How to Solve Issues Relating to the Waiving of Non-Compete Clauses Following Potential FTC Ban Reversal

                On September 4^th, 2024, the Federal Trade Commission’s ban on non-compete clauses will most likely go into effect. When it does, employers must give notice to all their workers who are under non-competes that they are waiving (i.e. not enforcing) their non-completes language in their employment agreement, although the remaining language will be enforceable. When this notice that is given, all non-compete clauses, except those held by senior executives, will become null and void.

                Although employers must give their employees notice of their waiving of the non-compete clauses, the FTC’s rule could be overturned before September 4^th, 2024, or after. As of May 23^rd, 2024, there have been four lawsuits filed against the FTC’s ruling, wherein the petitioners are arguing that the ban is unconstitutional as they believe the FTC overstepped their administrative authority with the ban on the non-compete clauses. If just one of the federal courts’ rules in favor of the petitioners, then the non-complete ban would be found to be unconstitutional and would allow non-compete clauses to stay in effect.

                If the scenario of the ban being found to be unconstitutional does occur, then all non-compete clauses would go back into effect. This would allow employers to reinstate the non-compete clauses that they had before the ban was put into place.

Or would it?.?!?

 Although this seems like a simple solution for employers, as everything would go back to how it was before the ban, in reality, workers could raise a defense of promissory estoppel based on the idea of detrimental reliance in order to protect themselves from not being put under their old non-compete clause. This article will go through the basics of what a detrimental reliance defense is, how it can apply to the FTC bam scenario, and what employers need to know going forward.

What is Promissory Estoppel?

Cornell Law School’s Legal Information Institutedefines promissory estoppel as a “doctrine that a party may recover on the basis of a promise made when the party’s reliance on that promise was reasonable, and the party attempting to recover detrimentally relied on the promise.” Defined in another way, within the realm of contract laws, a person who was promised something, and relied on that promise to a point where it became detrimental to them, the person can sue for damages based on relying on the promise.

Applied in the context of trying to enforce a non-compete clause that was originally agreed to by a worker, then the employer issued notice of revocation of the non-compete clause in compliance with the FTC ban, the FTC ban is declared unconstitutional, and then the employer repudiates the revocation, such a fact pattern could permit a worker to assert a defense or counter-claim in a breach of contract lawsuit[LD1] [CA2] .

The four pronged test that you must complete in order to have a case under the doctrine of promissory estoppel is:

“a promise which induced the promisee’s action or forbearance, the promisee’s reliance must have been reasonable, the promisee’s action or forbearance must have amounted to a substantial change in position, the promisee’s action or forbearance must have been actually foreseen by the promisor when making the promise, and the enforcement of the promise is required to prevent injustice.”

If a person has been made a promise by a person making a promise, and that promise was relied upon to detriment, then a person could sue the promisor (i.e. employer) for damages.

What is Detrimental Reliance?

                Detrimental Reliance is “a legal concept in contract law where one party suffers harm or incurs a loss as a result of relying on the promises or representations made by another party.” Detrimental reliance is one of the four prongs of the estoppel test and needs to be found to potentially when a suit for damages that occurred from relying on a bad promise.

How Would Promissory Estoppel Apply to the FTC Non-Compete Clause Ban?

                When it comes to the FTC Non-compete clause ban, promissory estoppel could be used as a defense to workers from having to be put back under a non-compete clause following a federal court finding the rule to be unconstitutional. The situation would occur when an employer issues a “non-compete clause is void” notice to their employee as required by the FTC, following a ruling by the federal court system that the FTC’s ban on non-competes is unconstitutional, and then the employer tries to reinstate the prior non-compete clauses.

If this were to happen, those employer’s workers could use a promissory estoppel defense to argue that due to relying on their employer’s “promise” of waiving their non-compete clauses, they could argue that they would face a detriment by being put back under the clause. Therefore, if they were to face financial harm from being put back under the non-compete clause, they could sue for the damages that arise from the ban coming back into effect.

How Can Employers Prepare for an Unconstitutional Ruling by the Federal Courts?

                If the FTC’s non-compete clause ban is not deemed unconstitutional before September 4^th, 2024, employer’s need to make sure they 1) prepare notices for all employee’s who are under employment agreements containing non-compete clauses; and 2) send the notice’s as required by the FTC to all such workers, either through in person meeting, mail, email, text, or phone call.

We recommend written mail, sent certified, so that what you’ve communicated to all such workers cannot be in dispute.

                And we recommend doing this at the last possible minute, just in case a federal court renders this rule unconstitutional before the September 4^th, 2024, deadline.

                If the federal court system rule’s the ban is unconstitutional in some way or fashion, then employer’s needs to decide whether to prepare to either reinstate their former non-compete clauses if they choose to, or to just let the non-competes stay ineffective. If they choose the first option, employers will need to prepare for the eventuality of some filing a lawsuit against them based on the doctrine of promissory estoppel.

                To stay up to date with the latest information regarding the Federal Trade Commission’s ban on non-compete clauses and the lawsuits that are filed against it, please look to our other blog posts on this issue.

Putting it All Together: Best Practices

Based on the above discussion, we recommend employers:

• Wait until the very last minute to send notices of the revocation of the non-compete clauses in relevant workers’ agreements.
• Consult with an attorney on the language of this revocation.  You do not want to inadvertently revoke other language, not related to the non-compete clause.
• If the courts hold the FTC ban on non-compete clauses as unconstitutional, you have options:
  • Do nothing.
  • Reinstitute the non-compete clause in a new agreement.  Note that you will need “consideration” (i.e. to pay the worker some fair amount) to make this new agreement enforceable.
• If the courts do not hold the FTC ban on non-compete clauses as unconstitutional, does the rest of the agreement with your worker(s) address confidentiality, trade secrets and non-solicitation adequately?
  • If not, draft a new agreement in compliance with the FTC ban, and get your worker(s) to sign it.  Remember you will need “consideration” (i.e. to pay your worker(s) some fair amount) to make this new agreement enforceable.