I recently saw the summer blockbuster Spider-Man: Across the Spider-Verse<\/em><\/a>, the sequel to Spider-Man: Into the Spider-Verse<\/em>, so new characters are on my mind.<\/p>\n 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).<\/p>\n So, meet Bobby Bluecollar. Bobby works for Vinny\u2019s 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.<\/p>\n Vinny himself doesn\u2019t work much anymore. His daughter Vanessa now runs the company. That includes supervising a team of over 50 sales people.<\/p>\n The old man was tough as nails, but generous to his employees, almost to a fault. Vanessa, on the other hand . . . Well, let\u2019s just say she\u2019s looking to sell the company to a private equity firm, so she watches margins like a hawk.<\/p>\n Bobby\u2019s a salesman, not a supervisor. He gets paid a combination of salary and commissions. In a good year, has made as much as $120k.<\/p>\n But that was before Vanessa\u2019s cost-cutting campaign.<\/p>\n First, she got strict about expense accounts: no more bass fishing with Bobby\u2019s buddy at Halliburton and calling it a \u201cnetworking\u201d expense.<\/p>\n Then she cut commission percentages.<\/p>\n Then she cut salaries for the inside sales employees, causing the best ones to leave. Customer orders started getting screwed up.<\/p>\n And the last straw: commission checks started coming late.<\/p>\n Bobby and his fellow sales people are hopping mad. They start talking about organizing to protest the cost-cutting measures. \u201cIf they don\u2019t start paying us fair commissions on time, we should just walk out,\u201d Bobby tells a group assembled in the break room one day, \u201cand we\u2019ll take our customers with us!\u201d<\/p>\n There\u2019s only one problem. Bobby and every other sales person at Vinny\u2019s Valves signed a Confidentiality, Non-Solicitation, and Non-Interference Agreement (a \u201cCNNIA\u201d) drafted years ago by Vinny\u2019s long-time golfing buddy, lawyer Fred Brunell.<\/p>\n The Agreement is seven pages of dense single-spaced paragraphs, but I\u2019ll sum it up: it says you\u2019re free to leave any time, and you can go work for one of our competitors, but you can\u2019t take your customers with you. \u00a0You also can\u2019t recruit any of your former co-workers to follow you.<\/p>\n Fred was apparently familiar with Wolfe\u2019s First Law of Texas Non-Compete Litigation<\/a>.<\/p>\n Anyway, Vanessa gets wind of the grumblings among the sales staff, and she doesn\u2019t mince words. \u201cLook, I\u2019ve got a responsibility to the owners of this company to keep costs down,\u201d she tells Bobby and his friends, \u201cand if y\u2019all don\u2019t like it, you can hit the road.\u201d<\/p>\n \u201cBut don\u2019t try taking any of my customers with you,\u201d she adds \u201cor I\u2019ll have Fred sue your ass.\u201d<\/p>\n Now here\u2019s the key question: Does the Vinny\u2019s Valve Agreement violate Section 8 of the National Labor Relations Act?<\/p>\n Wait, what?<\/p>\n The NLRA?!<\/p>\n If you\u2019re 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.<\/p>\n That is, until recently. When the General Counsel of the National Labor Relations Board (NLRB) issued a controversial new memo.<\/p>\n But first, the back story.<\/p>\n Section 7 of the NLRA protects worker rights to organize. It says in pertinent part:<\/p>\n 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<\/strong> . . . (emphasis added)<\/p>\n Some of you may immediately ask, what\u2019s an \u201cemployee\u201d? Hold that thought for now.<\/p>\n 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 \u201cconcerted activities\u201d for the purpose of \u201cmutual aid or protection.\u201d<\/p>\n 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 \u201cto interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.\u201d<\/p>\n 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.<\/p>\n That obviously leaves a lot of room for interpretation.<\/p>\n The McLaren Macomb<\/em><\/a> opinion issued by the Board in February 2023 signaled a broad interpretation of the scope of employee rights under Section 7. McLaren Macomb<\/em>, 372 NLRB No. 58, Case 07-CA-263041, 2023 WL 2158775 (Feb. 21, 2023).<\/p>\n The Board ruled that an employer substantially interfered with such rights by including overly broad non-disparagement and confidentiality provisions in a severance agreement:<\/p>\n \u201c[A]n employer violates Section 8(a)(1) of the Act when it proffers a severance agreement with provisions that would restrict employees\u2019 exercise of their NLRA rights,\u201d the Board held. \u201cSuch an agreement has the reasonable tendency to restrain, coerce, or interfere with the exercise of Section 7 rights by employees.