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Recent NLRB Activity is a Mixed Bag for Employers' Use of Restrictive Covenants

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Two recent developments involving the National Labor Relations Board's (NLRB) scrutiny of restrictive covenant agreements have provided a mix of good and bad news for employers.

Logo for the National Labor Relations Board (NLRB)
Logo for the National Labor Relations Board (NLRB)

On one hand, the NLRB's Division of Advice issued a memorandum analyzing a company's employment agreement and concluded that several key provisions — including non-solicitation, non-disclosure, and return of property clauses — were not unlawful and that a lawsuit filed to enforce them did not violate the National Labor Relations Act (NLRA). However, NLRB Region 9 announced a settlement of the first high-profile unfair labor practice charge involving the alleged unlawful use of a restrictive covenant agreement, and it included monetary relief, rescinding the challenged covenants, and posting a nationwide notice.

Division of Advice Memo

In Memorandum 23-08, Non-Compete Agreements that Violate the National Labor Relations Act (pdf), General Counsel Abruzzo urged Regional Directors to submit to the Division of Advice (the "Division") cases involving non-compete provisions, explaining that these provisions have a reasonable tendency to "chill" employees in the exercise of Section 7 rights under the National Labor Relations Act (NLRA). On December 7, 2023, the Division issued a memo analyzing how Abruzzo's interpretation of non-competes under the NLRA applies to the specific facts of an unfair labor practice charge claiming that an employer's employment agreement and related lawsuit against a former employee violated the Act. The Division evaluated the legality of the lawsuit and provisions included in the employer's employment agreements related to non-competition, business disclosures (confidentiality), termination, and employee duties.

Initially, it is important to note that the "non-compete" provision analyzed by the Division is not a true non-compete because the provision at issue provided:

that the Employee shall not, on Employee's behalf or on behalf of any other party, solicit or seek the business of any customer, client or account of the Company existing during the term of employment and where in said solicitation involves a product and/or service substantially similar to or competitive with any present or future product and/or service of the Company.

Though the Division titled this provision a "non-compete", it is more akin to a customer non-solicitation provision. In other words, the former employee is allowed to work for a competitor so long as the former employee does not solicit or seek the business of any of the prior employer's customers, clients, or accounts. As such, we do not yet know how the Division would construe a true non-compete.

Regardless of the provision's title, the Division found that it did not violate the Act because it does not prevent an employee from "accessing other employment opportunities." Instead, employees were "only restricted from soliciting the Employer's existing customers in order to provide similar services for a period of one year." Accordingly, absent evidence that "there [was] a limited pool of customers in the industry" such that the non-compete effectively foreclosed other employment opportunities, the Division declined to find a violation of the Act.

Next, the Division applied the Board's recent Stericycle decision to the business disclosures (confidentiality) provision and concluded that it too did not have a reasonable tendency to chill employees in the exercise of Section 7 rights. Here, to convey what constitutes "information related to the Employer's business" subject to non-disclosure requirements, the employer listed only trade secrets and other clearly proprietary information such as marketing plans and customer lists. Notably, this non-disclosure provision did not refer to employee information, wage information, or anything else relating to terms and conditions of employment. In finding this "business disclosures" provision lawful, the Division emphasized this "lack of any mention of employee information or things related to the terms and conditions of employment" distinguishes this policy from other rules the Board has found unlawful.

Further, regarding a termination provision requiring the return of company property, the Division once again declined to find a violation of the Act. The relevant provision merely required that employees return employer property upon separation of employment — an obligation that "does not implicate information known to employees that may be utilized in Section 7 activity." Thus, making swift work of non-coercive post-termination language here, the Division found the termination provision lawful.

Finally, the Division found the employee duties provision unlawful under the Act. This provision states:

Except as hereinafter provided, the Employee shall at all times during the continuance of this AGREEMENT devote her full time to the conduct of the business of the Employer and shall not directly or indirectly, during the term of this AGREEMENT engage in any activity competitive with or adverse to the Corporation's business or welfare whether alone, or as a partner, officer, director, Employee, advisor, agent or investor of any other individual corporation, partnership, joint venture, association, entity or person.

