I recently saw the summer blockbuster Spider-Man: Across the Spider-Verse, the sequel to Spider-Man: Into the Spider-Verse, so new characters are on my mind.
Nothing against Paula Payne and Dawn Davis, but I thought it was time to introduce some new characters to the FMLU (the Five Minute Law Universe).
So, meet Bobby Bluecollar. Bobby works for Vinny’s Valves, which started as a mom-and-pop operation but now has offices throughout Texas and the Gulf Coast, providing equipment to hundreds of customers in the oilfield exploration and production industry.
Vinny himself doesn’t work much anymore. His daughter Vanessa now runs the company. That includes supervising a team of over 50 sales people.
The old man was tough as nails, but generous to his employees, almost to a fault. Vanessa, on the other hand . . . Well, let’s just say she’s looking to sell the company to a private equity firm, so she watches margins like a hawk.
Bobby’s a salesman, not a supervisor. He gets paid a combination of salary and commissions. In a good year, has made as much as $120k.
But that was before Vanessa’s cost-cutting campaign.
First, she got strict about expense accounts: no more bass fishing with Bobby’s buddy at Halliburton and calling it a “networking” expense.
Then she cut commission percentages.
Then she cut salaries for the inside sales employees, causing the best ones to leave. Customer orders started getting screwed up.
And the last straw: commission checks started coming late.
Bobby and his fellow sales people are hopping mad. They start talking about organizing to protest the cost-cutting measures. “If they don’t start paying us fair commissions on time, we should just walk out,” Bobby tells a group assembled in the break room one day, “and we’ll take our customers with us!”
There’s only one problem. Bobby and every other sales person at Vinny’s Valves signed a Confidentiality, Non-Solicitation, and Non-Interference Agreement (a “CNNIA”) drafted years ago by Vinny’s long-time golfing buddy, lawyer Fred Brunell.
The Agreement is seven pages of dense single-spaced paragraphs, but I’ll sum it up: it says you’re free to leave any time, and you can go work for one of our competitors, but you can’t take your customers with you. You also can’t recruit any of your former co-workers to follow you.
Fred was apparently familiar with Wolfe’s First Law of Texas Non-Compete Litigation.
Anyway, Vanessa gets wind of the grumblings among the sales staff, and she doesn’t mince words. “Look, I’ve got a responsibility to the owners of this company to keep costs down,” she tells Bobby and his friends, “and if y’all don’t like it, you can hit the road.”
“But don’t try taking any of my customers with you,” she adds “or I’ll have Fred sue your ass.”
Now here’s the key question: Does the Vinny’s Valve Agreement violate Section 8 of the National Labor Relations Act?
Wait, what?
The NLRA?!
If you’re a lawyer like me who regularly deals with departing employee litigation, the NLRA is probably the last thing you would have thought of when presented with this fact pattern.
That is, until recently. When the General Counsel of the National Labor Relations Board (NLRB) issued a controversial new memo.
The Back Story to the NLRB General Counsel Memo
But first, the back story.
Section 7 of the NLRA protects worker rights to organize. It says in pertinent part:
Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purposes of collective bargaining or other mutual aid or protection . . . (emphasis added)
Some of you may immediately ask, what’s an “employee”? Hold that thought for now.
Note that Section 7 is clearly intended to protect the right to unionize, but it is not limited to unions. It more broadly protects the right of employees to engage in “concerted activities” for the purpose of “mutual aid or protection.”
Section 8(a)(1) of the NLRA puts the teeth in Section 7. It says in pertinent part that it is an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.”
Put them together, and the result is a pretty broad rule: Employers cannot restrain employees from engaging in concerted activities for mutual aid or protection.
That obviously leaves a lot of room for interpretation.
The McLaren Macomb Opinion
The McLaren Macomb opinion issued by the Board in February 2023 signaled a broad interpretation of the scope of employee rights under Section 7. McLaren Macomb, 372 NLRB No. 58, Case 07-CA-263041, 2023 WL 2158775 (Feb. 21, 2023).