\u201d<\/p>\n The Board would later make this \u201creasonable tendency\u201d standard more explicit in the Stericycle <\/em>case.\u00a0<\/strong><\/p>\n In Stericycle<\/em><\/a>, the Board clarified the general standard for determining whether an employer\u2019s workplace rules interfere with Section 7 rights. Stericycle, Inc. and Teamsters Local 628<\/em>, 372 NLRB No. 113, Case Nos. 04-CA-137660 et al., 2023 WL 4947792 (Aug. 2, 2023).<\/p>\n First, the Board will assess whether the General Counsel has established that a challenged work rule has \u201ca reasonable tendency to chill employees from exercising their Section 7 rights.\u201d<\/p>\n \u201cIn 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.\u201d<\/p>\n If an employee could reasonably interpret a rule to restrict Section 7 activity, the rule is \u201cpresumptively unlawful.\u201d<\/p>\n The burden then shifts to the employer, who may rebut the presumption by proving that \u201cthe rule advances a legitimate and substantial business interest and that the employer is unable to advance that interest with a more narrowly tailored rule.\u201d<\/p>\n This standard has three key features favoring employees:<\/p>\n On its face, this seems like a pretty plain vanilla \u201cbalancing test\u201d you can find in almost any area of law. But if you read what some law firms reported about Stericycle<\/em>, you\u2019d think the Board decided to require employers to issue employees copies of Das Kapital<\/em>. Just keep in mind that most of the law firms putting out these articles represent management.<\/p>\n Personally, I don\u2019t think this rule will end capitalism as we know it. Employers will adjust, and they\u2019ve got good lawyers. Just imagine all the billable hours from revising employee handbooks! It\u2019s not such a bad thing.<\/p>\n But what if the Board starts applying this standard to non-competes<\/em>?<\/p>\n Now that would be radical.<\/p>\n Enter Jennifer Abruzzo, General Counsel of the NLRB. It\u2019s no secret she doesn\u2019t like non-competes.<\/p>\n On May 30, 2023, she issued Memorandum GC 23-08<\/a> to all Regional Directors, Officers-in-Charge, and Resident Officers of the NLRB. I\u2019ll just call it \u201cthe Memo\u201d for short.<\/p>\n The Memo says that except in limited circumstances, the \u201cproffer, maintenance, and enforcement\u201d of non-compete agreements between employers and employees violates Section 8 of the NLRA.<\/p>\n 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<\/em><\/strong> carries some weight. It\u2019s not like the opinion of some lawyer who has a blog and a YouTube channel. So it\u2019s worth taking a close look.<\/p>\n The Memo has four main parts: Background, the Rule, the Chilling Argument, and the Business Interest Argument.<\/p>\n In the Background section, the Memo starts by stating what a \u201cnon-compete\u201d is. It says \u201cnon-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.\u201d<\/p>\n That\u2019s an accurate but quite vague definition. More about this later.<\/p>\n 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\u2019t interfere with or restrain those rights. I covered this earlier.<\/p>\n The General Counsel then cites the standard she urged the Board to adopt in Stericycle<\/em>.<\/p>\n And guess what? It\u2019s the standard the Board eventually adopted, explained above. In short, \u201ca 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.\u201d<\/p>\n Applying that standard, the Memo states this Rule:<\/p>\n \u201cNon-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.\u201d<\/p>\n Thus, under the Memo\u2019s standard, the key question is whether a \u201cnon-compete\u201d (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, \u201ctake this job and shove it.\u201d<\/p>\n Let\u2019s pause here. How does this standard apply to Bobby Bluecollar\u2019s non-compete? Remember, it says he\u2019s free to go to work for a competitor, he just can\u2019t take any of his customer with him (essentially). Does that cut off employment opportunities?<\/p>\n Hold that thought. Next let\u2019s look at the Memo\u2019s explanation of how a non-compete chills employee rights.<\/p>\n The Chilling Argument explains how a non-compete (whatever that is) chills employee rights to engage in concerted activity.<\/p>\n 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.<\/p>\n In other words, if an employee knows he can\u2019t go to work for a competitor in the same area in the same industry if he gets fired, he\u2019s less likely to rock the boat by joining together with other employees to complain about working conditions.<\/p>\n The Memo then gives five more specific examples of how non-competes chill concerted employee activity. Non-competes chill employees from:<\/p>\n In short, a non-compete chills concerted activity because an employee who can\u2019t get a replacement job with a competitor is less likely to engage in concerted activity.