US: Companies Should Not Change Non-Competition or Retirement Agreements Yet
In two highly publicized administrative actions, the Federal Trade Commission and the National Labor Relations Commission, respectively, ceased or at least ceased the use of standard non-discrimination and confidentiality clauses in non-competition and retirement agreements. trying to reduce it significantly.
Both lawsuits will be challenged, creating a tremendous period of time for employers as the court proceedings conclude.
Guidance on how to act during this interim period ranges from an immediate full review of all existing agreements to nothing.
In this article, we join the fray and recommend a wait-and-see approach for non-competitors and a careful case-by-case analysis of termination agreements.
In January, the FTC proposed a rule banning most non-compete agreements in the U.S.
The comment period for the proposed rule closed on April 19, and nearly 20,000 comments, often very harsh, were received.
In its request for comment, the FTC asked specifically about possible alternatives to a blanket ban, including whether different rules should apply to executives. It’s unclear when the FTC will issue the final rule, but it’s certain that legal challenges will follow once it’s issued.
And in another dramatic change to employment contracts, in February the NLRB ruled in the McLaren-McComb case to void standard non-honor and confidentiality clauses in termination contracts. McLaren’s legitimacy will be heard by the United States Court of Appeals for the Sixth Circuit.
The FTC’s non-compete action is certainly novel, but novel administrative lawsuits have been dismissed by the current U.S. Supreme Court, and the FTC’s attempt is likely to suffer the same fate.
The FTC has essentially acknowledged that its proposed rule relies on a reconsideration of the powers of Section 5 of the FTC Act, and the Supreme Court is likely to view this reconsideration in the same way as the FTC’s sole dissident. , calling this a “fundamental deviation”. From hundreds of years of case law. “
Therefore, we do not recommend a full review of the anti-competition agreement until it is clear whether the final rules will survive.
Comments on the proposed rule
Of the 20,000 comments submitted, opponents of the proposed rule generally echoed four arguments of opposing FTC commissioners.
- The FTC does not have the authority to participate in unfair competition rulemaking.
- The power to regulate non-competition has traditionally and properly been reserved to the states.
- The Supreme Court’s recent ruling in West Virginia v. EPA barred rulemaking because the FTC lacks clear congressional authority to undertake this effort.and
- This rulemaking violates the non-delegation principle.
Criticism from the American Bar Association’s Antitrust Division was more limited, arguing that there may be viable criteria for distinguishing low-wage workers from other workers, and that the proposed rules condemned the blanket approach.
Perhaps the most offensive comment came from the U.S. House Judiciary Committee, which warned it was “monitoring the FTC’s grip on power” and filed documents related to the proposed rule-making process. requested.
There is no reliable information as to when the FTC will finish reviewing the comments and issue a final rule.
The final rule will not be effective for 180 days, and legal challenges will commence upon publication of the final rule.
As noted above, the Supreme Court is hostile to administrative rulemaking beyond the express powers of government agencies, and this is such a big change that the Supreme Court may consider legal challenges. expensive.
In West Virginia v. EPA, the Supreme Court ruled that the Environmental Protection Agency lacked the authority to regulate greenhouse gas emissions in any industry because there was no explicit congressional authorization.
Similarly, the Supreme Court is likely to find that the FTC’s Section 5 powers had not been exercised in this new way for 100 years, as there is no congressional basis for this re-envisionment.
Therefore, we anticipate that the FTC’s non-compete action will be withdrawn with the caveat that unforeseen consequences may occur, possibly depending on the terms of the final rule.
Our Recommended Approach
At this time, we do not recommend that noncompete agreements be amended because of the proposed rules. Likewise, we recommend that you make no immediate changes after the final rule is published.
At best, catalog existing non-compete agreements so that employers have a complete understanding of the agreements currently in place, if changes are required or are required (which could take a while) recommended.
It’s even harder to predict the future of McLaren’s decision on the NLRB.
As some aspects of the decision are likely to stand up to scrutiny, it is important to consider whether, if, how and when to amend the termination agreements of non-supervisory and non-managerial employees. We recommend doing a case-by-case analysis. Factors relevant to this analysis are jurisdiction, industry, and well-informed risk assessment.
McLaren and General Counsel’s Interpretation of Memorandum Regarding McLaren
At McLaren, the NLRB decided that this clause could potentially violate the rights of employees under Section 7 of the National Labor Relations Act and invalidated two relatively standard retirement agreement clauses. bottom. Specifically, the provisions were as follows.
The first is the non-disrespect provision, a provision that prohibits employees from making statements that may disparage or harm the image of their employer.
