U.S. National Labor Relations Board General Counsel issues memorandum invalidating most postemployment noncompete restrictions
Blog Sidley Employment Law Blog

The U.S. National Labor Relations Board (NLRB or Board) appears to have jumped on the anti- noncompete bandwagon initiated by the Federal Trade Commission (FTC) just a few months ago. NLRB General Counsel Jennifer A. Abruzzo on May 30 issued a memorandum that, if adopted by the Board, could invalidate many, if not most, noncompetition restrictions in employment severance agreements as violating employee rights under Section 7 of the National Labor Relations Act (the Act).¹ Although not binding on the Board or the courts, such general counsel memoranda often provide guidance for the Board and for potential complainants to use in challenging the employment practice at issue.

Section 7 of the Act in part protects the right of employees “to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”² It is an unfair labor practice under Section 8(a)(1) for an employer to interfere with, restrain, or coerce employees in the exercise of these Section 7 rights. In the General Counsel’s view, noncompetition agreements restricting future employment can constitute such interference.³

Specifically, in her memo, the General Counsel states that noncompetition provisions “reasonably tend to chill employees in the exercise of Section 7 rights, 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 that they are qualified for....”⁴ The General Counsel reasons that

this denial of access to employment opportunities chills employees from engaging in Section 7 activity because: employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships—and the communication and solidarity engendered thereby—to encourage each other to exercise their rights to improve working conditions in their new workplace.

Going further, the General Counsel identifies five specific ways that such noncompetition agreements purportedly interfere with Section 7 rights. First, “they chill employees from concertedly threatening to resign to demand better working conditions” — because the employees know they have very limited options for alternative employment (and because they may fear retribution for threatening to violate their agreements).

Second, such provisions “chill employees from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.” Though the General Counsel recognizes that the Board has not recognized a right to engage in such concerted resignations, she states that it “follows logically from settled Board law, Section 7 principles, and the Act’s purposes.”

Third, “they chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.” Fourth, “they chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity.”

And fifth, “they chill employees from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace. In this regard, they effectively limit employees from the kind of mobility required to be able to engage in some particular forms of this activity, such as union organizing, which may involve obtaining work with multiple employers in a specific trade and geographic region.”

There are exceptions to the General Counsel’s position against noncompetes. The typical formulation is that the employer must have a “legitimate business interest” or “special circumstance” to justify the noncompete. The General Counsel does not disagree, but she emphasizes that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Such issues as access to trade secrets should be handled by “narrowly tailored workplace agreements” rather than overbroad noncompetes. And she notes that restrictions on employees’ managerial or ownership interests in competing business are likely acceptable.

As noted, at this point this memorandum is not binding, and the Board or a court of appeal may reject it or adopt it as it sees fit and as the circumstances of a particular case warrant. Nonetheless, the memorandum is significant, as it signals the issues and the arguments that the Board will likely hear from complainants and the types of cases on which the General Counsel is likely to issue a complaint. At Sidley Austin, our labor and employment attorneys have decades of experience advising clients with respect to noncompetition agreements and the sometimes unpredictable prescriptions of the NLRB.