<\/p>\n Under the Stericycle<\/em> standard, the question then becomes whether the employer has a substantial business interest that cannot be protected with a more narrowly tailored restriction.<\/p>\n The Memo\u2019s answer: Nope.<\/p>\n The Memo says \u201ca desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.\u201d<\/p>\n Business interests in retaining employees or protecting special investments in training employees are \u201cunlikely 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.\u201d<\/p>\n What about the employer\u2019s interest in protecting confidential information and trade secrets? That interest \u201ccan be addressed by narrowly tailored workplace agreements that protect those interests.\u201d<\/p>\n The Memo goes on to explain that an employer\u2019s justification for a non-compete is unlikely to be reasonable \u201cin 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.\u201d<\/p>\n This does not mean that every<\/em> non-compete violates the NLRA, the Memo stresses. A \u201cnarrowly tailored\u201d non-compete may be justified by \u201cspecial circumstances.\u201d<\/p>\n But in general, the Memo says, the NLRB should seek relief for employees who, \u201cbecause of their employer\u2019s unlawful maintenance of an overbroad non-compete provision, can demonstrate that they lost opportunities for other employment.\u201d<\/p>\n Let\u2019s 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.<\/p>\n I don\u2019t have scientific evidence, but I\u2019ve represented dozens of employees who have non-competes, and I can vouch for the fact that an employee who doesn\u2019t have the option to say take this job and shove it is less likely to rock the boat complaining about management\u2019s treatment of workers.<\/p>\n 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 \u201cthis non-compete doesn\u2019t restrict concerted activity in any way, and you\u2019re free to leave any time you want.\u201d<\/p>\n But that just doesn\u2019t acknowledge the reality. In most cases, it\u2019s 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.<\/p>\n So, yes, of course a broad non-compete is going to have a chilling effect. That\u2019s just common sense.<\/p>\n The Bad part of the Memo is the Business Interest Argument.<\/p>\n The Memo just doesn\u2019t take the employer\u2019s business interest in a non-compete that seriously. It devotes fewer than 250 words to that issue. It brushes aside the employer\u2019s 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.<\/p>\n There are thousands of court cases that seek to balance an employer\u2019s interest with the public interest in free competition. But you\u2019d barely know it from the Memo.<\/p>\n And then there\u2019s the Ugly part: the absence of any real discussion of the crucial employer interest in enforcing a non-compete.<\/p>\n I\u2019m talking about goodwill, of course. Protecting customer goodwill is the most important purpose of a proper non-compete.<\/p>\n The Memo never even uses the word \u201cgoodwill.\u201d As much as I like the Memo\u2019s realism and concern for protecting employees, this glaring admission is simply inexcusable.<\/p>\n An employer\u2019s confidential information can be protected by confidentiality agreements and trade secrets law. A non-compete, in contrast, is really the only<\/em> legal mechanism for protecting goodwill with customers.<\/p>\n But the Memo gives short shrift to customer goodwill. It barely even mentions it.<\/p>\n The closest the Memo comes to addressing goodwill is a single footnote that mentions an employer\u2019s \u201clegitimate interest in restraining the employee from appropriating . . . customer relationships [i.e. goodwill] to which he has had access in the course of his employment.\u201d<\/p>\n That\u2019s it, though. There\u2019s no real discussion of the employer\u2019s interest in protecting its goodwill with customers, how a reasonably tailored non-compete protects that interest,<\/p>\n Don\u2019t get me wrong. I\u2019m not necessarily saying the employer\u2019s interest in protecting goodwill outweighs the employee\u2019s right to engage in concerted activity. In any given case applying the Stericycle<\/em> framework, the evidence may be insufficient to rebut the presumption that the non-compete violates the NLRA. But the Memo\u2019s failure to meaningfully grapple with that issue reduces its persuasive power.<\/p>\n The best justification I can give for the Memo\u2019s failure to address the employer\u2019s 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. \u201cportable business.