The NLRB said this language could limit employees’ rights under section 7 to speak negatively about their employer, including the right to speak publicly to third parties such as the media. determined that it was too broad because it did not follow the definition of defamation. .
The second is confidentiality, a clause that prohibits employees from disclosing the terms of their termination agreements. The NLRB determined that there was a provision that could prohibit the employee from filing an unfair labor practices complaint with her NLRB or assisting in an NLRB investigation.
McLaren did not include guidance on its scope and what the NLRB considers legitimate dishonor and confidentiality provisions, leaving many unanswered questions. Recognizing this confusion, NLRB’s general counsel issued a FAQ memorandum containing interpretations about McLaren. Below are summaries and interpretations of important FAQs from the notes.
What non-defamation and confidentiality provisions are legal?
Non-defamatory clauses limiting only defamatory statements (i.e., statements made with malicious intent or reckless disregard for the truth), and financial terms in retirement agreements that protect or otherwise by way of a “confidentiality clause restricting the dissemination of company proprietary or trade secret information” for a period of legitimate business justification. “
The NLRB may take a narrow view of what is considered proprietary or confidential trade information.
Does McLaren apply to supervisory or managerial employees?
Generally no. Supervisors or managers have no Section 7 rights.
Do savings clauses and disclaimers protect overly broad clauses?
No, but it may help resolve ambiguities in some cases.Legal advisers recommend including long model statements in retirement benefits
Although the agreement advises employees on nine activities in which they can legally participate (e.g. union organizing, workplace videography, wearing the union badge, etc.), this model statement It has not been adopted by the NLRB, and the General Counsel did not state: Its inclusion saves us from overly broad provisions.
Would a clause that is too broad invalidate the entire termination agreement?
No, only illegal terms are void.
Does McLaren apply other employment contracts or policies?
General counsel has suggested that McLaren may apply to other contracts, including offer letters, but has not provided meaningful guidance on how to do so.
Legal challenges against McLaren and our predictions
The NLRB has no legal authority to enforce its decisions. Therefore, an employer may challenge the NLRB’s decision by refusing to comply with the decision, after which the NLRB may appeal to either the United States Court of Appeals for the District of Columbia or the court of appeals in the employer’s locality. You must seek enforcement of the decision. McLaren refused to comply, and the NLRB filed an enforcement action in the Sixth Circuit Court of Appeals covering Kentucky, Michigan, Ohio and Tennessee.
Enforcement action is pending, but no briefing has been scheduled. McLaren argues that the NLRB overturned the current law without notice and, as the sole dissenting member of the NLRB stressed, the NLRB’s justification for overturning this law was based on a fundamental misperception of past NLRB litigation. is expected to. While the Sixth Circuit intends to give the NLRB some respect, there is also a valid argument that the NLRB has extended the cited lawsuit beyond breaking point.
It is therefore difficult to predict whether it will be enough to honor the controversial rationale underlying the NLRB’s decisions, and the predicted odds remain shamelessly vague 50/50. .
Our Recommended Approach
Even if the Sixth Circuit refuses to enforce McLaren, the NLRB and general counsel view the decision as one of their top priorities, putting employers in a tough spot and lawyers facing prosecution. likely to seek enforcement in another jurisdiction.
So employers basically have two options. Employers may wait and see how the 6th Circuit will treat McLaren to determine how the court may address this issue, or they may consider existing guidance from McLaren and Non-supervisory or non-managerial termination agreements may be amended immediately to attempt to comply with the memorandum. A non-defamation clause prohibiting defamation and a confidentiality clause limited to financial terms and proprietary or trade secret information.
To determine their approach, employers should consider the jurisdiction in which they are located, the industry, and the benefits to be gained from maintaining existing agreements as-is against the potential risks of enforcement and related penalties. there is.
Unlike the FTC’s proposed rule, there is no one-size-fits-all approach for McLaren, and employers will need to carefully consider both the appropriate nature and timing of changes to retirement agreements.
Finally, at this time, we do not recommend adding Memorandum’s model language to retirement agreements until that model is accepted by the NLRB. We also have no intention of changing other agreements because of McLaren.
Employers will have to await future NLRB decisions that specifically address these other agreements.
In summary, we recommend:
- There are currently no changes to non-compete agreements. Employers should, at best, verify the agreements currently in force.and
- For termination agreements, we perform a case-by-case analysis that considers jurisdiction, industry, risk assessment and other relevant factors to determine.
Appropriate content and timing of changes.
As it stands, these acts barely amount to a fuss about anything.
With the FTC’s final rule, Sixth Circuit decisions, and the NLRB’s continued attacks on policies deemed inconsistent with the NLRA, this assessment and our recommendations could change significantly in the coming months.