The Board ruled that an employer substantially interfered with such rights by including overly broad non-disparagement and confidentiality provisions in a severance agreement:
“[A]n employer violates Section 8(a)(1) of the Act when it proffers a severance agreement with provisions that would restrict employees’ exercise of their NLRA rights,” the Board held. “Such an agreement has the reasonable tendency to restrain, coerce, or interfere with the exercise of Section 7 rights by employees.”
The Board would later make this “reasonable tendency” standard more explicit in the Stericycle case.
The Stericycle Opinion
In Stericycle, the Board clarified the general standard for determining whether an employer’s workplace rules interfere with Section 7 rights. Stericycle, Inc. and Teamsters Local 628, 372 NLRB No. 113, Case Nos. 04-CA-137660 et al., 2023 WL 4947792 (Aug. 2, 2023).
First, the Board will assess whether the General Counsel has established that a challenged work rule has “a reasonable tendency to chill employees from exercising their Section 7 rights.”
“In doing so, the Board will interpret the rule from the perspective of the reasonable employee who is economically dependent on her employer and thus inclined to interpret an ambiguous rule to prohibit protected activity she would otherwise engage in.”
If an employee could reasonably interpret a rule to restrict Section 7 activity, the rule is “presumptively unlawful.”
The burden then shifts to the employer, who may rebut the presumption 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.”
This standard has three key features favoring employees:
- An employer’s work rule doesn’t have to prohibit concerted activity to violate Section 8. It’s enough that the work rule has a reasonable tendency to chill concerted activity.
- The Board will interpret the work rule from the perspective of a reasonable employee who can’t afford to lose a job.
- If a work rule is presumptively unlawful, the employer must show that it could not advance its substantial business interest with a more narrowly tailored rule.
On its face, this seems like a pretty plain vanilla “balancing test” you can find in almost any area of law. But if you read what some law firms reported about Stericycle, you’d think the Board decided to require employers to issue employees copies of Das Kapital. Just keep in mind that most of the law firms putting out these articles represent management.
Personally, I don’t think this rule will end capitalism as we know it. Employers will adjust, and they’ve got good lawyers. Just imagine all the billable hours from revising employee handbooks! It’s not such a bad thing.
But what if the Board starts applying this standard to non-competes?
Now that would be radical.
The General Counsel’s Memo
Enter Jennifer Abruzzo, General Counsel of the NLRB. It’s no secret she doesn’t like non-competes.
On May 30, 2023, she issued Memorandum GC 23-08 to all Regional Directors, Officers-in-Charge, and Resident Officers of the NLRB. I’ll just call it “the Memo” for short.
The Memo says that except in limited circumstances, the “proffer, maintenance, and enforcement” of non-compete agreements between employers and employees violates Section 8 of the NLRA.
The Memo is, like, just her opinion, man. But still, an opinion from the Office of the General Counsel of the National Labor Relations Board carries some weight. It’s not like the opinion of some lawyer who has a blog and a YouTube channel. So it’s worth taking a close look.
The Memo has four main parts: Background, the Rule, the Chilling Argument, and the Business Interest Argument.
Background
In the Background section, the Memo starts by stating what a “non-compete” is. It says “non-compete agreements between employers and employees prohibit employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment.”
That’s an accurate but quite vague definition. More about this later.
The Memo then sets the stage. Section 7 of the NLRA, the Memo explains, protects employee rights to engage in concerted activities, and Section 8 says employers can’t interfere with or restrain those rights. I covered this earlier.
The General Counsel then cites the standard she urged the Board to adopt in Stericycle.
And guess what? It’s the standard the Board eventually adopted, explained above. In short, “a provision in an employment agreement violates Section 8(a)(1) if it reasonably tends to chill employees in the exercise of Section 7 rights unless it is narrowly tailored to address special circumstances justifying the infringement on employee rights.”
The Rule
Applying that standard, the Memo states this Rule:
“Non-compete provisions are overbroad, that is, they reasonably tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”
Thus, under the Memo’s standard, the key question is whether a “non-compete” (whatever that is) could reasonably be construed to cut off employment opportunities if the employee decides to say, in the immortal words of Johnny Paycheck, “take this job and shove it.”
