NLRB General Counsel’s Spring 2023 Memorandum Regarding Non-Competes is Being Put to the Litigation Test
Rob Thomas, Of Counsel
As previously discussed in The Rocky Mountain Employer,[1] the General Counsel for the National Labor Relations Board (“NLRB” or “the Board”), Jennifer Abruzzo, has taken the position that most non-compete provisions in employment contracts and separation agreements are unlawful under the National Labor Relations Act (“NLRA” or the “Act”).[2] The General Counsel’s position will be tested at a hearing on November 28, 2023, per a consolidated complaint from Region 9 of the NLRB against an employer, Juvly Aesthetics.
The Juvly Aesthetics Complaint
As part of her May 31, 2023 memorandum discussing non-compete agreements and their legality under the Act, the General Counsel recommended that Regional Directors seek make-whole relief for employees who lost employment opportunities as a result of the implementation or enforcement of non-compete provisions which chill protected activity under Section 7 of the Act (which, under the General Counsel’s analysis, would be almost all non-compete agreements). Now, Region 9 of the NLRB (“Region 9”)[3] is doing just that and, on November 28, 2023, the Region litigated its consolidated complaint against Juvly Aesthetics (“Juvly”) before an NLRB administrative law judge (“ALJ”), which alleges in part that Juvly maintained and enforced unlawful non-compete and non-solicitation provisions in both its employment and exit agreements.[4]
The provisions at issue prohibited employees from both soliciting other employees to leave Juvly and from competing with Juvly within a 20-mile radius of any of its locations for up to two years after the end of employment. Notably, the provisions contained liquidated damages language providing that in the event of a breach of the non-compete agreements, the breaching employee would immediately owe the costs associated with his or her training while employed, which could amount to tens of thousands of dollars. Similarly, the company’s non-solicitation language stated that Juvly’s “minimum damages” for breaches of its non-solicitation provisions would be $150,000.00, in addition to any available injunctive relief.
In light of these provisions, Region 9 is seeking to invalidate the offending non-compete and non-solicitation provisions, to make affected employees whole via consequential damages, and to rescind Juvly’s allegedly unlawful demands for liquidated damages (recoupment of training costs) associated with the employees’ breaches of the non-compete provisions.
The General Counsel’s Memorandum and its Applicability to the Juvly Complaint
Importantly, the General Counsel previously opined that costs associated with training employees would not constitute “special circumstances” that would warrant the imposition of an otherwise overly-broad non-compete agreement, since such investments could be protected by less-restrictive means (such as longevity bonuses). The General Counsel also noted that employee non-solicitation agreements are likely unlawful under the Act because they impair the ability of employees to solicit their coworkers to work for local competitors as part of a broader course of protected, concerted activity (i.e., a collective effort to seek better working conditions or terms of employment).
Accordingly, it appears that Region 9 is relying on the General Counsel’s logic in bringing the present consolidated complaint against Juvly, and the legal merits of the General Counsel’s memorandum were put before an ALJ for the first time at the November 28, 2023 hearing. The ALJ will issue a ruling on the merits of the complaint in the near future.
Employer Considerations
The Juvly case will provide key insights into how Board ALJs (and, perhaps, the Board itself) may treat the legality of non-compete and non-solicitation agreements under the Act moving forward. Such agreements are already under fire by multiple states (including Colorado)—as well as the Federal Trade Commission via proposed rulemaking[5]—but Board ALJ decisions declaring non-compete and non-solicitation agreements unlawful (consistent with the General Counsel’s memorandum) could present further challenges to employers seeking to implement lawful, narrowly tailored non-compete and non-solicitation agreements for legitimate business ends. Campbell Litigation will be following the Juvly case closely in the coming weeks, and is available to assist employers with these and other non-compete-related questions and issues.
[1]https://www.rockymountainemployersblog.com/blog/2023/6/22/new-guidance-issued-by-the-national-labor-relations-board-regarding-non-compete-agreements.
[2] See https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national for a full copy of the General Counsel’s memorandum discussing non-compete agreements and the Act.
[3] Region 9 of the NLRB operates out of Cincinnati, Ohio and serves parts of Indiana, Kentucky, Ohio, and West Virginia.
[4]The consolidated complaint against Juvly Aesthetics may be found here: https://www.nlrb.gov/news-outreach/region-09-cincinnati/region-9-cincinnati-issues-complaint-alleging-unlawful-non.
[5]See https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.