US: Companies Shouldn't Alter Noncompete, Severance Agreements Yet

In two highly publicized administrative actions, the Federal Trade Commission and the National Labor Relations Board have sought to end, or at least significantly curtail, the use of noncompete agreements, and standard non disparagement and confidentiality provisions in severance agreements, respectively.

Both actions will be challenged, thus creating a limbo period for employers as the court proceedings unwind.

Guidance for how to act during this interim period has varied widely, from immediately overhauling all existing agreements to doing nothing.

In this article, we join the fray and recommend a wait-and-see approach for noncompetes, and a measured, case-by-case analysis for severance agreements.

General Background

In January, the FTC proposed a rule to ban most noncompete agreements in the U.S.

The comment period for the proposed rule ended on April 19, with approximately 20,000 — often highly charged — comments.

In its request for comments, the FTC specifically asked about potential alternatives to a total ban, such as whether executives should be subject to a different rule. It is uncertain when the FTC will issue its final rule, but it is certain that legal challenges will be filed as soon as it is issued.

And in another dramatic change to employment agreements, in February, the NLRB issued a decision in McLaren Macomb that would invalidate standard non disparagement and confidentiality provisions in severance agreements.[2] The validity of McLaren will be addressed by U.S. Court of Appeals for the Sixth Circuit.

The Proposed Rule

The FTC's noncompete ban is certainly novel, but novel administrative actions have been rejected by the current U.S. Supreme Court, and the FTC's attempt is likely to suffer the same fate.

The FTC has essentially admitted that its proposed rule relies on a reimagined view of the FTC Act's Section 5 powers, and the Supreme Court is likely to view this reimagining in the same way as the FTC's sole dissenting commissioner did, calling it "a radical departure from hundreds of years of legal precedent."

Accordingly, we advise against overhauling noncompete agreements until there is clarity on whether the final rule will survive.

Comments to the Proposed Rule

Of the 20,000 comments submitted, opponents of the proposed rule generally echoed the four arguments from the dissenting FTC commissioner:

• The FTC lacks authority to engage in unfair competition rulemaking;
• The authority to regulate noncompetes has traditionally and appropriately been reserved to the states;
• The Supreme Court's recent ruling in West Virginia v. EPA bars the rulemaking because the FTC lacks clear congressional authorization to undertake this initiative; and
• The rulemaking violates the nondelegation doctrine.

The critique from the Antitrust Law Section of the American Bar Association was more limited, arguing there may be workable criteria for differentiating between low-wage and other workers, and denouncing the blanket approach in the proposed rule.

Perhaps the most aggressive comment was from the U.S. House of Representatives Committee on the Judiciary, which warned that it "is conducting oversight of the FTC's power grab" and demanded documents related to the proposed rule's development process.

Predictions

We have no reliable information on when the FTC will finish reviewing the comments and issue its final rule.

Any final rule will not go into effect for 180 days, and legal challenges will begin as soon as the final rule is issued.

As noted, the Supreme Court has been hostile to administrative rulemaking that goes beyond an agency's explicit authority, and because this is such a transformational change, it is likely the Supreme Court would review a legal challenge.

In West Virginia v. EPA, the Supreme Court held that the Environmental Protection Agency did not have the authority to regulate greenhouse gas emissions in every industry because there was no clear congressional authorization to do so.

Similarly, here the Supreme Court is likely to find that the FTC's Section 5 authority hasn't been exercised in this new way for 100 years because there is no congressional basis for this reimagination.

We therefore predict — with the caveats that it may depend on the terms of the final rule, and that surprises can happen — the FTC's noncompete ban will be struck down.

Our Recommended Approach

We do not recommend revising any noncompete agreements at this time because of the proposed rule, and we similarly recommend against any immediate changes after the final rule is issued.

At most, we recommend cataloging existing noncompete agreements so that if, or when, any changes may be necessary — which may be some time — employers have a complete understanding of the agreements currently in place.

McLaren

The future of the NLRB's McLaren decision is more difficult to predict.

It is likely that some aspect of the decision will survive scrutiny, and we therefore recommend a case-by-case analysis to determine if, how, and when to revise severance agreements for nonsupervisory and nonmanagerial employees. Relevant factors for this analysis are jurisdiction, industry and an informed risk assessment.

McLaren and the General Counsel's Memorandum Interpreting McLaren

In McLaren, the NLRB invalidated two relatively standard severance agreement provisions, finding that the provisions could potentially infringe Section 7 employee rights under the National Labor Relations Act. Specifically, the provisions were the following.

The first was non disparagement, which is a provision prohibiting employees from making statements that could disparage or harm the employer's image.

