Employment update: Recent decisions and agency actions

Recent court decisions and agency actions have threatened companies' ability to protect themselves through noncompetition, nondisclosure and similar agreements. However, the U.S. Supreme Court overturning Chevron threw open the door to challenges of agency action.

Despite this uncertain regulatory landscape, employers are well advised to consider agency decrees—unless and until they are definitively struck down—while challenges play out. Additionally, employers should know that a mandamus petition is pending in the U.S. Court of Appeals for the Sixth Circuit concerning whether attorney-client privilege and work product protection apply to documents created during counsel-conducted internal investigations. The outcome could significantly impact disclosure protections of internal investigations.

Employment Regulations

• NRLB's 'McLaren Macomb' Decision

Last year, the National Labor Relations Board (NLRB) took aim at nondisparagement and confidentiality clauses in employment agreements in its landmark decision McLaren Macomb. The National Labor Relations Act (NLRA), which McLaren Macomb interpreted, applies to most private sector employers nationally. McLaren Macomb reviewed severance agreements prohibiting employees from disparaging the employer and disclosing the agreement's terms. The NLRB found the agreements unlawful because the provisions were not narrowly tailored and had a "reasonable tendency to interfere with, restrain, or coerce employees' exercise of their NLRA Section 7 rights"—which include "the right to self-organization, to form, join, or assist labor organizations, to bargain collectively … and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection." Moreover, the NLRB held the "mere proffer" of severance agreements conditioning receipt of benefits on the "forfeiture of statutory rights" violates the NLRA.

The NLRB's guidance post-McLaren Macomb clarifies that, while not banning severance agreements outright, the NLRB seeks to significantly curtail them and prohibit overly broad provisions impacting employees' Section 7 rights. Importantly, McLaren Macomb is not limited to severance agreements, and its rationale is likely not limited to confidentiality and nondisparagement provisions. The guidance notes that other common provisions in employment agreements—such as noncompetes, nonsolicitation, no-poaching, broad liability releases and covenants not to sue—may also come within McLaren Macomb's ambit. That said, courts have treated McLaren Macomb as nonbinding and have found ways to distinguish it when cited in support of invalidating various severance and employment agreements.

• FTC's Noncompete Ban

The Federal Trade Commission (FTC) issued a final rule earlier this year imposing a near-complete ban on employers' use of non-compete agreements. In the FTC's view, noncompetes violate Section 5 of the FTC Act, which prohibits "unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce." The rule defines a "noncompete clause" as "a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: seeking or accepting work … with a different person" post-employment; or "operating a business" post-employment. The final rule precludes employers from entering into new noncompetes, enforcing existing noncompetes with workers other than senior executives (i.e., those workers in policy-making positions making at least $151,164), or representing that workers (other than senior executives subject to existing non-compete agreements) are subject to noncompetes. However, as discussed below, a district court vacated the rule, and it did not take effect as planned. (Notably, NLRB's general counsel also signaled that noncompete provisions violate the NLRA except in limited circumstances).

• CFPB's Confidentiality Agreement Circular

More recently, the Consumer Financial Protection Bureau (CFPB) issued a circular signaling intent to crack down on financial services entities' use of broad nondisclosure and confidentiality agreements that might dissuade whistleblowers from disclosing potential consumer law violations. According to the CFPB, its ability to protect consumers is compromised "if, due to a confidentiality agreement, an employee perceives that they could suffer adverse consequences for cooperating." The CFPB deems such agreements violative of Section 1057 of the Consumer Financial Protection Act, which prohibits entities within the CFPB's jurisdiction from "terminating or in any other way discriminating against" employees for whistleblowing. The circular interprets the term "discriminating against" broadly, citing language from both the Commodity Exchange Act and the Securities Exchange Act that suggests "discriminating against" includes "discharging, demoting, suspending, threatening, or harassing." Per the CFPB, because employees may interpret broadly worded confidentiality agreements as retaliation threats for whistleblowing, such agreements may violate Section 1057. To avoid a violation, the CFPB circular offers employers the following solution: confidentiality agreements should "clearly permit communicating with government enforcement agencies or cooperating with law enforcement, especially when circumstances bear indicia of potential or suspected wrongdoing."

This solution, however, is at odds with another mechanism through which companies detect and report corporate misconduct to regulators: internal investigations. The circular notes: "When an employee participates in an investigation … and simultaneously is required to sign [a confidentiality] agreement, there is a heightened risk that the employee reasonably would view the requirement to sign as a threat by the employer to take adverse action if the employee were to engage in whistleblowing activity." To the extent the circular advises that companies must "essentially encourage" internal investigation interviewees to take what they learn to regulators, the CFPB guidance may chill such investigations.

Heightened Scrutiny on Agencies Post-'Chevron'

Regulatory scrutiny of employer/employee relationships, once largely insulated from review under Chevron, is now subject to scrutiny under the Supreme Court's recent watershed decision, Loper Bright Enterprises v. Raimondo.

Loper Bright ostensibly ended four-decades of judicial deference to agencies under Chevron U.S.A. v. Natural Resources Defense Council. Previously, under Chevron, if a court concluded the meaning of a statute that an agency administers was ambiguous, the court would defer to the agency's interpretation, if reasonable. But Loper Bright held: "The deference that Chevron requires of courts reviewing agency action cannot be squared with the Administrative Procedure Act (APA)." Courts now "must exercise their independent judgment in deciding whether an agency has acted within its statutory authority," and "need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous." The decision essentially subjects agency action to independent, de novo scrutiny, subject only to Skidmore deference. Loper Bright did, however, acknowledge that a court, in exercising its independent judgment, may find "a statute's meaning is that the agency is authorized to exercise a degree of discretion."

