Regulatory Update: ALJ Holds Non-Compete Did Not Violate NLRA (Again)

Regulatory Update

Potential Client Alert! President Trump will probably remove NLRB General Counsel Jennifer Abruzzo next month, so her attempts to prosecute non-compete agreements as labor violations will likely fall by the wayside under the new administration. But even under the current administration, her challenges to non-compete agreements have been largely unsuccessful. For the second time in a month (read about the first here), an administrative law judge rejected the GC’s argument that a non-compete violated the Act. The ALJ concluded “the asserted Section 7 right to quit an employer for a competitor is a stretch and more theoretical than real.” In this case, there was also a dispute about whether the employer’s federal lawsuit to enforce the non-compete was preempted and/or a separate violation. (Read our summaries of the previous preemption developments here and here.) The ALJ concluded the federal lawsuit was not preempted by the NLRB proceedings, and the employer’s attempt to enforce the non-compete did not violate the Act. However, the ALJ concluded the agreement’s non-disparagement and confidentiality provisions did violate the Act, so employers still need to cabin these provisions and include appropriate carve-outs for protected activity.

NLRB ALJ Finds Non-Compete Lawful Under NLRA

The NLRB General Counsel filed a complaint against Permobil, Inc. (“Permobil”) alleging that Permobil required as a condition of employment that employees sign an agreement with certain restrictive covenants that interfered with, restrained, and coerced employees in the exercise of their rights under Section 7 of the NLRA.  The GC also alleged Permobil’s federal lawsuit to enforce such provisions violated the Act, and the lawsuit was preempted by the Board’s exclusive jurisdiction.

The Administrative Law Judge (“ALJ”) ruled as follows:

Non-Compete Provision. The Charging Party (“Westphal”) was a long-time employee assigned to work on a confidential project to launch a new product line (“Project Greenleaf”), and was required to sign an employment agreement (“Agreement”) in conjunction with receiving a bonus and increased incentive compensation. The non-compete in the Agreement prohibited Westphal for one year post-separation from working within the United States for an entity engaged in the “Business,” defined as manufacturing, marketing and selling complex rehabilitation devices and accessories.

The ALJ, applying the Stericycle standard, concluded that the non-compete provision did not violate the Act. Noting that the Board itself has not opined on the issue, the ALJ concluded there was no violation based on existing Board law. Considering “not only the context of the noncompetition provision in the entire Employment Agreement, but also the circumstances that led to the Agreement itself,” the ALJ concluded the provision could not be read by a reasonable employee as an infringement of Section 7 rights, for the following reasons:

• The reasonable employee would understand the non-compete was meant to protect Permobil’s secrets, particularly those associated with Project Greenleaf.

• “Any Section 7 rights affected by employees agreeing not to be employed by a competitor is remote and, in any event, overridden by the language spelling out the business reasons for the ban.”

• The GC conceded her contention that “employees are protected when they band together to quit their employment to obtain better benefits” is “not the existing law.”

• “[T]he asserted Section 7 right to quit an employer for a competitor is a stretch and more theoretical than real.”

• “Even if quitting one’s employment to work for a union employer could be considered concerted and thus protected in a salting situation or a similar hiring hall situation, there is no way it could be in the circumstances of this case because neither salting nor union-run hiring halls are shown to be prevalent in Respondent’s industry.”

Employee Non-Solicitation. Westphal also agreed that for one year post-separation, he would not “(i) participate, directly or indirectly, in or be materially involved in any manner in the hiring or any attempt to hire as an employee, officer, director, consultant, or advisor any person who is at the time of such hiring or attempted hiring, or was within six (6) months of such hiring or attempted hiring, an employee of the Company; or (ii) otherwise, directly or indirectly, induce or attempt to induce any employee of the Company to leave the employ of the Company.”

The ALJ concluded this provision also did not violate the Act. The “thrust” of this provision was the same as the non-compete—to protect Permobil’s business interests, and “a reasonable employee would not read the language of the clause and believe it inhibits Section 7 activities.”

Moreover, the “Board has held that soliciting other employees to work for a competitor is not protected concerted activity in and of itself.”

Preemption and Separate Violation for Enforcement Action. The GC also argued Permobil’s lawsuit to enforce the non-compete was preempted by the Board’s exclusive jurisdiction. The ALJ disagreed.

The ALJ noted the “thrust” of the lawsuit is “addressed to [Westphal’s] harm to [Permobil’s] business interests by allegedly taking his knowledge of the secret Greenleaf project to [Permobil’s] competitor. The lawsuit does not present a controversy that is within the Board’s jurisdiction.” Since the lawsuit has a “completely different objective than any unfair labor practices that were or could be presented to the Board, it is not preempted and thus not violative of the Act.”

The ALJ also concluded the lawsuit does not have an “illegal objective” under the Bill Johnson’s Restaurants analysis, for the reasons above.

Non-Disparagement and Confidentiality Provisions Did Violate the Act. However, this was not a complete win for Permobil.

The ALJ concluded the non-disparagement and confidentiality provisions in the Agreement violated the Act under the Stericycle analysis.

The non-disparagement provision banned employees from “taking any action” to “disparage or criticize” Permobil. The ALJ held this language was similar to that found unlawful in McLaren, because it would “encompass conduct regarding any labor issue, dispute or term and condition of employment.”

The confidentiality clause prohibited employees from disclosing the terms of the Agreement to “any third person.” The ALJ concluded this violated the Act because it would prohibit employees from disclosing an unlawful provision to the Board by filing an unfair labor practice charge. The ALJ rejected Permobil’s argument that a savings clause allowing the employee to “truthfully testify[] in response to a legal or government inquiry” saved the provision, because “Section 7 activity is not limited only to Board investigations and testimony.”