Jennifer Abruzzo, general counsel of the National Labor Relations Board (NLRB), recently issued a memo claiming that certain noncompete clauses in labor contracts are illegal, on grounds that they violate employees’ right to organize and negotiate better working conditions under Section 7 of the National Labor Relations Act (NLRA).
The NLRB isn’t the first Biden administration agency to signal harsher curtailment of employment terms it deems unfair. Earlier this year, the FTC also released a proposed blanket rule against noncompete clauses, which has been subject to substantial criticism on legal and economic grounds (see, for example, here, here, here, here, and here). Though Abruzzo’s memo is nonbinding and doesn’t create a new cause of action, it still encourages agency staff to investigate, examine and prosecute existing noncompetes.
An estimated 18.1% of U.S. workers—more than 28 million individuals—are currently employed under noncompetes. The NLRB memo potentially creates litigation risk for businesses, connoting substantial costs and uncertainty. Rather than protecting future workers, this could lead to the chilling of employment and training opportunities—even though the memo is based on tenuous legal interpretation and reasoning that may not survive a court challenge.
Likely Effects of the NLRB Memo
The memo’s central claim is that noncompetes are illegal unless they are narrowly drafted to protect specific interests, such as preventing an employee from using proprietary or trade secrets to which they have access. It argues that denying workers the ability to change jobs—by blocking their access to other employment opportunities for which they’re qualified for—violates workers’ rights under Section 7 of the NLRA because it chills their ability to concertedly threaten to resign or undertake other industrial action against employers as part of negotiating or seeking better working conditions.
The memo acknowledges that the NLRA doesn’t apply to employees who supervise others, and explicitly excludes noncompete clauses that clearly restrict only the worker’s managerial or ownership interests in a competing business. It also doesn’t apply to independent-contractor relationships, and focuses on low and middle-income workers. (It doesn’t, however, exclude workers with higher incomes.) Abruzzo even suggests that noncompete clauses drafted specifically to protect trade secrets and proprietary information may be illegal if courts or the NLRB concludes that there were alternative ways to achieve that objective.
Despite the memo’s nonbinding nature, its limits, and its untested validity in the courts or even at the NLRB, it’s still likely to influence business and employer conduct across the United States, due to companies wanting to avoid the risk and cost of litigation. Responses are likely to include a decline in investment in training and development of workers, as it will be harder for employers to ensure that employees who undertake training at their expense do not simply take those benefits to a competitor. This would make it harder for those entering the workforce to get a foot in the door for career advancement relative to their established peers, and could lead to more skilled jobs in mobile labor sectors like information technology shifting to jurisdictions that are more permissive about noncompetes.
It could also lead companies to become more reluctant to share trade secrets and proprietary information with workers, even where this would make those workers less productive than they otherwise would be. Workers could also suffer from a decline in opportunities for secure jobs, with employers shifting their preference toward recruiting independent contractors. The economic implications of banning or severely restricting noncompetes are discussed further in this public interest comment from my colleagues Alden Abbott and Liya Palagashvili.
The memo and its analysis could also mean that fiduciary-duty laws, no-recruit agreements, and even NDAs or confidentiality agreements are likely to be next on the chopping block, as all of these agreements appear to run afoul of the NLRB logic that they hinder workers from soliciting their coworkers to move to a competitor as part of a broader course of protected concerted activity. This would heighten the likely net effect of creating a less-favorable commercial climate with fewer opportunities for workers, even if those currently employed benefit from the increased ability to seek alternative opportunities in the short term.
Moreover, the risk of NLRB investigations and prosecutions could expose many employers to internal NLRB processes with which they are unfamiliar, including internal decision-making by administrative law judges (ALJs) and a politically appointed board. These daunting prospects would further deter employers from making suitable job offers, even when the noncompete clause they wish to include may not be found to violate the law.
The Memo Stands on Tenuous Legal Footing
So just how likely is it that the NLRB general counsel’s interpretation of the law will be upheld by the courts?
The central argument is that preventing an employee from working for a competitor for a period of time after they cease to work for their current employer “interfere[s] with, restrain[s], or coerce[s]” [Section 8(a)(1), NLRA] him or her from exercising their right to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection” [Section 7, NLRA], as restricting alternative employment opportunities would hinder employees from collectively resigning or threatening to resign to demand better working conditions.