Let’s pause here. How does this standard apply to Bobby Bluecollar’s non-compete? Remember, it says he’s free to go to work for a competitor, he just can’t take any of his customer with him (essentially). Does that cut off employment opportunities?
Hold that thought. Next let’s look at the Memo’s explanation of how a non-compete chills employee rights.
The “Chilling” Argument
The Chilling Argument explains how a non-compete (whatever that is) chills employee rights to engage in concerted activity.
A non-compete, the Memo explains, chills employees from engaging in Section 7 activity because employees know it will be difficult to replace their lost income with a suitable job if they get fired for acting together to try to improve working conditions.
In other words, if an employee knows he can’t go to work for a competitor in the same area in the same industry if he gets fired, he’s less likely to rock the boat by joining together with other employees to complain about working conditions.
The Memo then gives five more specific examples of how non-competes chill concerted employee activity. Non-competes chill employees from:
- Making concerted threats to resign
- Carrying out such threats
- Seeking or accepting employment with a local competitor
- Soliciting co-worker to work with a local competitor
- Seeking employment to specifically engage in protected activity with other workers at an employer’s workplace
In short, a non-compete chills concerted activity because an employee who can’t get a replacement job with a competitor is less likely to engage in concerted activity.
Under the Stericycle standard, the question then becomes whether the employer has a substantial business interest that cannot be protected with a more narrowly tailored restriction.
The “Business Interest” Argument
The Memo’s answer: Nope.
The Memo says “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.”
Business interests in retaining employees or protecting special investments in training employees are “unlikely to ever justify an overbroad non-compete provision because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus.”
What about the employer’s interest in protecting confidential information and trade secrets? That interest “can be addressed by narrowly tailored workplace agreements that protect those interests.”
The Memo goes on to explain that an employer’s justification for a non-compete is unlikely to be 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 protectible interests.”
This does not mean that every non-compete violates the NLRA, the Memo stresses. A “narrowly tailored” non-compete may be justified by “special circumstances.”
But in general, the Memo says, the NLRB should seek relief for employees who, “because of their employer’s unlawful maintenance of an overbroad non-compete provision, can demonstrate that they lost opportunities for other employment.”
Analysis of the Memo: The Good, the Bad, and the Ugly
Let’s start with the Good. The Memo is absolutely right that a broad non-compete that prevents an employee from accepting a job with a competitor is going to have a chilling effect on that employee banding together with other employees to improve working conditions.
I don’t have scientific evidence, but I’ve represented dozens of employees who have non-competes, and I can vouch for the fact that an employee who doesn’t have the option to say take this job and shove it is less likely to rock the boat complaining about management’s treatment of workers.
And I give the Chilling Argument extra points for realism. It would be easy to take the formalistic approach. The typical corporate-oriented lawyer, or judge who comes from that background, can easily say “this non-compete doesn’t restrict concerted activity in any way, and you’re free to leave any time you want.”
But that just doesn’t acknowledge the reality. In most cases, it’s not a realistic option for the employee to change careers, to accept a much lower salary, or to move to another city or even state. That means the employee will feel stuck.
So, yes, of course a broad non-compete is going to have a chilling effect. That’s just common sense.
The Bad
The Bad part of the Memo is the Business Interest Argument.
The Memo just doesn’t take the employer’s business interest in a non-compete that seriously. It devotes fewer than 250 words to that issue. It brushes aside the employer’s interest in restraining competition from a former employee in a single sentence supported by a footnote citing one comment from the Restatement of Contracts and one Tennessee case.
There are thousands of court cases that seek to balance an employer’s interest with the public interest in free competition. But you’d barely know it from the Memo.
The Ugly
And then there’s the Ugly part: the absence of any real discussion of the crucial employer interest in enforcing a non-compete.
I’m talking about goodwill, of course. Protecting customer goodwill is the most important purpose of a proper non-compete.
The Memo never even uses the word “goodwill.” As much as I like the Memo’s realism and concern for protecting employees, this glaring admission is simply inexcusable.
An employer’s confidential information can be protected by confidentiality agreements and trade secrets law. A non-compete, in contrast, is really the only legal mechanism for protecting goodwill with customers.
But the Memo gives short shrift to customer goodwill. It barely even mentions it.
