Court of Appeals Affirms NLRB's Aggressive Approach to Confidentiality Provisions that May Tend to Inhibit the Exercise of Section 7 Rights

Alerts / August 26, 2011

NLRB v. Northeastern Land Services
2011 U.S.App. LEXIS 12678 (June 22 2011)

On June 22, 2011, the Court of Appeals for the First Circuit affirmed the decision of the National Labor Relations Board (the Board) in Northeastern Land Services, Ltd., Case 1-CA-39447. The Board had determined that a confidentiality provision in an agreement with an unrepresented employee interfered with the employee’s rights under Section 7 of the National Labor Relations Act (the Act) and thus violated Section 8(a)(1) of the Act. Given the breadth of the decision, employers should be encouraged to rethink, and perhaps revise, confidentiality agreements with both represented and unrepresented employees.

NLS and Employee Dupuy Become Embroiled in Disputes Over Payments of Wages and Reimbursement of Expenses

In July 2000, temporary agency Northeastern Land Services, Ltd. (NLS) hired Charging Party Jamison Dupuy (Dupuy) to perform work for NLS client, El Paso Energy (El Paso). NLS hired Dupuy as a right-of-way agent, and his job was to assist El Paso in obtaining permits and acquiring temporary space along roadways for a pipeline.[1]

At the time he was hired, Dupuy received an offer letter setting forth the terms of his employment. The letter contained a clause (a) protecting the confidentiality of information received from NLS clients; and (b) prohibiting the solicitation or acceptance of work or assignments from any NLS clients while working for NLS and for a period of six months thereafter. In addition, the clause contained the following language:

Employee also understands that the terms of his employment, including compensation, are confidential to Employee and the NLS Group. Disclosure of these terms to other parties may constitute grounds for dismissal.

Dupuy’s employment contract with NLS contained the same provisions.

At trial, Jesse Green, NLS’s Executive Vice President and Chief Operating Officer, testified about the competitive nature of the industry, and how the cost of labor constitutes a substantial part of its bidding for contracts. The confidentiality agreement was intended to prevent NLS employees from dealing directly with clients regarding the terms of their employment. On this point, Green described the adverse effect on client relationships if employees approached clients with their problems.

[W]e have very specific billing requirements from our clients . . . and when individuals try to circumvent these contractual obligations . . ., of course it creates problems for us. . . . [W]hen our employees approach our client with . . . their problems, then we’re not providing the services that we contracted to provide.[2]

Green also testified that the provision prohibiting discussion of wages or terms of employment was not intended to prohibit NLS employees from discussing these issues among themselves, nor had it ever been enforced that way.

Dupuy was employed by NLS on two separate occasions in 2000.[3] During the course of his second term, Dupuy complained to NLS regarding the timing and amount of expense reimbursement and late payment of his wages. On at least one occasion, Dupuy threatened to file a complaint with the Massachusetts Attorney General’s Office.

Believing that NLS was not responsive enough to his demands, Dupuy brought El Paso into the dispute, contacting El Paso employee, Rick Lopez. Dupuy had known Lopez before Dupuy was hired by NLS, and had obtained his job with NLS through Lopez.

NLS was unhappy when it discovered that Dupuy had contacted Lopez for help. After a further escalation of the disputes with Dupuy, NLS terminated his employment. Jesse Green told Dupuy that Dupuy was being let go because he had violated the provision in his employment agreement that prohibited him from discussing his wages with other parties.

Dupuy Files Unfair Practice Charge; ALJ Applies Balancing Test in NLS’s Favor

Dupuy filed an unfair practice charge against NLS, claiming that the prohibition on discussing terms of employment, including compensation, was unlawful because of the potential chilling effect on employees’ Section 7 rights. Therefore, Dupuy alleged that his termination violated Section 8(a)(1) of the NLRA. Following a trial on the issue, the ALJ found that the rule in question “reasonably tended to coerce [employees] in the exercise of their Section 7 rights.”[4] But because the employer had a “legitimate and substantial business justification” for the rule, this outweighed what the ALJ considered to be a “minor” infringement on the employees’ Section 7 rights. His recommended order was that the complaint be dismissed in its entirety.