Notably, even a broad noncompete clause doesn’t technically prevent anyone from resigning, threatening to resign, or inducing others to do so. It just makes that threat more difficult or costly to carry out, depending on the limitations of the specific noncompete. For instance, threatening to resign en masse to demand better working conditions is a more credible threat if workers bound by a noncompete are able to perform the same job for employers that don’t compete with their current one, such as those involved in different industries. For example, a quantitative analyst who has signed a noncompete with an investment bank under which they agree not to work for one of its competitors may still seek employment at any firm that doesn’t compete with their original employer.
In its 2017 Minteq International decision, the U.S. Circuit Court of Appeals for the D.C. Circuit canvassed established precedent and found that even clauses that don’t explicitly restrict a worker’s Section 7 (NLRA) rights can violate the law if workers would reasonably interpret them as prohibiting Section 7 activities. The majority concluded that NLRB determinations of whether an employer rule illegally interfered with Section 7 activities are to be given considerable deference, provided that it is “reasonably defensible.” Applying these rules—as well as prior precedent that deemed the organization of consumer boycotts by disgruntled employees as part of a labor dispute to be a protected activity—the circuit court found that an employer could not preclude employees from soliciting customers to boycott their employer as part of Section 7 concerted activity, upholding a determination made by the NLRB.
In a similar vein, courts have recognized threats of concerted resignation as part of a pre-existing labor dispute to be protected (see, e.g., Crescent Wharf & Warehouse Co.). They have also recognized as protected the solicitation of opportunities from alternative employers, albeit only where no contractual terms bar the employees to do so (see, e.g., QIC Corp.).
An important distinction, however, is that noncompete clauses do not prohibit concerted resignation or the threat of doing so. They typically apply only to direct competitors of the employer firm, and often within a specific geographic area. As such, the limitations placed on concerted activities connected to a labor dispute are far narrower in the case of even broad noncompetes than in the case of the prohibited conduct in the case law the NLRB’s Abruzzo cites. This indicates that while the reasoning she forwarded may be upheld with respect to specific noncompetes or in specific situations, this is a far cry from the broad net she casts and encourages other agency staff to cast in cracking down on these clauses.
Though Minteq International also found that a noncompete clause in the same contract violated Section 7, this was because noncompetes were deemed to be a “mandatory subject” of collective bargaining and because the union representing the workers hadn’t had the opportunity to negotiate on that clause—not because the clause otherwise violated Section 7. The question of whether noncompete questions in general—or even that particular one—violate Section 7 was left unaddressed.
Even if courts entertain the argument that noncompetes typically constrain protected Section 7 activities, Abruzzo argues that business-justification defenses—such as the protection of trade secrets, proprietary information, or investments in employee training—are unlikely to hold up, since these interests can be protected through other “narrowly tailored” means. She suggests, for example, that longevity bonuses may encourage workers who’ve benefited from training investments to remain with the firm. In addition to imposing significant new costs on employers, however, such incentives may not be sufficient to prevent employees from leaving. Abruzzo also provides no specifics about alternative means to protect employees from using trade secrets or proprietary information as competitors. This could be because many of the possible alternatives, such as nondisclosure agreements, would be captured by the same arguments she cites against noncompetes.
Thus, expanding Section 8(a)(1)’s constraints on terms of employment to include noncompete clauses would uphold a standard that the NLRB and the courts have not adopted over the many decades of the NLRA’s existence, as well as one that Congress did not contemplate when it enacted the law. It would also call into question many other contractual restraints on employment, including fiduciary-duty laws, no-recruit agreements, and even NDAs or confidentiality agreements. It’s thus likely that courts will be reluctant to uphold this broad interpretation as “reasonably defensible,” even if the general counsel’s advice is ultimately reflected in an NLRB decision.
Conclusion
The net effect of the NLRB memo and its signaling of greater scrutiny of noncompete agreements is likely to chill the use of such clauses. While this would increase labor mobility in the short term, it would bring with it a range of likely adverse long-term consequences for opportunity and employment across various industries. A more narrowly tailored approach that singles out specific kinds of noncompetes—or noncompetes in specific situations, such as low-wage workers—may be more desirable, although this is a policy principle already reflected in the labor laws of various states.
Congress did not envisage the National Labor Relations Act being used to target noncompete clauses, which have existed in some form since well before the NLRA came into effect. Given the unprecedented nature of blanket rules against all or most noncompetes now contemplated by agencies like the FTC and NLRB, courts are unlikely to uphold the legal reasoning that Abruzzo forwards here. This is, however, unlikely to stop the NLRB’s push against noncompetes from modifying business conduct, while imposing significant costs on those who hire workers in a range of contexts.