IS THIS THE BEGINNING OF THE END? New Efforts to Limit Non-Compete Agreements

Over the years, non-compete agreements have become a common fixture in employment relationships. Until recently, the legal principles controlling the use of non-compete agreements was governed by state law. “For example, in Tennessee, although disfavored as a “restraint on trade,” courts generally enforce non-compete agreements so long as the terms “are reasonable under the particular circumstances.” Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471, 472 (Tenn. 1984). Employers—both in Tennessee and other states—have traditionally operated  according to the particular state law when drafting non-compete agreements to ensure enforceability. Recently, however, non-compete  agreements have caught the attention of federal agencies who are now seeking to significantly restrict, if not prohibit, non-compete  agreements.

The First Step
In January 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that would ban employers from executing non-compete agreements with its workers, including independent contractors. See https://www.ftc.gov/news-events/news/press-releases/2023/01/ ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harmcompetition. Specifically, the new rule would prohibit employers from (1)  “enter[ing] into or attempt[ing] to enter into a noncompete” agreement, (2) “maintain[ing] a noncompete with a worker,” or (3)  “represent[ing] to a worker, under certain circumstances, that the worker is subject to a noncompete” agreement. Id.

The FTC published the rule and accepted public comments on the rule through April 19, 2023. Id. The FTC is in the process of reviewing the public comments and, if necessary, will revise its proposed rule. Once the revisions, if any, are completed, the FTC will publish its final rule. Employers continue to await the FTC’s final rule.

The Second Step
On May 30, 2023, the National Labor Relations Board’s General Counsel, Jennifer Abruzzo, issued Memorandum GC 23-08 (“the  Memo”),  opining that non-compete agreements violate the National Labor Relations Act (“NLRA”). More specifically, Abruzzo asserts that non-compete agreements “interfere with employees’ exercise of rights under Section 7” of the NLRA and “the proffer, maintenance, and  enforcement of such agreements violate[s] Section 8(a)(1)” of the NLRA. See Memorandum GC 23-08, at p. 1 (available at https:// www.nlrb.gov/guidance/memos-research/general-counsel-memos). In Abruzzo’s opinion, non-compete agreements ordinarily prohibit  employees from quitting or changing jobs by limiting their access to other job opportunities, and the “denial of access to employment opportunities chills employees from engaging in Section 7 activity.” Id. at p. 2. Abruzzo identified five examples of ways an employee’s  activities are allegedly chilled:

• Employees are chilled “from concertedly threatening to resign to demand better working conditions.”
• Employees are chilled “from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working  conditions.”
• Employees are chilled “from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.”
• Employees are chilled “from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity.”
• Employees are chilled “from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.”

Id. at pp. 3-4. Thus, Abruzzo concluded that “the proffer, maintenance, and enforcement of a non-compete provision that reasonably tends to chill employees from engaging in Section 7 activity as described above violate Section 8(a)(1) unless the provision is narrowly tailored to  special circumstances justifying the infringement of employee rights.” Id. at p. 4. So, what are special circumstances that would justify a non-compete agreement? Instead of identifying special circumstances, Abruzzo identified what, in her opinion, does not qualify as special circumstances:

• Seeking “to avoid competition” by a former employee
• Employee retention
• Protecting investment in employee training
• Broad efforts to protect trade secrets/proprietary information

Id. at pp. 4-5. According to the Memo, these are all illegitimate business reasons and should not constitute a special circumstance to permit an employer to infringe on an employee’s rights under the NLRA. In fact, the Memo advises that “[i]t is unlikely an employer’s justification  would be considered reasonable in common situations where overbroad non-compete provisions are imposed on low-wage or middle-wage  workers who lack access to trade secrets or other protectable interests.” Id. at p. 5.

However, Abruzzo does concede a few situations in which a non-compete agreement may be acceptable. First, Abruzzo acknowledged that employers have a “legitimate business interest in protecting proprietary or trade secret information” when they can protect the information by a “narrowly tailored” agreement. Id. at p. 5.

Second, non-compete agreements that “clearly restrict only individuals’ managerial or ownership interests in a competing business” will not  violate the NLRA. Id. at p. 5. And, lastly, non-compete agreements with “true independent contractor[s]” will not violate the NLRA either. Id. at pp. 5-6.

What does the future hold?
So where does that leave us? Many employers are likely scratching their heads as they begin to think about what the FTC’s proposed rule may  ultimately impose and what Abruzzo’s memo means going forward.

For now, Employers must continue to await the final contents of the FTC’s rule.

As for the NLRA, the Memo does not reflect settled law. Rather, the Memo is the position and guidance for all regional offices that will be investigating and prosecuting unfair labor practice charges. Indeed, the Memo specifically advises the regional offices to submit “cases involving non-compete provisions that are arguably unlawful under the [Memo’s] analysis.” Id. at p. 6. Consequently, the Memo will likely cause an increase of NLRB investigations of non-compete agreements. Based on the Memo, it appears that the General Counsel is looking for a case to take before the NLRB to establish her position in the Memo as precedent. However, after the NLRB renders its decision, any party  dissatisfied with the NLRB ruling may appeal to the federal court system. Consequently, the battle over non-compete agreements is just beginning and may likely last over the next several years.

How should employers respond now?
For now, employers should consult with their legal counsel to determine how the Memo may potentially affect their business. And employers  will likely need to consult with legal counsel again once the FTC’s final rule is published.

Employers should consider auditing their existing non-compete agreements to determine which employees the Memo’s guidance may apply  to. For instance, for individuals with non-competes that are classified as independent contractors, employers should ensure that the  individual is not misclassified. Similarly, for individuals considered managers or supervisors, employers should verify that the individual qualifies as a “supervisor” under the NLRA and, thus, is not subject to the NLRA.

For individuals who are not excluded from the Memo as independent contractors or managers/supervisors, employers may consider assessing the risks and threats posed if that individual departs for a competitor. Employers may also consider whether the concerns and risks can be addressed through less burdensome means, such as an agreement prohibiting solicitation of customers, clients, or personnel. In the  end, employers should be on the lookout for further developments from the NLRB and the FTC on non-compete agreements.

By MATTHEW COURTNER