D.C. Circuit Rules That Employer’s Noncompete Violates Federal Labor Law

May 12, 2017

Employers face numerous hurdles in implementing and enforcing noncompetition agreements.  Now, the D.C. Circuit has added another: the National Labor Relations Act (NLRA). In Minteq Int’l Inc. v. NLRB, the influential appeals court upheld a National Labor Relations Board decision that the employer’s effort to have new hires sign restrictive employment covenants violated its duty to bargain and the non-interference obligations of NLRA Section 8(a)(1). 

The employer in Minteq sold proprietary refractory materials for furnaces used in the steel-making process. It was subject to a collective bargaining agreement (CBA) with Operating Engineers Local 150 (the union) that contained fairly broad management rights language. In 2012, Minteq implemented a noncompete and confidentiality agreement (NCCA) for new employees only. The NCCA contained provisions prohibiting employees from working for competitors, soliciting or encouraging customers or suppliers from ending their relationships with Minteq, or disclosing Minteq’s confidential information. It also asked employees to acknowledge that the NCCA did not affect their at-will status. In other words, the NCCA contained terms typical of employer noncompetition agreements.

After Minteq threatened to enforce the NCCA against a former employee, the union filed unfair labor practice charges, claiming, among other things, that Minteq violated the NLRA by unilaterally implementing the agreements and that specific terms of the NCCA interfered with employees’ labor rights granted under Section 7 of the NLRA. After lengthy administrative proceedings, the NLRB agreed with the union on both points and ordered Minteq to cease and desist from using the NCCA and to rescind all executed NCCAs. Minteq appealed.

On April 28, the D.C. Circuit Court of Appeals upheld the NLRB’s finding that the NCCA was a mandatory subject of bargaining because it “prohibits an employee from working for another company that might have any connection to Minteq’s business both during his employment and for 18 months afterward, effectively imposing a cost in lost economic opportunities on employees. . . .” Therefore, the court said, the NCCA has “a clear and direct economic impact on employees – and thus represent[s] precisely the sort of matters suitable for collective bargaining.”

The D.C. Circuit rejected Minteq’s arguments that it was not required to bargain with the union over the NCCA because the NCCA was a “work rule,” which the CBA’s management rights clause allowed Minteq to implement unilaterally. The court disagreed in part because the CBA governs workers only during their employment, but the NCCA creates legal obligations after the end of the employment relationship. The D.C. Circuit also noted that the NCCA purported to bind an employee’s “heirs, successors and assignees,” who are not governed by the CBA. 

The D.C. Circuit then went further, holding that the NCCA itself violated Section 8(a)(1) of the NLRA. Section 8(a)(1) prohibits employment practices “that would reasonably tend to chill employees in the exercise of their statutory rights,” which include the right to unionize and engage in concerted labor activities. The court found that the NCCA’s nonsolicitation language, prohibiting employees from encouraging customers or suppliers from “terminating or altering” their relationships with Minteq, interfered with concerted labor activities, specifically the encouragement of boycotts in support of a labor dispute. The court further found that the NCCA’s at-will language contradicted the CBA’s requirement that nonprobationary employees may be discharged or disciplined only for “just cause” and therefore interfered with statutory rights. Thus, the court held that these aspects of the NCCA would violate federal labor law even if Minteq had properly bargained with the union.

Minteq cautions unionized employers against implementing or modifying noncompetition agreements without consulting the union, particularly if the agreements may restrict protected labor activities or are inconsistent with the terms of a CBA. However, the D.C. Circuit’s finding of a Section 8(a)(1) violation makes its opinion concerning for all employers, as the NLRA’s non-interference provisions apply even to employers that don’t have unions and have not been the target of union organization activity. The opinion suggests that overly broad restrictive covenants not only run the risk of unenforceability under state law, but could violate the NLRA. Such covenants may be enjoined as unfair labor practices and are especially vulnerable to enforceability challenges.

In light of Minteq, employers should consider reviewing their noncompetition covenants and other restrictive covenants to ensure they do not inadvertently limit protected activities. Language that prohibits employees from interfering with customer or other business relationships, such as that contained in the NCCA, may be particularly problematic. Employers may wish to narrow this language to refer specifically to customer solicitation rather than “interference” with customer relationships. Employers also can add disclaimer language, common in settlement and severance agreements, clarifying that nothing in the agreement should be construed to interfere with concerted activities protected by the NLRA.

If you have any questions about this legal development, please contact the authors, your McGuireWoods contact, or other members of the firm’s labor and employment department.