\u201d<\/p>\n This is apparent in the Memo\u2019s statement that the employer\u2019s justification is unlikely to be reasonable \u201cin 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<\/strong>\u201d (emphasis added).<\/p>\n Customer goodwill is the most likely candidate for some \u201cother protectible interest.\u201d And lower-level workers are less likely to maintain the goodwill with the customers.<\/p>\n 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?<\/p>\n The short answer is that we don\u2019t know. At least, not yet.<\/p>\n The threshold question is whether Bobby\u2019s agreement is a \u201cnon-compete.\u201d The Memo doesn\u2019t really tell us, because it never really defines what a \u201cnon-compete\u201d is.<\/p>\n 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.<\/p>\n Hmm. This sounds familiar.<\/p>\n In its proposed rule that would prohibit most employee \u201cnon-competes\u201d as unlawful restraints on competition, the FTC defines a non-compete clause as: \u201ca 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\u2019s employment with the employer.\u201d I covered this in What Everybody\u2019s Missing About the FTC\u2019s Proposed Non-Compete Ban<\/a>.<\/p>\n The FTC identifies some other types of clauses that are not non-competes: (1) confidentiality agreements, (2) non-solicitation agreements, (3) \u201cno-business\u201d agreements, and (4) \u201cno recruit\u201d agreements.<\/p>\n The NLRB Memo, in contrast, doesn\u2019t make these delineations.<\/p>\n But let\u2019s assume the FTC and the NLRB define a \u201cnon-compete\u201d the same way. They\u2019re both part of the Biden Administration (sort of), and the law is, of course, a seamless web.<\/p>\n Applying this definition, Bobby\u2019s agreement isn\u2019t really a \u201cnon-compete\u201d at all. It\u2019s really just a combination of the four kinds of clauses the FTC says are not \u201cnon-competes.\u201d<\/p>\n And there you have it. Nothing to worry about! The typical Texas non-compete doesn\u2019t violate the NLRA.<\/p>\n I\u2019m half kidding, of course. The NLRB Memo isn\u2019t that precise about what is or is not a \u201cnon-compete,\u201d and its rationale sweeps broadly.<\/p>\n So I come back to my bottom line answer: we just don\u2019t know yet.<\/p>\n 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?<\/p>\n I think the thing for Texas employers to do is first, ask themselves \u201cdo I really want or need my employees to sign a non-compete?\u201d I covered this in my post The Most Effective Form of Non-Compete in Texas (or Anywhere)<\/a>.<\/p>\n 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<\/a>.<\/p>\n Then if the NLRB comes calling, at least you\u2019ll have a decent argument that the agreement is narrowly tailored to protect the employer\u2019s interest in protecting its goodwill and confidential information.<\/p>\n 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<\/a>.<\/p>\n New characters, same old story.<\/p>\n ______________________<\/p>\n Zach Wolfe (<\/em>zach@zachwolfelaw.com<\/em><\/a>)<\/em>\u00a0<\/em>is a Texas trial lawyer who handles non-compete and trade secret litigation at Zach Wolfe Law Firm (<\/em>zachwolfelaw.com<\/em><\/a>). Thomson Reuters named him a Texas Super Lawyer\u00ae for Business Litigation in 2020, 2021, and 2022.<\/em><\/p>\n These are his opinions, not the opinions of his firm or clients, so don\u2019t cite part of this post against him in an actual case. Every case is different, so don\u2019t rely on this post as legal advice for your case.<\/em><\/p>\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":" 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 […]<\/p>\n","protected":false},"author":1,"featured_media":121260,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[97],"tags":[53529,13604,4524,12685,30655,49429,15105,5816],"dealstore":[],"offerexpiration":[],"class_list":["post-121259","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal","tag-abolishes","tag-employee","tag-firm","tag-law","tag-nlrb","tag-noncompetes","tag-wolfe","tag-zach"],"yoast_head":"\nThe Back Story to the NLRB General Counsel Memo<\/strong><\/h3>\n
The McLaren Macomb<\/em> Opinion<\/strong>\u00a0<\/strong><\/h3>\n
The Stericycle<\/em> Opinion <\/strong><\/h3>\n
\n
The General Counsel\u2019s Memo <\/strong><\/h3>\n
Background<\/strong><\/h3>\n
The Rule <\/strong><\/h3>\n
The \u201cChilling\u201d Argument<\/strong><\/h3>\n
\n
The \u201cBusiness Interest\u201d Argument<\/strong><\/h3>\n
Analysis of the Memo: The Good, the Bad, and the Ugly<\/strong><\/h3>\n
The Bad<\/strong><\/h3>\n
The Ugly <\/strong><\/h3>\n
Applying the Memo to a Sample Texas Non-Compete<\/strong><\/h3>\n
Advice for Employers: Same As It Ever Was<\/strong><\/h3>\n
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