Introduction
On September 4th, 2024, the Federal Trade Commission’s (FTC) ban on non-compete clauses is expected to take effect. This change means employers must notify their employees that any non-compete clauses in their contracts will no longer be enforced, although the rest of the contract will remain valid. However, there’s a twist—this ruling could be overturned before or after the effective date due to ongoing lawsuits challenging its constitutionality.
In this blog, we’ll guide employers and HR executives through the complexities of this potential ban reversal and explain how to handle non-compete agreements in this evolving legal landscape.
What Is Promissory Estoppel?
Cornell Law School defines 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.” In simpler terms, if someone makes a promise, and the other party relies on it to their detriment, they can seek legal recourse.
In the context of the FTC ban scenario, if an employer revokes a non-compete clause due to the ban, and later tries to reinstate it if the ban is overturned, employees could argue that they relied on the initial revocation to their detriment.
Detrimental Reliance Explained
Detrimental reliance is a key component of the promissory estoppel doctrine. It refers to a situation where one party suffers harm or incurs a loss because they relied on promises made by another party. For employees, this could mean making career or financial decisions based on the revocation of a non-compete clause.
How Promissory Estoppel Applies to the FTC Non-Compete Clause Ban
If the FTC’s ban is overturned, employers might consider reinstating the previously revoked non-compete clauses. However, employees could use promissory estoppel as a defense. They might argue that they relied on the employer’s notice of revocation and would face significant harm if the non-compete clause were reinstated. This could lead to legal battles over the enforceability of these clauses.
Preparing for an Unconstitutional Ruling
Employers need to be prepared for the possibility that the FTC’s ban could be declared unconstitutional. Here’s how to stay ahead of the curve:
- Prepare Notices:
Draft notices informing employees of the revocation of non-compete clauses. Ensure these notices only address the non-compete clauses and do not inadvertently revoke other contract terms.
- Send Notices at the Last Minute:
To minimize unnecessary confusion, send these notices as close to the September 4th deadline as possible. Use certified mail to have a clear record of communication.
- Consult Legal Counsel:
Work with an attorney to ensure the language in your notices is precise and does not affect other contract terms.
- Decide on Next Steps:
If the ban is overturned, decide whether to reinstate the non-compete clauses or leave them unenforced. If you choose reinstatement, be prepared for potential legal challenges based on promissory estoppel.
Dealing with Reinstatement and Promissory Estoppel
If you decide to reinstate non-compete clauses after a potential overturning of the FTC ban, consider these steps:
- Do Nothing:
Keep the clauses revoked and avoid potential legal battles.
- Reinstitute Clauses:
Draft new agreements with the non-compete clauses and provide “consideration” (a fair payment) to make the new agreements enforceable.
- Ensure Compliance:
If the ban is upheld, ensure your employment agreements adequately address confidentiality, trade secrets, and non-solicitation without relying on non-compete clauses.
Conclusion
The potential FTC ban on non-compete clauses presents significant challenges for employers and HR executives. By understanding the doctrine of promissory estoppel and preparing for possible legal outcomes, businesses can protect themselves from potential disputes and maintain compliance.
Stay updated on this evolving issue by following our blog, and consult with legal professionals to tailor your approach to your specific needs. For personalized advice, consider booking a consultation with one of our experts.
Next Steps:
Stay informed and prepared—Consult with on of our Attorneys today to discuss how to manage non-compete clauses in your employment agreements.
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