While employers continue to wait for a ruling on restrictive covenants by the National Labor Relations Board (“NLRB”), two recent developments involving the agency’s General Counsel’s scrutiny of restrictive covenant agreements, per GC Memorandum 23-08, provide some potential guidance to employers in the interim. The NLRB’s Division of Advice (“Advice”) issued a memorandum analyzing a company’s employment agreement and concluded that several key provisions – including non-solicitation, non-disclosure, and return of property clauses – were not unlawful and that a lawsuit filed to enforce them did not violate the National Labor Relations Act (the “Act” or “NLRA”). However, NLRB Region 9 announced a settlement of the first high-profile unfair labor practice charge involving the alleged unlawful use of a restrictive covenant agreement, and it included monetary relief, rescinding the challenged covenants, and posting a nationwide notice.     

Division of Advice Memo

In Memorandum 23-08, Non-Compete Agreements that Violate the National Labor Relations Act, General Counsel Abruzzo urged Regional Directors to submit to Advicet cases involving non-compete provisions, explaining that these provisions have a reasonable tendency to “chill” employees in the exercise of Section 7 rights under the National Labor Relations Act.¹

On December 7, 2023, Advice issued a memo analyzing how Abruzzo’s interpretation of non-competes under the NLRA applied to the specific facts of an unfair labor practice charge in which it was alleged that an employer’s employment agreement and related lawsuit against a former employee violated the Act.² Advice evaluated the legality of the lawsuit and the provisions included in the employer’s employment agreements related to non-competition, business disclosures (confidentiality), termination, and employee duties, taking guidance from GC Memo 23-08.

It is important to note that the “non-compete” provision analyzed by Advice was not a true non-compete.

The provision at issue provided:

that the Employee shall not, on Employee’s behalf or on behalf of any other party, solicit or seek the business of any customer, client or account of the Company existing during the term of employment and wherein said solicitation involves a product and/or service substantially similar to or competitive with any present or future product and/or service of the Company.³

While Advice referred to this provision a “non-compete”, it is more akin to a customer non-solicitation provision. In other words, the former employee is allowed to work for a competitor so long as the former employee does not solicit or seek the business of any of the prior employer’s customers, clients, or accounts.

Advice found that this restriction  did not violate the Act because it does not prevent an employee from “accessing other employment opportunities.”⁴ Instead, employees were “only restricted from soliciting the Employer’s existing customers in order to provide similar services for a period of one year.”⁵ Accordingly, absent evidence that “there [was] a limited pool of customers in the industry” such that the restriction effectively foreclosed other employment opportunities, Advice declined to find a violation of the Act.⁶

Next, Advice applied the Board’s recent Stericycle decision⁷ to the business disclosures (confidentiality) provision and concluded that it did not have a reasonable tendency to chill employees in the exercise of Section 7 rights.⁸ Here, to convey what constitutes “information related to the Employer’s business” subject to non-disclosure requirements, the employer identified only trade secrets and other clearly proprietary information such as marketing plans and customer lists.⁹ Notably, this non-disclosure provision did not refer to employee information, wage information, or anything else relating to terms and conditions of employment. In finding this “business disclosures” provision lawful, Advice emphasized this “lack of any mention of employee information or things related to the terms and conditions of employment” distinguished this policy from other rules¹⁰ the Board has found unlawful. 

Further, regarding a termination provision requiring the return of company property, Advice once again declined to find a violation of the Act. The relevant provision merely required that employees return employer property upon separation of employment—an obligation that “does not implicate information known to employees that may be utilized in Section 7 activity.”¹¹ Thus, Advice found the termination provision lawful.

Finally, Advice found the employee duties provision unlawful under the Act. This provision states:

Except as hereinafter provided, the Employee shall at all times during the continuance of this AGREEMENT devote her full time to the conduct of the business of the Employer and shall not directly or indirectly, during the term of this AGREEMENT engage in any activity competitive with or adverse to the Corporation’s business or welfare whether alone, or as a partner, officer, director, Employee, advisor, agent or investor of any other individual corporation, partnership, joint venture, association, entity or person.¹²

Advice concluded that the provision was overbroad under Stericycle and would have a reasonable tendency to chill employees in the exercise of their Section 7 rights under the Act. Advice reasoned that the employee duties provision could be reasonably read to prohibit engagement in union organization or other protected concerted activities that the employer may deem to be “adverse” to the employer’s business, such as speaking out publicly about terms and conditions of employment.¹³ Advice also concluded that this provision violates the Act because it could be reasonably read to prevent an employee from engaging in outside employment while employed due to the restriction on being an “employee” of another entity.

