Assault on Noncompete Agreements Continues
As we have reported over the past five months, read here, the Biden Administration is continuing to orchestrate a frontal assault on noncompete agreements, while at the same time trying to change the rules on a going forward basis. This article provides a short update on the latest federal agency actions, including a new opinion released by the NLRB’s General Counsel and the status of the FTC’s Draft Rule, recent state law changes, and an important reminder that employment relationships are fiduciary in nature and are supposed be based on “integrity and fairness” which is a concept that swings both ways.
NLRB GC Targets Noncompete Agreements
The most recent action by the Biden Administration is the release of an opinion by the General Counsel to the National Labor Relations Board (“GC”) where she asserted her view that her office will begin taking the position that an employer who proposes, maintains, or seeks to enforce a post-employment noncompete agreement, even in a separation agreement, has violated Section 8(a)(1) of the National Labor Relations Act (“Act”), except in very limited circumstances.[1] In the GC’s view, most non-compete provisions are overbroad and they reasonably tend to chill employees in the exercise of their Section 7 rights because the restrictions deny the right to quit or change jobs thereby cutting off access to other opportunities, and this diminishes their bargaining power (i.e., unhappy employees can’t threaten as a group to resign to demand better working conditions because they can’t work elsewhere because of the noncompete provision).[2]
This position announced on May 30, 2023, if applied and upheld, will be available to be asserted by nearly any non-supervisory employee against any employer, even those without a union, because Section 7 rights apply to all employers.[3] The GC’s memo noted the NLRB’s commitment to an interagency approach to this issue, noting the approach taken by the FTC and the Department of Justice in bringing criminal prosecutions based on what the Administration sees as the anticompetitive effects of noncompete provision. The next day, the US Chamber of Commerce issued a statement announcing its intention to use “all available tools to fight this extreme and blatantly unlawful overreach” by the GC.[4]
The GC’s opinion that noncompete agreements “chill” concerted actions seek to go well beyond the NLRB’s traditional reluctance to recognize a Section 7 right for employees to resign en masse,[5] and she openly urged the Board to limit earlier decisions to their facts or to overrule decisions that are not consistent with her “chilling” analysis. She also argues that employees should not be “chilled” from soliciting their co-workers to go to work for a local competitor, ignoring common law fiduciary duty obligations, like those discussed below. Tracking with the same logic used by the FTC in its Draft Rule, the GC argues that employers can protect their legitimate business interests in protecting propriety and trade secret information by narrowly tailored workplace agreements to protect those interests.[6] But she also quickly noted that it will be hard to an employer to make a reasonable argument to impose noncompete provisions on low-wage, or middle-way workers who lack access to trade secrets or other protectible interests, and noted she had just authorized the issuance of a complaint against an employer who sought to impose a two-year noncompete provision on a low wage employee where there is little evidence of a legitimate business reason for the restriction.
The GC’s memo closes with a direction to the NLRB Regional Offices to submit cases involving noncompete provisions that are “arguably unlawful,’ and when appropriate, to “seek make-whole relief for employees” where the agreement caused them to lose out on other employment opportunities, “even absent additional conduct by the employer to enforce the provision.” It is hard to know at this point how much of an impact this new GC directive will have in our Region, especially since Virginia has adopted a ban on noncompete provisions with “low wage.” What does seem likely is that any employer in Virginia who is violating Virginia’s ban on low wage noncompete agreement will also likely now find themselves defending an unfair labor charge with the NLRB and the potential exposure to make-whole relief.