The NLRB held that this language was overly broad because it could limit an employee's right under Section 7 to talk negatively about an employer, including the right to make public statements to third parties such as the media, and it did not track the NLRB's defamation definition.

The second was confidentiality — a provision prohibiting employees from disclosing the terms of a severance agreement. The NLRB held the provision could prohibit an employee from filing an unfair labor practice charge with the NLRB or assisting the NLRB in an investigation.

McLaren left many unanswered questions because it did not include guidance on its scope or what the NLRB would consider to be lawful non disparagement and confidentiality provisions. Recognizing this confusion, the NLRB's general counsel issued an FAQ memorandum with her interpretation of McLaren. Below is our summary and interpretation of the critical FAQs from the memo.

What non disparagement or confidentiality provisions are lawful?

Non disparagement provisions that restrict only defamatory statements — i.e., maliciously untrue statements or statements made with reckless disregard for the truth — and confidentiality provisions that protect the financial terms of a severance agreement or otherwise "restrict the dissemination of proprietary or trade secret information for a period of time based on legitimate business justifications."

The NLRB is likely to take a narrow view of what will be considered proprietary or trade secret information.

Does McLaren apply to supervisory or managerial employees?

Generally, no. Supervisors or managers do not have Section 7 rights.

Will a savings clause and disclaimer save an otherwise overbroad provision?

No, but it may help resolve ambiguity in some cases. The general counsel recommends including a lengthy model statement in the severance
agreement that advises employees of nine activities — e.g., union organizing, taking videos in the workplace and wearing union insignia — in which they may lawfully engage, but this model statement has not been adopted by the NLRB, and the general counsel does not say that including this will save an otherwise overly broad provision.

Will overbroad provisions invalidate the entire severance agreement?

No. Only the unlawful provisions will be invalidated.

Does McLaren apply to other employment agreements or policies?

The general counsel suggests that McLaren could apply to other agreements, including offer letters, but the counsel does not provide meaningful guidance on how.

The Legal Challenge to McLaren and Our Predictions

The NLRB does not have the legal authority to enforce its own decisions. Thus, an employer may challenge the NLRB's ruling by refusing to comply with the decision, and the NLRB must then ask either the U.S. Court of Appeals for the District of Columbia Circuit or the court of appeals where the employer is located to enforce its decision. McLaren has refused to comply, and the NLRB filed an enforcement action with the U.S. Court of Appeals for the Sixth Circuit — covering Kentucky, Michigan, Ohio and Tennessee.

The enforcement action is pending, but no briefing schedule has been set. McLaren is expected to argue that the NLRB overturned existing law without notice, and the NLRB's justification for overturning this law — as highlighted by the NLRB's sole dissenting member — is based on fundamental mischaracterizations of past NLRB cases. While the Sixth Circuit will give the NLRB some deference, there is a legitimate argument that the NLRB has stretched the cases it cites beyond their breaking points.

It is therefore difficult to predict whether deference will be enough to overcome the debatable rationales underlying the NLRB's decision — leaving our predicted odds at a shamelessly equivocal 50-50.

Our Recommended Approach

Even if the Sixth Circuit refuses to enforce McLaren, employers are in a difficult place because the NLRB and the general counsel see this decision as one of their top priorities, and the counsel is likely to prosecute and seek enforcement in another jurisdiction.

Thus, employers essentially have two choices. Employers can either wait and see how the Sixth Circuit handles McLaren to determine how courts are likely to address this issue, or immediately make changes to nonsupervisory or nonmanagerial severance agreements to attempt to comply with existing guidance from McLaren and the memo — i.e., by imposing a non disparagement clause that prohibits defamation and a confidentiality clause that is limited to financial terms and proprietary or trade secret information.

To decide on their approach, employers should consider the jurisdiction where they are located, their industry and any perceived benefits to keeping existing agreements as-is against the potential risk of enforcement and associated penalties.

Unlike the FTC's proposed rule, there is no one-size-fits-all approach for McLaren, and employers should carefully consider both the appropriate content and timing for any severance agreement changes.

Finally, at this time we do not recommend adding the memo's model language to severance agreements unless and until that model is embraced by the NLRB, and we would not make changes to any other agreements because of McLaren.

Employers should wait for future NLRB decisions that specifically address these other agreements.

Conclusion

In sum, we recommend:

• For noncompete agreements, no current changes — at most, employers should take stock of those agreements currently in effect; and
• For severance agreements, perform a case-by-case analysis that considers jurisdiction, industry, risk assessment and any other relevant factors to decide on
  the appropriate content and timing for any changes.

As things stand now, these actions amount to much ado about just barely something.

This assessment and our recommendations could drastically change over the next few months because of the FTC's final rule, the Sixth Circuit's decision and  NLRB's continued attack on policies it deems to conflict with the NLRA.