Region 9 Settlement

While the Advice memo provided some good news and helpful guidance for employers that use restrictive covenants, the recently announced settlement¹⁴ reached by the NLRB’s Cincinnati office (Region 9) and a medical spa, Juvly Aesthetics, should be a caution and warning for employers whose restrictive covenants contain broad restrictions. The unfair labor practice charge in that case alleged that the employer unlawfully made workers sign overbroad non-compete and training repayment agreements.¹⁵ The non-competes at issue applied a 20-mile radius and prevented departing employees from engaging in the following activities for a period of 24 months after separation from the company: (1) practicing aesthetic medicine and related services at competitor facilities; and (2) having an ownership interest in or investing in competitor facilities. Juvly’s restrictive covenants also contained a non-disparagement provision, and a non-solicitation provision that not only prevented contact with former clients but also responses to any general questions about employment status. Furthermore, upon an employee’s violation of the non-compete or departure from the company before 12 months, Juvly’s agreements provided for liquidated damages in the form of employee reimbursement remitted to the employer for the costs of training.

In resolution of the charges, Juvly agreed to  more than $27,000 in monetary relief and issue a nationwide remedial notice, in lieu of continued litigation. As part of the resolution the settlement also invalidated the following policies and rules:

• A non-solicitation of employees provision prohibiting employees from soliciting or encouraging any person to leave the employment or other service of the employer or its affiliates, or to interfere with any relationship of the employer or its affiliates or its employees, or endeavor to entice away from the employer or its affiliates, any person who was a tenant, co-investor, co-developer, joint venture, contractor, advisor, employee or another client of the employer or its affiliates.
• Any policy or rule that requires employees to refrain from conduct or communication, which may damage the goodwill, brand, or business reputation of the employer, and/or that requires employees to act in ways that merit the trust, confidence, and respect of all the employer's employees, clients, and vendors.
• Juvly’s Non-Compete and Confidentiality Agreement or any other policy or rule that:
  
  • prohibits employees from soliciting any employer clients, employees, or contractors for any reason;
  • prohibits employees from disclosing and/or discussing any materials obtained via employment with the employer including confidential business information (the definition of which broadly includes any materials obtained via employment at the employer) or salary information;
  • threatens legal action, including the employer's right to seek minimum damages of $150,000 per employee solicitation plus any business damages sustained due to loss of revenue, interference of business functions, or loss of clients via solicitation or otherwise related to the direct or indirect result of the solicitation;
  • threatens to collect from employees the repayment of initial and continuing education training costs, or the repayment of any other funds, and all associated legal or collection costs, if employees violate the terms of the unlawful Non-Compete and Confidentiality Agreement or similar policy;
  • prohibits employees from discussing the terms of the policy with anyone outside of legal counsel;
  • prohibits employees, both during and after employment, from making negative comments about the employer;
  • prohibits practicing aesthetic medicine within a 20-mile radius of any company location for 24 months following the termination of employment.¹⁶

Takeaways

Employers seeking to review their restrictive covenants in light of the GC’s Memo can gain insight by reviewing both the Advice memo and Juvly settlement. First, as a threshold distinction, the “non-compete” analyzed by Advice did not prevent employees from obtaining outside employment in any way whereas the Juvly non-compete prevented employees from working at competitor facilities in any capacity within a 20-mile radius for a period of two years. Next, even though both agreements contained customer non-solicitation provisions, the provision analyzed by Advice only restricted employees from soliciting customers for the purpose of providing competing products/services while the Juvly non-solicit provision prohibited solicitation of any Juvly customers for any reason, which Region 9 alleged violated the Act.

While the full NLRB has not ruled on the lawfulness of restrictive covenants, the Advice Memo  and the Juvly settlement provides helpful guidance to employers seeking some insight into how the GC is likely to view certain restrictions. The conclusion to be reached is that even under the GC’s theory of the law, not all restrictions will be violative. However, it remains to be seen how the NLRB will rule and whether they will agree with the GC’s theorization and line drawing, or whether they will formulate their own conclusions as to the legality of non-competes and other post-employment restrictions.