The closest the Memo comes to addressing goodwill is a single footnote that mentions an employer’s “legitimate interest in restraining the employee from appropriating . . . customer relationships [i.e. goodwill] to which he has had access in the course of his employment.”
That’s it, though. There’s no real discussion of the employer’s interest in protecting its goodwill with customers, how a reasonably tailored non-compete protects that interest,
Don’t get me wrong. I’m not necessarily saying the employer’s interest in protecting goodwill outweighs the employee’s right to engage in concerted activity. In any given case applying the Stericycle framework, the evidence may be insufficient to rebut the presumption that the non-compete violates the NLRA. But the Memo’s failure to meaningfully grapple with that issue reduces its persuasive power.
The best justification I can give for the Memo’s failure to address the employer’s interest in customer goodwill is that the Memo is really focused on lower-level workers, the kind who are less likely to have customer relationships they can move to a competitor, i.e. “portable business.”
This is apparent in the Memo’s statement that the employer’s justification is unlikely to be 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 protectible interest” (emphasis added).
Customer goodwill is the most likely candidate for some “other protectible interest.” And lower-level workers are less likely to maintain the goodwill with the customers.
Applying the Memo to a Sample Texas Non-Compete
Bobby Bluecollar, on the other hand, does have customer relationships he could move to a competitor. How would the NLRB Memo apply to his non-compete?
The short answer is that we don’t know. At least, not yet.
The threshold question is whether Bobby’s agreement is a “non-compete.” The Memo doesn’t really tell us, because it never really defines what a “non-compete” is.
It does tell us that a non-compete prohibits employees from accepting certain jobs. So we might hypothesize that a non-compete, for NLRA purposes, is an agreement that prevents an employee from accepting a job working for a competitor in the same field and in the same geographic area.
Hmm. This sounds familiar.
In its proposed rule that would prohibit most employee “non-competes” as unlawful restraints on competition, the FTC defines a non-compete clause as: “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” I covered this in What Everybody’s Missing About the FTC’s Proposed Non-Compete Ban.
The FTC identifies some other types of clauses that are not non-competes: (1) confidentiality agreements, (2) non-solicitation agreements, (3) “no-business” agreements, and (4) “no recruit” agreements.
The NLRB Memo, in contrast, doesn’t make these delineations.
But let’s assume the FTC and the NLRB define a “non-compete” the same way. They’re both part of the Biden Administration (sort of), and the law is, of course, a seamless web.
Applying this definition, Bobby’s agreement isn’t really a “non-compete” at all. It’s really just a combination of the four kinds of clauses the FTC says are not “non-competes.”
And there you have it. Nothing to worry about! The typical Texas non-compete doesn’t violate the NLRA.
I’m half kidding, of course. The NLRB Memo isn’t that precise about what is or is not a “non-compete,” and its rationale sweeps broadly.
So I come back to my bottom line answer: we just don’t know yet.
Advice for Employers: Same As It Ever Was
So what are Texas employers to do? Fear the worst from the NLRB and abandon non-competes completely? Hope for the best and do nothing?
I think the thing for Texas employers to do is first, ask themselves “do I really want or need my employees to sign a non-compete?” I covered this in my post The Most Effective Form of Non-Compete in Texas (or Anywhere).
Assuming the employer wants some kind of non-compete with its employees, the next thing to do is to make the non-compete as narrow as reasonably possible, such as limiting it to customers the employee had relationships with. For guidance, see my series Drafting the Bullet-Proof Non-Compete.
Then if the NLRB comes calling, at least you’ll have a decent argument that the agreement is narrowly tailored to protect the employer’s interest in protecting its goodwill and confidential information.
Which Texas law already requires. I covered this in my very first blog post, What a Litigator Looks For in the Typical Texas Non-Compete.
New characters, same old story.
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Zach Wolfe (zach@zachwolfelaw.com) is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm (zachwolfelaw.com). Thomson Reuters named him a Texas Super Lawyer® for Business Litigation in 2020, 2021, and 2022.
These are his opinions, not the opinions of his firm or clients, so don’t cite part of this post against him in an actual case. Every case is different, so don’t rely on this post as legal advice for your case.
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