued attacks on these agreements at the state and federal level, employers may want to consider alternatives for protecting business interests.