FTC Draft Rules & Other Enforcement Actions
Since the Federal Trade Commission (“FTC”) issued its proposed nationwide ban on post-employment noncompete agreement on January 5, 2023,[7] more than 26,800 comments have been submitted and each of them must be evaluated and addressed before a final rule can be issued. It has been suggested that it will take the FTC until next spring to address all of these comments and issue a final version of the proposed ban.[8]
This hiatus period has not stopped the FTC from taking additional enforcement action to invalidate targeted noncompete agreements. On March 15, 2023, the FTC announced that it had accepted and entered into a new Consent Agreement with a company which, once approved, will invalidate more than 300 noncompete agreements that Anchor Glass has in place with a broad range of employees.[9] The FTC finalized the consent order on May 18, 2023, and Anchor Glass is barred from entering into, maintaining, enforcing or attempting to enforce or threatening to enforce noncompete restrictions, and is also banned from telling other employers that the employee is subject to a noncompete.[10]
This latest case against Anchor Glass tracks the similar law enforcement actions taken against O-I Glass and the Ardagh Group announced on January 4, 2023, where the FTC claimed that the use of non-compete agreements in the glass container industry constituted an unfair method of competition in violation of Section 5 of the FTC Act.[11] The FTC contended in each of these cases that the glass container industry in the US is highly concentrated, and it alleged that Anchor Glass, like O-I Glass and the Ardagh Group, had entered into noncompete agreements with employees many of whom were salaried, but worked with the plants’ furnaces and other forming equipment, as well as in glass production, engineering and quality assurance roles. The FTC found that Anchor’s use of the agreements was unfair and had the tendency or likely effect of harming competition by impeding the entry and expansion of rivals in the industry, by reducing employee mobility, lowering wages, salaries, and benefits, and promoting less favorable working conditions. It also noted that there were less restrictive means available to protect the company’s legitimate business interests by entering into confidentiality agreements that protect trade secrets and confidential information.
Recent State Legislative Actions
It is not just the federal government who is looking to address noncompete agreements. Legislation has been introduced in more than 30 states this year that seek to limit or clarify the use of noncompete agreements in various contexts. In Virginia, the legislature elected not to address the issue in its 2023 session, but the state’s ban on using non-competes with “low wage” employees got its regular annual adjustment as noted below. Keeping up with these issues on a nationwide basis could be a full-time job and there are many other sites that can provide up to date information on the status of legislation in your state. One state was noteworthy for this article.
As of July 1, 2023, Minnesota will become the fourth state to ban the use of most noncompete agreements with employees and independent contractors[12]. The Minnesota law is not retroactive, so it only applies to new agreements entered into on or after July 1, 2023. However, unlike Virginia and a few other jurisdictions, the ban on noncompete provisions is not limited to just “low wage” employees, the law protects individuals regardless of the employee’s compensation level or position in the company.[13] It gives employees and independent contractors the right to void offending provisions and collect attorney fees related to the litigation.
This new law also undermines traditional “choice of law” and “choice of form” provisions for noncompete provisions, as it prohibits an employer from requiring an employee who primarily resides and works in Minnesota from agreeing to a provision that applies the law of another state or requires litigation or arbitration outside Minnesota. Notably, rather than rendering the entire agreement void or unenforceable, the Minnesota law only applies to and invalidates the offending provisions. The rest of the agreement is enforceable.
There are two carve outs for restrictions imposed in connection with the sale of a business or in anticipation of the dissolution of the business. The law does not prohibit an agreement or other requirement that prohibits an employee or an independent contractor from working for a competitor while employed by the company. Moreover, the law expressly allows companies to continue to use nondisclosure agreements to protect trade secrets and confidential information, and non-solicitation restrictions that limit the amount to use client lists and information to solicit business from clients.
Positive Note for Employers to End
In a recent decision, the 4th Circuit Court of Appeals, gave employers some solace when it issued an important reminder that in Virginia an employee’s fiduciary duty of loyalty is not narrowly drawn, and is not dependent on the existence of a noncompete agreement. To the contrary, the 4th Circuit clarified that this fiduciary duty means that an employee must avoid taking steps that compete with one’s employer while employed. The Court said to find the line between merely preparing to leave and direct competition requires a balancing the desire for competition in the marketplace and “the importance of the integrity and fairness” in the employment relationship.
In this case, the 4th Circuit ruled that the employees crossed the line by approaching one of the company’s key customers to let them know of their future plans and when they submitted a bid for future work with this customer in direct competition with their employer while still employed. The 4th Circuit reversed the lower court’s summary judgment ruling[14] and held that in connection with a breach of a fiduciary duty claim there is no requirement for the employer to prove that it had an objective business expectancy in landing the contract in question, as this issue is irrelevant.[15] On remand, it will now be up to a jury to decide the case.