Board and Court of Appeal Favor Inflexible Standard

The Board disagreed. Even though employees could discuss compensation among themselves, employees would “reasonably construe the language of the rule to prohibit Section 7 activity.” Therefore, the prohibitions on discussions with other parties ran afoul of the standard articulated in Lutheran Heritage Village-Livonia 343 N.L.R.B. 646 (2004)[5] The Board did not consider NLS’s arguments as to the business justification for the rule. In addition, the Board rejected the contention that an employer may lawfully terminate an employee for violation of a lawful provision of an overly broad, unlawful rule. Finally, the Board would not consider whether Dupuy would have been discharged in the absence of a violation of the confidentiality provision, because any discharge pursuant to the unlawful provision was unlawful as well.

Following NLS’s appeal, the Court of Appeals directed entry of judgment enforcing the Board’s order.[6] The Court of Appeals agreed with the NLRB’s conclusion that employees would reasonably construe the confidentiality provision to prohibit Section 7 activity. It was of no import that the provision was not intended, and had not been applied, to prohibit the employees from discussing compensation and other terms of employment among themselves. The court also declined to second guess the Board’s refusal to apply a balancing test, stating that it owed “deference” to the Board not to do so. Rather, the court declared that a more narrowly tailored provision could have accomplished NLS’s stated goal. Finally, the court determined that the Board “did not err” when it declined to consider whether Dupuy would have been terminated in the absence of the confidentiality rule.

Gleanings: Confidentiality Provisions Should Be Reviewed by Legal Counsel

This decision creates headaches for employers across many industries, including construction and construction project management, facilities management, municipal water, energy and waste management, and aspects of film or television production, where labor costs are a key element of bidding and can be akin to trade secret information.[7] While the Court of Appeals notes, almost in passing, that the confidentiality provision could have been more narrowly tailored, it does not provide any concrete suggestions as to how that might be accomplished. In its 2004 decision in Lutheran Heritage Village-Livonia, the Board affirmatively rejected the view of then Members Liebman and Walsh that employers must expressly affirm that work rules do not apply to Section 7 activity in order to protect them from legal challenge. Given the current composition of the Board, it is unclear whether that view would still carry the day.[8]

One possible response to the court's decision would be to prohibit the use or disclosure of pricing information (that may be trade secret or otherwise protected) and to include “compensation” as part of pricing information. An employer could also better define the scope and purpose of the prohibition (e.g., so that it applies to the extent necessary to protect the employer’s competitive advantage and to prevent unfair competition). In recent years, California courts have moved toward tolerance of confidentiality and non-solicitation agreements only to the extent necessary to protect trade secret information. Such an approach might be necessary here as well.

One conclusion is clear: Employers should have confidentiality provisions reviewed by legal counsel for compliance with Section 8(a)(1).

If you have any questions about the material presented in this alert or how this decision may impact your business, please contact any member of Baker Hostetler’s Employment and Labor Practice.

Authorship Credit: Ellen J. Shadur

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[1] Excerpted from decision of ALJ Joel P. Biblowitz (“ALJ Decision”), in NLRB in Northeastern Land Services, Ltd d/b/a/ The NLS Group and Jamison Dupuy 352 N.L.R.B. 744 (2008).
[2] Id.
[3] During his first term of employment, Dupuy also signed an eight paragraph Confidentiality Agreement which did not refer to an employee’s wages or other conditions of employment. It is unclear whether Dupuy signed a similar agreement during his second period of employment with NLS. Id.
[4] Id.
[5] In Lutheran Heritage Village-Livonia the Board acknowledged prior precedent as establishing the following two-part test: A work rule is overboard if it explicitly restricts activity protected by Section 7. If there is no express restriction, the rule is overbroad if “(1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.” 343 N.L.R.B. 646 (2004). Because the Board found that NLS’s confidentiality rule, while not expressly directed at Section 7 activity, would reasonably be construed to prohibit Section 7 activity, it did not consider whether it ran afoul of other elements of the test.
[6] The Court of Appeals had previously affirmed the NLRB’s decision, however, that decision was vacated by the United States Supreme Court when it also issued an order granting NLS’s petition for writ of certiorari. The Court remanded the case for reconsideration in light of its decision in New Process Steel v. NLRB 130 S. Ct. 2635 (2010). On remand, the NLRB essentially adopted its prior decision and order.
[7] California Civil Code § 3426.1(d) defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Many other states use the same or similar definition of “trade secret.”
[8] California has long prohibited employers from requiring, as a condition of employment, that employees refrain from disclosing wages or information about their working conditions, or from disciplining employees who disclose such information. See Cal. Labor Code §§ 232 and 232.5. We are not aware, however, of any case addressing prohibitions on disclosure of compensation which may be akin to trade secret pricing information.

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