The NLRB’s Dim View of Noncompetes Spurs Review by Corporates

In a new memo issued by Jennifer Abruzzo, the National Labor Relations Board’s general counsel, “the proffer, maintenance, and enforcement of a noncompete provision” is described as a violation of Section 8 of the National Labor Relations Act in almost all circumstances. The NLRB’s negative view of noncompetes dovetails with efforts by the Federal Trade Commission to prohibit use of these contracts as an unfair restraint of trade.

Last year, the FTC and the NLRB entered into a memorandum of understanding, agreeing to share information, cross-train staff, and consult with each other on law enforcement efforts. The memo specifically mentioned noncompetes among their common enforcement interests. Attention from one agency will pique the interest of the other when it comes to such agreements.

But this doesn’t mean employers need to take immediate, drastic steps regarding their current use of noncompetes. The FTC’s proposed rule is not expected to be finalized until next year, and the general counsel memo is merely a statement of that office’s interpretation of the law. For the memo’s position to have authority, the NLRB must apply the interpretation in a particular case. Even then, appeals through the court system are likely. Similarly, any final FTC rule is expected to be challenged through the courts.

While there may not be a need for employers to take immediate action in response to the Abruzzo memo, the tide has definitely turned against noncompetes. Thus, employers should consider examining how and when they use the agreements, considering these key factors:

What state law applies to the situation? Some states already prohibit use of noncompete agreements or severely limit their use. Most others impose specific rules that must be met for noncompetes to be enforceable, such as reasonableness as to scope, geography, and time period.

Which employees are covered by noncompetes? Noncompetes should be restricted to as few employees as possible and only to those with a solid business justification for a noncompete agreement. That justification cannot simply be to restrict competition. Rather it should be something like protecting trade secrets or confidential information or maintaining the value of a purchased business.

While the FTC’s proposed rule is extremely broad in the types of employees it would prevent from entering into noncompetes, employers should keep in mind that the NLRA provides express exclusions from coverage for certain workers such as supervisors. And, while not expressly excluded by statute, nonsupervisory managerial employees and certain “confidential employees” have been held to be excluded by the courts.

The prohibitions described in the NLRB general counsel’s memo won’t apply to many of the employees whom employers would view as most likely needing to be subject to noncompete agreements in order to protect legitimate business interests. Significantly, though, employees like nonsupervisory sales representatives would be covered.

Are there effective alternatives to noncompetes, such as bonuses to incentivize employees to remain employed, confidentiality and trade secret agreements, or non-solicitation agreements? Keep in mind that the proposed FTC rule specifically says that anything that is the functional equivalent of a noncompete, however, is equally prohibited.

The bottom line: It’s important for companies to start analyzing their use of noncompete agreements and exploring alternatives to noncompetes. A key part of this analysis is ensuring the company has a legal team that understands the changing tides against noncompetes and the interplay between the NLRB and FTC.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Natalie K. Sanders is a partner at Brooks Pierce and provides counsel and defense to businesses in all aspects of employment law.

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