Memo asserts such provisions in employment contracts and severance agreements violate the National Labor Relations Act

On May 30, 2023, the General Counsel of the National Labor Relations Board, Jennifer Abruzzo, issued Memorandum GC 23-08, setting forth her view that noncompete provisions in employment contracts and severance agreements violate the National Labor Relations Act because such clauses interfere with employees' rights to engage in protected concerted activities. This is the latest effort by an increasing number of government entities to invalidate, or severely limit, the use of noncompete agreements.

Abruzzo Continues Efforts to Limit the Scope of Employment Agreements

Memorandum GC 23-08follows the Board's recent decision in McLaren Macomb, wherein the Board held that the mere act of offering a severance agreement that contains broadly worded confidentiality, nondisclosure, and/or nondisparagement clauses is unlawful. (For more on McLaren Macomb, please see our advisory).

Abruzzo asserts in the Memorandum that overbroad noncompete agreements interfere with employees' ability to engage in the following activities:

• Concertedly threaten to resign – or actually resign – to secure better working conditions;
• Concertedly seek or accept employment with a local competitor to obtain better working conditions;
• Solicit their co-workers to go work for a local competitor as part of a broader course of protected concerted activity; and
• Seek employment elsewhere in order to engage in protected activity, including union organizing, with other workers at another employer's workplace.

Abruzzo concedes that noncompete agreements could be lawful in discrete circumstances, but only if the provisions clearly restrict only the individual's managerial or ownership interests in a competing business, or in bona fide independent-contractor relationships. In addition, GC Abruzzo acknowledges that there may be "special circumstances" in which a narrowly tailored noncompete agreement's infringement on employee rights may be justified. But Abruzzo neglects to provide much practical guidance for employers who rely on noncompete agreements to protect their legitimate business interests.

While Abruzzo fails to enumerate the special circumstances in which a narrowly tailored noncompete agreement may justifiably infringe on employees' rights, she notes that "a desire to avoid competition from a former employee" and "business interests in retaining employees or protecting special investments in training employees" are unlikely to justify a noncompete agreement.

Abruzzo's view reflects a nationwide trend towards substantially narrowing noncompete provisions. For example, Washington state, the District of Columbia, and Colorado impose salary thresholds for the enforcement of noncompete agreements, and California bans them entirely except for limited circumstances. Minnesota's governor also recently signed a law banning most noncompetition agreements effective July 1, 2023. The Federal Trade Commission proposed a rule earlier this year to ban noncompetition agreements as well, though it has not yet adopted a final regulation and many corners of industry have threatened immediate court action to stop the FTC from ever implementing such a ban. Abruzzo's memo reflects a second attempt to institute a similar ban nationwide without the participation of any actual lawmakers.

To address any alleged violation of the Act, Abruzzo urges Regions to seek make-whole relief for employees who can demonstrate that they lost opportunities for employment due to an overbroad noncompete provision, even absent additional conduct by the employer to enforce the provision.

It is uncertain whether the Board will adopt Abruzzo's approach. In a previous decision, members of the Board made clear that the Board has limited authority to award make-whole remedies. Members Kaplan and Ring recently dissented in Thrivy, Inc., noting, "In our view, however, the majority's decision to include compensation for all losses foreseeably resulting from an unfair labor practice is unwise and likely beyond the Board's statutory authority."

What Can Employers Do to Protect Proprietary and Trade Secret Information?

The GC Memorandum foreshadows the Board's continued emphasis on limiting the scope of employment agreements. The changing landscape for noncompetes is a challenge for employers seeking to protect sensitive or confidential information entrusted to employees. While it is unclear whether the Board or courts would agree with Abruzzo's view, employers should consider taking the following proactive steps:

• Consider whether noncompete provisions are necessary when dealing with employees covered by the Act.
• Evaluate which employees have access to trade secrets, confidential information, and client or contract lists to consider other measures to protect this information.
• Continue to limit the use of noncompetes to individuals with managerial or ownership interests in a competing business, or true independent-contractor relationships.
• Create policies and procedures that clearly define the scope of the company's proprietary information, trade secrets, and data-security policies and procedures. Reference such policies and procedures in employment contracts, offers of employment, and employee handbooks, and allow for regular compliance monitoring.
• Implement a robust out-boarding process with departing employees that emphasizes an ongoing duty to protect, and to not disclose, company proprietary information and/or trade secrets.

This continues to be an evolving area of law. DWT will continue to monitor these and other labor law developments.

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