Noncompete Policing Boosted With Second Agency Entering Fray

The Biden administration's chief labor law enforcer created an immediate problem for employers that use noncompete agreements even as they await a broader ban on those restrictive contracts from another agency, the Federal Trade Commission.

Noncompete pacts violate federal labor law, with narrow exceptions, National Labor Relations Board General Counsel Jennifer Abruzzo announced May 30. Abruzzo's view of labor law isn't binding precedent—that requires a ruling from the NLRB—but her announcement puts employers on notice that they could face allegations from the agency over their use of restrictive contracts.

"Even though it's just Abruzzo's theory, an employer can be forced into an expensive unfair labor practice proceeding just to litigate her theory," said Jerry Hunter, a former NLRB general counsel who represents management at Bryan Cave Leighton Paisner LLP.

Abruzzo's memo doubles the number of federal agencies conducting enforcement against restrictive covenants. While the FTC follows with its slower rulemaking process—likely to conclude in April 2024—it's brought several more immediate enforcement actions against glass container manufacturers and a security guard company for use of the agreements.

The NLRB is well-positioned to conduct similar enforcement. The board's appearance on the noncompete scene could add staying power to federal oversight of the agreements as the FTC faces the looming threat of lawsuits over its proposed rule.

In the short-term, companies can expect to face greater scrutiny and case-by-case enforcement over their use of restrictive covenants as a result of the NLRB's involvement, said Catherine Fisk, a University of California, Berkeley Law School professor.

"Many noncompete agreements that were formerly arguably lawful are now void," Fisk said. "That is, they’re an unfair labor practice, so any effort to enforce could presumably draw an unfair labor practice charge."

Tuesday's memo is just the latest federal effort to take on noncompete agreements, which the Treasury Department found cover about one in five American workers. Banning the clauses in employment contracts would increase wages by nearly $300 billion a year, the FTC said.

The NLRB's authority on noncompetes isn't as far-reaching as the FTC. It's limited to agreements between rank-and-file employees and employers, and can't touch covenants restricting the post-employment movement of management or supervisors, said Anthony Haller, a partner at Blank Rome.

But by throwing its hat in the ring, the NLRB can assist with its sister agency's work, Fisk said. More agencies getting involved on the push to ban noncompetes immediately ramps up pressure on companies, she added. And the differing enforcement and referral mechanisms between the FTC and NLRB means they’ll have a greater variety of ways to find and confront illegal agreements, Fisk said.

The immediacy is a major factor—employees could file an unfair labor practice charge that starts the ball rolling on NLRB action as soon as "tomorrow," unlike the FTC's rule, Fisk said.

The coordinated effort is the latest reflection of the whole-of-government approach to boosting competition that President Joe Biden directed in a July 2021 executive order.

Abruzzo noted that goal in a footnote of the memo, saying she's "committed to an interagency approach to restrictions on the exercise of employee rights, including limits to workers’ job mobility," and pointing to collaboration agreements signed by the agencies last summer that boosted the effort.

The FTC's attempt to follow through on the proposed ban is facing strong headwinds. The US Chamber of Commerce and other business groups have vowed to fight the final rule in court, arguing the agency lacks both the statutory and legal authority to promulgate the regulation.

The NLRB memo seems to be a "backstop" or "Plan B" for the FTC's broader rule, Glenn Spencer, a senior vice president at the Chamber, told reporters in a press briefing this week. Although there's no legal angle to challenge the memo itself, the Chamber plans to "step in to make sure we get a decision we think is right" if and when companies appeal NLRB enforcement to a federal court, Spencer said.

Both Abruzzo's memo and the FTC's proposed rule, championed by agency head Lina Khan, puts pressure on lawmakers and judges to take a critical eye to noncompete agreements, said Tobias Schlueter, co-chair of the unfair competition and trade secrets practice group at Ogletree Deakins Nash Smoak & Stewart PC.

"Chair Khan and General Counsel Abruzzo are smart people," Schlueter said. "They know that if they generate enough press, it will create an environment that state legislatures and courts can't help but notice."

To contact the reporters on this story: Robert Iafolla in Washington at [email protected]; Dan Papscun in Washington at [email protected]

To contact the editor responsible for this story: Martha Mueller Neff at [email protected]; Rebekah Mintzer at [email protected]

AI-powered legal analytics, workflow tools and premium legal & business news.