Your (Almost) Illegal Noncompete
A proposed Federal Trade Commission rule outlaws noncompetition restrictions on workers, regardless of their job function or compensation level. Not only would new noncompetition agreements be prohibited, but employers would be obligated to cancel existing noncompetition agreements and notify workers that their non-compete is no longer effective. The FTC estimates 30 million employees would benefit and total worker’s earnings would increase by $250 to $296 billion per year.
Most state laws permit reasonable restrictions to protect the employer’s business goodwill and the worker’s employment rights. The FTC intends to preempt state law in this area with a rule eliminating this balancing test. As a limited concession, the FTC would permit nondisclosure and customer non-solicitation provisions provided they do not function as non-competes.
Allowing key employees to compete could be extremely destructive to business operations and the valuation of a business in a sale, especially if customer nonsolicitation and nondisclosure restrictions are nonexistent or unenforceable.
The FTC’s rule becomes effective in March 2023 unless withdrawn, modified or delayed. Some commentators expect a delay or modification. However, the FTC may not be so inclined since, in anticipation of fierce pushback, it devoted significant resources to analyzing the issues in its 216-page notice of proposed rulemaking.
All noncompete, nonsolicitation and nondisclosure provisions should be reviewed before their potential invalidation should the FTC proceed with this rule.
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Legal Landmines — Emails + “From” Field = A $400,000 Contract
Electronic contracts are easily made.
An email without a typed signature can support an enforceable electronic contract because the sender’s name in the “From” line of the email is a signature according to the First District Texas Court of Appeals in Khoury v. Tomlinson (Dec. 22, 2106). Following are relevant excerpts of those emails.
Subject Re: agreement
From: Prentis Tomlinson
Date: Monday, January 16, 2012 8:32 AM
“We are in agreement and I am working on… the financial documents you requested….”
***
From: John Khoury
Date: January 16, 2012 3:47 PM
“Prentiss, to recap our meeting in Houston on Monday January 9, 2012….:
1. You confirmed your intention to repay the $400,000 loan….
[2 through 4 omitted here for brevity]
Please confirm this agreement. Also, please make the regular payment for January
Thank You for honoring your word….
Best Regards,
John Khoury”
Most courts recognize that emails can create contracts. To overcome this obstacle, Mr. Tomlinson argued that he had not “signed” his email. The court, citing several authorities, ruled that Mr. Tomlinson’s name in the “From” line of the email was his signature, an electronic contract was formed, and Mr. Tomlinson breached the contract.
As this case demonstrates, affirmative actions should be taken to avoid contracting by email or other electronic communication. Those wanting to avoid electronic contracts should discuss with legal counsel using electronic contract disclaimers and avoiding words typically used to form contracts (such as offer, propose, accept, agree, etc.). Those interested in forming electronic contracts should discuss with legal counsel alternatives superior to litigation for proving signatures.