The Division explained that the above provision is overbroad under Stericycle and would have a reasonable tendency to chill employees in the exercise of their Section 7 rights under the Act. The Division reasoned that the employee duties provision could be reasonably read to prohibit engagement in union organization or other protected concerted activities that the employer may deem to be "adverse" to the employer's business, such as speaking out publicly about terms and conditions of employment. The Division also concluded that this provision violates the Act because it could be reasonably read to prevent an employee from engaging in outside employment while employed due to the restriction on being an "employee" of another entity.

Region 9 Settlement

While the Division memo provides some good news for employers that use restrictive covenants, the recently announced settlement reached by the NLRB's Cincinnati office and a medical spa, Juvly Aesthetics, is concerning for employers and contains a number of noteworthy provisions. The unfair labor practice charge in that case alleged that the employer unlawfully made workers sign overbroad non-compete and training repayment agreements. The non-competes at issue here applied a 20-mile radius and prevented departing employees from engaging in the following activities for a period of 24 months after separation from the company: (1) practicing aesthetic medicine and related services at competitor facilities; and (2) having an ownership interest in or investing in competitor facilities. Juvly's restrictive covenants also contained a non-disparagement provision, and a non-solicitation provision that not only prevented contact with former clients but also responses to any general questions about employment status. Furthermore, upon an employee's violation of the non-compete or departure from the company before 12 months, Juvly's agreements provided for liquidated damages in the form of employee reimbursement remitted to the employer for the costs of training. Region 9's settlement required Juvly to pay more than $27,000 in monetary relief and issue a nationwide remedial notice; the settlement also invalidated the following policies and rules:

  • A non-solicitation of employees provision prohibiting employees from soliciting or encouraging any person to leave the employment or other service of the employer or its affiliates, or to interfere with any relationship of the employer or its affiliates or its employees, or endeavor to entice away from the employer or its affiliates, any person who was a tenant, co-investor, co-developer, joint venture, contractor, advisor, employee or another client of the employer or its affiliates.
  • Any policy or rule that requires employees to refrain from conduct or communication, which may damage the goodwill, brand, or business reputation of the employer, and/or that requires employees to act in ways that merit the trust, confidence, and respect of all the employer's employees, clients, and vendors.
  • Juvly's Non-Compete and Confidentiality Agreement or any other policy or rule that:
    • prohibits employees from soliciting any employer clients, employees, or contractors for any reason;
    • prohibits employees from disclosing and/or discussing any materials obtained via employment with the employer including confidential business information (the definition of which broadly includes any materials obtained via employment at the employer) or salary information;
    • threatens legal action, including the employer's right to seek minimum damages of $150,000 per employee solicitation plus any business damages sustained due to loss of revenue, interference of business functions, or loss of clients via solicitation or otherwise related to the direct or indirect result of the solicitation;
    • threatens to collect from employees the repayment of initial and continuing education training costs, or the repayment of any other funds, and all associated legal or collection costs, if employees violate the terms of the unlawful Non-Compete and Confidentiality Agreement or similar policy;
    • prohibits employees from discussing the terms of the policy with anyone outside of legal counsel;
    • prohibits employees, both during and after employment, from making negative comments about the employer;
    • prohibits practicing aesthetic medicine within a 20-mile radius of any company location for 24 months following the termination of employment.

Takeaways

Notwithstanding the mixed bag of recent NLRB activity, drawing distinctions between the Division of Advice Memo and the Region 9 settlement can provide insight for employers seeking to use restrictive covenants and mitigate risk. First, as a threshold distinction, the "non-compete" analyzed by the Division did not prevent employees from obtaining outside employment in any way whereas the Juvly non-compete prevented employees from working at competitor facilities in any capacity within a 20-mile radius for a period of two years. Next, even though both agreements contained customer non-solicitation provisions, the provision analyzed by the Division only restricted employees from soliciting customers for the purpose of providing competing products/services while the Juvly non-solicit provision prohibited solicitation of any Juvly customers for any reason, which violated the Act. Finally, the Division did not analyze an employee non-solicitation provision, which Region 9 determined to be unlawful under the Act in the Juvly case.

As the Board continues to clarify the legal parameters of non-competes and other restrictive covenants under the NLRA, employers should review their current restrictive covenant agreements and related policies with employment counsel and consider whether there are reasonable ways to mitigate risk.

Posted In: National Labor Relations Act (NLRA); National Labor Relations Board (NLRB); Non-Compete Clause (Restrictive Covenant), Non-Disclosure Agreement (NDA)

Want to know more? Read the full article by at Littler Mendelson

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