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NLRB Files Test Case Against Non-Competes

NLRB Files Test Case Against Non-Competes

In May 2023, NLRB General Counsel Jennifer Abruzzo issued a memorandum stating that employers violate the National Labor Relations Act when they require employees to sign non-competition agreements. Ms. Abruzzo reasoned that non-competes can potentially chill an employee’s Section 7 rights under the NLRA (including quitting to secure better working conditions) by undermining that employee’s ability to obtain a new job. This guidance was significant because a federal agency was taking direct aim at the legality of a restrictive covenant that: (1) many employers have implemented to protect their intellectual property and other business interests; and (2) is typically governed and enforced under state law.     

Several months after Ms. Abruzzo issued the NLRB’s memorandum regarding non-competes, NLRB’s Cincinnati regional office filed its first test case in reliance on the memo. Its target: Juvly Aesthetics, an Ohio-based operator of spas and non-surgical medical centers. Juvly required employees to sign a non-compete that prohibited them from (among other things) competing against Juvly within a 20-mile radius of the spa’s various locations for a period of 24 months following the termination of employment. The NLRB’s complaint alleges that this non-compete agreement violates the NLRA by discouraging employees from engaging in activities protected under the NLRA. It sought an order requiring Juvly to rescind the non-compete.     

Juvly moved to dismiss much of the NLRB’s complaint in October 2023, arguing that: (1) there was no basis for the proposition that merely maintaining a non-compete agreement would reasonably chill an employee’s Section 7 rights under the NLRA; (2) that Juvly has legitimate and substantial business reasons for utilizing non-competes; and (3) its non-compete was governed by Ohio law, which has long recognized the legality of such provisions.  The GC opposed the motion and pointed out the “draconian” scope of Juvly’s non-compete and the significant financial penalties former employees faced for violating it.  On December 22, 2003, a three-member panel of the NLRB denied Juvly’s motion to dismiss in a two-sentence order.

The next step is a hearing on the NLRB’s complaint before an Administrative Law Judge (“ALJ”), which is currently scheduled for January 30, 2024.  The ALJ will preside over the trial and file a decision recommending either: (1) an order requiring Juvly to cease and desist from committing an unfair labor practice with its non-compete agreement; or (2) dismissal of the complaint.  If exceptions are filed by the losing party, then the Board will review and act on the ALJ’s recommended decision.  Then comes judicial review.  The federal Court of Appeals can enforce, set aside, or remand the case.  The U.S. Supreme Court would then have an opportunity to review that decision.  Employers that have implemented and rely on non-competes will undoubtedly continue to follow this important test case at every stage.            

William B. Forrest III