Loper Bright's ultimate impact is not yet clear. For example, in his article, "Chevron By Any Other Name," professor Adrian Vermeule argues Loper Bright changes Chevron in name only. He suggests Loper Bright creates a Chevron-sized loophole in which "Chevron deference" is replaced by the substantially similar "Loper Bright delegation." Under his theory, courts can both discharge their duty under Loper Bright to determine questions of law and also effectively defer to agencies by determining the statute delegated authority or discretion to an agency. By contrast, Ballard Spahr's consumer financial services group has indicated that it "strongly disagrees" with Vermeule, instead reading Loper Bright as wholly divorcing itself from the prior regime of deference and freeing courts to ignore agencies' statutory interpretations "if the court reads the statute differently." So far, each approach has gained at least some traction. For example, in Consumer Financial Protection Bureau v. Townstone Financial, the Seventh Circuit gave apparent credence to Vermeule's view: in upholding a CFPB regulation, the Seventh Circuit rested its reasoning, in part, on the breadth of Congress's delegation to the CFPB to issue regulations "necessary or proper to effectuate the purposes of the relevant title," or "to prevent circumvention or evasion thereof." But in Restaurant Law Center v. United States Department of Labor, the Fifth Circuit undertook its own statutory interpretation of a Department of Labor rule: although recognizing that the "DOL is authorized to promulgate rules interpreting and clarifying the statute" the court held the rule was contrary to the statute's clear text and vacated the rule.

The overturn of Chevron will invariably increase challenges to agency action. And it has already led to inconsistent results across jurisdictions. Three district courts have considered challenges to the FTC noncompete rule post-Chevron: two sided against the FTC (one of which the FTC has appealed to the Eleventh Circuit) while one sided with the FTC. The most notable, Ryan LLC v. Federal Trade Commission, granted summary judgment striking down the rule nationally, holding the FTC lacked statutory authority to promulgate the rule, and the rule is arbitrary and capricious. The court cited Loper Bright for the proposition that the court no longer needed to exercise Chevron deference. Accordingly, the rule did not go into effect as planned on September 4th. The FTC is likely to appeal, which could, in turn, tee up the issue for the Supreme Court.

Privilege and Work Product Protections Threatened in Internal Investigations

Beyond the CFPB's circular implicitly threatening the sanctity of internal investigations, such investigations have come under attack in the Southern District of Ohio. In In re FirstEnergy Securities Litigation, the district court compelled FirstEnergy to produce documents from an internal investigation conducted by outside counsel over FirstEnergy's attorney-client privilege and work product protection objections.

The court applied to the attorney-client privilege analysis a motivation test—not on the typical communication-by-communication basis, but to the entirety of the investigation. The court held the test was whether "the 'predominant purpose' of the internal investigation was to conduct business or to solicit or render legal advice." The court found FirstEnergy had not shown the investigation's predominant purpose was legal.

And in conducting its work product analysis, the court acknowledged that "a document can be used both in the ordinary course of business and in anticipation of litigation without losing work-product protection," but later stated FirstEnergy's burden was to "show the internal investigation was conducted because of litigation, and not because of employment decisions and business concerns." Again, the court found FirstEnergy had not done so.

Because the court denied FirstEnergy's motion to certify an interlocutory appeal, FirstEnergy petitioned the Sixth Circuit for a writ of mandamus. See In re FirstEnergy, No. 24-3654 (6th Cir. July 29, 2024), Doc. No. 1. Notably, 39 law firms filed an amicus brief arguing both that attorney-client privilege attaches when the purpose of a given communication is to receive or provide legal advice (i.e., the motivation for initiating the investigation is irrelevant), and that the work product doctrine protects documents when prepared in anticipation of litigation regardless of whether they also have a business purpose. More fundamentally, the brief highlights the importance of privilege in investigations: it permits candid advice of counsel, which permits companies to exercise good governance and compliance practices, and even to cooperate with external investigations and self-disclose wrongdoing.

A denial of mandamus could have far-reaching implications for privilege law in the Sixth Circuit. If the Sixth Circuit does not correct the district court's misstatements of law, companies will be disincentivized to conduct investigations for fear that their and their counsel's most candid confidences may be shared publicly during discovery, should the investigation or document be deemed to have been initiated for business versus legal purposes. In terms of employment investigations specifically, a denial of mandamus may create the perverse incentive to terminate employees without conducting a robust investigation. Together with the CFPB circular, this ruling could trigger an era with fewer and less robust internal investigations.

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Although the administrative state's power is in significant flux post-Loper Bright, employers should generally still seriously consider applicable regulations unless and until such regulations are definitively struck down. In that vein, in light of McLaren Macomb, employers should review employment agreements with an eye toward narrowly tailoring provisions that may interfere with employees' Section 7 NRLA rights. Similarly, despite the vacatur of the FTC noncompete ban, employers should review policies on non-compete clauses and consider narrowly tailoring any continued use of such clauses. Moreover, employers should include in confidentiality agreements a carveout for employee communication with enforcement agencies. Finally, it is worth following the Sixth Circuit's upcoming ruling in the FirstEnergy case, because it could greatly impact privilege law and internal investigation practices.

Christopher N. LaVigne is a partner in the litigation and arbitration team of Withersworldwide in the firm's New York office. He regularly handles complex litigation before federal and state trial courts, appellate courts and arbitral bodies, as well as investigations involving the U.S. Department of Justice, the Securities and Exchange Commission and other regulatory and prosecutorial agencies. Kimberly Pallen is a partner with the litigation and arbitration team. She handles actions filed in state and federal courts throughout the state of California. Jordan Garman and Vahe Mesropyan are senior associates with the firm.

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