Closing
Employers are certainly on notice that the use of noncompete provisions can make you the target for litigation, even if the company has not attempted to enforce the provision. Nevertheless, businesses must protect their critical assets and Virginia courts have shown a willingness to enforce reasonably drawn noncompete provisions that are tied to the employee’s duties, to the need to protect goodwill with customers, and to safeguard trade secrets and confidential information. Navigating these choppy waters can be a challenge, so if you need assistance in crafting enforceable agreements or assessing an existing agreement, or bringing or defending litigation that involves trade secrets, confidential information, breach of fiduciary duties, or violations of a noncompete, nonsolicitation, or antipiracy provisions, please call a member of Gentry Locke’s Employment Team.
[1] https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national
[2] This aggressive approach by the NLRB which revisits and broadens the application “concerted activity” is nothing new in the post-Trump era. On February 21, 2023, the NLRB issued McLauren Macomb, 372 NLRB No. 58 (2023), which utilizes a very broad notion of Section 7 rights when it held that an employer had violated the Act by simply offering a severance agreement that contained non-disparagement and confidentiality provisions because NLRB found these provisions “chilled” the employees’ rights to share information and thereby interfered with the rights of both current and former employees to engage in “concerted activity.”
[3] The NLRA applies to most private sector employers, but does not apply to federal, state, or local governments, agricultural workers, and those covered by the Railway Labor Act. It also does apply to independent contractors or to those employees of a company that are found to be supervisors, managers or owners.
[4] https://www.uschamber.com/employment-law/u-s-chamber-opposes-nlrb-general-counsel-memo-on-noncompetes
[5] In Feddeman & Co. v Langan Assoc., 530 S.E.2d 668 (Va. 2000), the Supreme Court of Virginia recognized that when a group of 25 employees (out of a total of 31) met and agreed to resign en masse if their effort to take over the business did not succeed had violated their fiduciary duty to act with integrity and fairness. In reaching this decision the Supreme Court relied on other similar cases from New York, Illinois and Maryland, and this fiduciary duty rule continues to be a significant & issue in Virginia as discussed below.
[6] The GC also notes that some noncompete agreements may not violate the Act because the provision clearly restricted only that individual’s managerial or ownership interest in a competing business, there is a true independent contractor relationship, or there are narrowly tailored restrictions that are justified by “special circumstances.” She was bluntly clear that the desire to avoid competition is not a legitimate business interest that will support a “special circumstance.’ Similarly, the desire to retain employees or protect special investments in training are not “special circumstances” because the GC said there are less restrictive means available to address and protect that interest.
[7] https://www.gentrylocke.com/article/ftcs-proposed-rule-to-ban-noncompete-agreements-initial-reactions/
[8] https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses
[9] https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-takes-action-against-another-company-imposed-harmful-noncompete-restrictions-its-workers?utm_source=govdelivery
[10] https://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-approves-final-order-requiring-anchor-glass-container-corp-drop-noncompete-restrictions-it
[11] The other FTC consent agreement case announced in January 2023 involved Prudential Security, a private security company who had used noncompete restrictions with its low wage security guards.
[12] The other three states banning post-employment noncompete restrictions are California, Oklahoma, and North Dakota.
[13] Currently DC and 11 states ban the use of noncompete provisions with “low wage” employees. Each jurisdiction defines “low wage” in a different way. In DC, a fixed amount is used – $150,000, except for those who are medical specialists. Virginia uses the “average weekly wage,” which changes annually, currently the “low wage” rule in Virginia applies to anyone who earns up to $69,836 annually. By contrast, Maryland a set hourly rate, which is currently $15/hour, or $31,200/annually, but the Maryland legislature recently increased this pay level to protect those who make $19.88/hour or less. This new Maryland rule become effective October 1, 2023, except for small employers where the amount used to define “low wage” will be $19.20/hour. The other jurisdictions with “low wage” bans are – Colorado, Illinoi, Maine, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, and Washington.
[14] Adnet, Inc. v Rohit Soni, 2021 US Dist. LEXIS 177825 (E.D.Va. Sept. 21, 2021)
[15] Adnet, Inc. v. Rohit Soni, et al, 66 F.4th 510, (4th Cir. Apr. 27, 2023) r citing Williams v Dominion Tech. Partners, LLC, 576 S.E.2d 752, 757 (Va. 2003)
