Trade Secrets & Employee Mobility

As federal administrative agencies wade further into rulemaking and adjudicative efforts to outlaw noncompetes and restrictive covenants, defendants are beginning to raise preemption arguments in response to state court breach of contract claims on the topic.

A recent case shows defendants are taking things into their own hands and not waiting for the Federal Trade Commission (“FTC”) to conclude its announced rulemaking on the subject or for the National Labor Relations Board (“NLRB”) to rule on the NLRB General Counsel’s stated position that nearly all noncompetes violate the National Labor Relations Act (“NLRA”). Instead, they are preemptively raising federal preemption arguments to try to stop enforcement actions in their tracks. This recent case shows that making these arguments, and seeking to remove a state court action to federal court, faces many legal hurdles. In UGI Energy Services, LLC v. Manning, No. 5:23-cv-3169 (E.D. Pa., Oct. 26, 2023), the Court held that raising FTC and NLRA claims did not “completely preempt” a plaintiff’s state law breach of contract claim, and, therefore, the defendant could not remove the case to federal court.

The National Labor Relations Board (NLRB) has found its first target under recent guidance issued in a memo from its General Counsel claiming that noncompete agreements may violate the National Labor Relations Act (NLRA). According to Bloomberg Law, “[t]he NLRB’s first enforcement action against an employer’s noncompete agreement targeted a Michigan cannabis processor and ended with a recent private settlement resolving the alleged labor law violations.” (The enforcement action predates the guidance memo). Bloomberg obtained redacted documents from the case via a Freedom of Information Act request.

The National Labor Relations Board’s top lawyer, Jennifer Abruzzo, issued  a General Counsel memo today instructing the Labor Board’s Regional Directors of her position  that noncompete clauses for employees protected by the National Labor Relations Act (NLRA) (i.e., nonmanagerial and nonsupervisory employees) in employment contracts and severance agreements violate federal labor law except in limited circumstances. The memo, while not law, outlines her legal theory which she will present to the National Labor Relations Board, which makes law primarily through adjudication of unfair labor practice cases.  The memo instructs the agency’s field offices of the position that the General Counsel is instructing them to take when investigating unfair labor practice charges claiming that such clauses interfere with employees’ rights under the NLRA.

On February 21, 2023, the National Labor Relations Board (“NLRB” or “Board”) continued its aggressive application of the National Labor Relations Act (“Act” or “NLRA”) to workplaces without union representation and lessened the value of severance agreements for all employers by finding it unlawful for an employer to merely proffer a severance agreement that includes broad non-disparagement and confidentiality provisions to an employee. In McLaren Macomb, the Board held that a severance agreement that contains a confidentiality clause and a non-disparagement clause was unlawful because, in the Board’s view, these provisions impermissibly infringe on employees’ rights under the Act. Specifically, the Board found that these two provisions limit employees’ ability to discuss their wages, hours, and working conditions (which could include disparaging remarks) with other employees, prevent employees from assisting other employees seeking assistance, and hinder employees themselves from seeking assistance from the NLRB, unions, and other outside organizations.