The NLRB Joins the Crackdown on Non-Competes
12.2.2024
Much has been written about the Federal Trade Commission’s “final rule” banning the use of most employee non-compete agreements by private sector employers.[1] While litigation over the enforceability of the final rule works its way through the federal courts, the National Labor Relations Board has also sought to invalidate non-competes and other restrictive covenants – a development that has received much less attention.
The FTC Ban: Heading to a Circuit Split and Then the Supreme Court?
Over a several week period, three federal district courts reached conflicting decisions over the enforceability of the FTC’s final rule. On July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania ruled in ATS Tree Services, LLC v. Federal Trade Commission et al[2] that the FTC “is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” Like the ATS court, the U.S. District Court for the Middle District of Florida in Properties of the Villages, Inc. v. Federal Trade Commission[3] rejected the argument that the FTC lacked authority. Nevertheless, the court issued a preliminary injunction limited to the plaintiff in that case, reasoning that the final rule violated the major questions doctrine, which requires an agency to demonstrate clear congressional authorization when it issues a rule that has extraordinary economic and political significance.
On Aug. 20, 2024, in Ryan LLC et al v. Federal Trade Commission,[4] the U.S. District Court for the Northern District of Texas issued a nationwide injunction blocking enforcement of the final rule. The court found that the final rule exceeded the FTC’s statutory authority, reasoning that the FTC does not have authority to promulgate substantive rules addressing unfair methods of competition. The court also concluded that the sweeping final rule was arbitrary and capricious in violation of the Administrative Procedure Act because the FTC did not justify the broad scope of its ban.
The FTC filed a notice of appeal in Properties of the Villages to seek reversal in the U.S. Court of Appeals for the 11th Circuit. As of this writing, the FTC has not appealed the Ryan decision. On Oct. 4, 2024, ATS Tree Services voluntarily dismissed its case against the FTC. This dismissal prevents the FTC from eventually seeking an affirmance from the U.S. Court of Appeals for the Third Circuit and decreases the likelihood of a circuit split resulting in the U.S. Supreme Court deciding the fate of the final rule.
The NLRB Seeks To Void Restrictive Covenants
Last year, NLRB General Counsel Jennifer Abruzzo issued a memo[5] expressing her view that non-competition and non-solicitation provisions could interfere with non-supervisor employees’ exercise of their rights under Section 7 of the National Labor Relations Act. On June 13, 2024, in J.O. Mory, Inc.,[6] an NLRB administrative law judge agreed, finding that the company’s non-competition and non-solicitation provisions chilled non-supervisor employees’ Section 7 rights to engage in protected concerted activity. The judge ordered J.O. Mory to rescind these contractual provisions and notify current and former employees who were subject the restrictions that they were no longer in effect.
In J.O. Mory, employees had agreed that during their employment and for 24 months after termination for any reason, they would not solicit, encourage, or attempt to persuade any other J.O. Mory employee to leave the company’s employment. They also agreed to a 12-month non-compete, which barred them from working for a company in the same or similar business in the county where they worked and in contiguous counties.
Section 7 of the National Labor Relations Act gives non-supervisory employees,[7] including those in non-union workplaces: (i) the right to discuss and/or act together to improve terms and conditions of employment, such as salary, benefits and working conditions, or to disclose their own contact information or compensation and (ii) the right to decide for themselves if they want to be represented by a union. On their face, the challenged restrictive covenants do not impact Section 7 rights. However, in Stericycle, Inc.,[8] the NLRB adopted an expansive test for determining if neutral polices or rules chill non-supervisory employees’ exercise of their Section 7 rights. Now, if an economically dependent non-supervisory employee contemplating engaging in Section 7 activity could reasonably interpret the rule or policy to have a coercive meaning, then the rule or policy will be presumptively unlawful, even if a contrary, non-coercive interpretation of the rule is equally reasonable. The only way for an employer to rebut that presumption is “by proving that the rule advances a legitimate and substantial business interest, and that the employer is unable to advance that interest with a more narrowly tailored rule.”
Applying the Stericycle framework, the judge in J.O. Mory ruled that the restrictive covenants were presumptively unlawful. The judge determined that the non-compete would make an employee more fearful of being fired and less willing to rock the boat because they face the possibility of being unable to work in their geographic area. The judge found that the non-solicitation would dissuade a reasonable employee from engaging in protected concerted activity, such as telling their coworkers about union wages and benefits, fearing their employer might accuse them of inducing others to quit.
The judge stated that J.O. Mory provided no evidence that these restrictive covenants advanced a legitimate business interest, making it unnecessary to conduct the second part of the Stericycle analysis. Nevertheless, the judge noted that other unchallenged contractual terms, including a requirement to turn over confidential and proprietary information and a prohibition against diverting customers, show that the company’s legitimate business interest could be protected with more narrowly tailored restrictions.
Although J.O. Mory has appealed, this decision represents an expansive read of Section 7 rights being used to invalidate restrictive covenants covering non-supervisory employees – an interpretation that recently has been extended to no-poach agreements.[9]
New York State and Local Efforts To Limit Non-Competes
Historically, the enforceability of restrictive covenants has been decided at the state level. The use of federal regulations like the FTC’s final rule and the NLRB’s use of Section 7 to void restrictive covenants with non-supervisory employees certainly open new avenues for challenging these restrictive covenants. However, these federal efforts have not stopped the propagation of proposed state and local legislation. On Dec. 22, 2023, Gov. Kathy Hochul vetoed legislation[10] that would have broadly prohibited non-competes. In her veto memo, Gov. Hochul said she supports limits on non-competes for middle-class and low-wage workers, but to date a ban for those earning under a salary threshold has not been enacted. The New York City Council also is considering bills banning non-competes – one prohibits non-competes for all New York City workers, including independent contractors;[11] another prohibits non-competes for clerical and other workers under New York Labor Law Section 190 (7), except those employed in a bonafide executive, administrative or professional capacity earning in excess of $1,300 each week;[12] and a third bars non-competes for freelance workers, unless it contains a requirement that the hiring party pay an agreed upon sum for the period when the non-compete is in effect.[13]
Looking Ahead
The law surrounding the enforceability of non-competition and non-solicitation provisions is unstable and rapidly evolving. Given these recent developments, employers that use restrictive covenants and their attorneys must continue to monitor these cases and legislation that seek to limit their use.
Howard Lavin is partner at Thompson Coburn, where he represents employers in all aspects of labor and employment. This article appears in a forthcoming issue of One on One, the newsletter of NYSBA’s General Practice Section. For more information, please visit NYSBA.ORG/GEN.
Endnotes
[1]. 2024-09171 (89 FR 38342); The final rule includes exceptions, such as for non-competes entered into pursuant to a bona fide sale of a business and entities not subject to FTC jurisdiction. Other than for existing non-competes with “senior executives” earning over $151,164 annually and holding a policymaking position, the proposed ban would have applied retroactively. As a result, employers would have been required to provide employees and former employees currently subject to an existing non-compete clause with written notice that their non-competes are no longer enforceable. This senior executive exemption would not have applied to non-competes entered into after the September 4, 2024 expected effective date of the final rule.
[2]. Civ No. 24-1743 (E.D. Pa. 2024).
[3]. Civ No. 5:24-cv-000316 (M.D. Fla. 2024).
[4]. Civ No. 3:24-cv-00986 (N.D. Tex. 2024).
[5]. Mem GC 23-08 (May 30, 2023).
[6]. 25-CA-309577 and 25-CA-336995.
[7]. Under Section 2(11) of the NLRA, supervisors are individuals with authority to perform certain functions, including hiring, promoting, discharging, disciplining, directing work and dealing with workplace complaints or even making recommendations about such matters, provided they exercise independent judgment when doing so.
[8]. 372 NLRB No. 113 (2023).
[9]. On Sept. 12, 2024, the regional director of Region 22-Newark issued a complaint alleging that Planned Companies maintains contracts with its client buildings that interfere with, and are inherently destructive of, workers’ rights. According to the complaint, Planned Companies restricts its client buildings from soliciting its employees to work for them in a similar job classification for a period of 6 months after the agreement is terminated, or from hiring employees after they leave Planned Companies’ employment. The regional director alleges that restrictions create an obstacle to the exercise of employee rights and future bargaining. NLRB Case No. 22-CA-321532.
[10]. Senate Bill S3100A.
[11]. Int 0140-2024.
[12]. Int 0146-2024.
[13]. Int 0375-2024.
