Question: I’m reading media accounts that the FTC is about to ban all covenants not to compete. When will this happen? Will the covenant not to compete in my employment agreement that I signed two years ago be banned? Will Michigan law that allows covenants not to compete have to be changed also?

Answer: On Jan. 5, 2023, the FTC issued a Notice of Proposed Rulemaking (the “Proposed Rule”). The Proposed Rule would ban covenants not to compete in employment agreements. Covenants not to compete obtained in connection with the sale of a business would remain enforceable in accordance with their terms and to the extent allowed by state law. Examples of such covenants not to compete are those contained in a purchase agreement, or a stand-alone document entered into in connection with a purchase agreement.

An FTC summary of the Proposed Rule can be found online. Specifically, the Proposed Rule declares that it is “an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.”

Therefore, the Proposed Rule would ban both the entering into of future covenants not to compete and covenants not to compete contained in existing employment agreements. If the Proposed Rule takes effect, a prospective employer will not be able to include a covenant not to compete in a proposed employment agreement and your current employer would not be able to enforce a covenant not to compete already in place.

No changes to Michigan law would be needed to put the ban into effect. The Proposed Rule provides that it “shall supersede any state statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with” the Proposed Rule’s ban of covenants not to compete in employment agreements. If a state has a law in place that already bans covenants not to compete, that state law would remain in force to the extent it provides greater protection to the employee than the Proposed Rule.

The Proposed Rule was issued subject to a 60-day public comment period beginning when it is published in the Federal Register. Following the expiration of this public comment period, the FTC has indicated its intention to quickly finalize the rule. The ban would take effect 180 days after the FTC publishes the final rule. However, the ban will face significant challenges in the courts that will very likely delay when the ban becomes effective. The expected legal battle will likely take years.

The FTC is attempting to ban covenants not to compete in employment generally. This action is not specific to the health care industry. The FTC states the rationale for the Proposed Rule as: “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” These and other factors unique to the health care industry (such as patient choice, disruption of patient care, etc.) are very likely to be considered in the regulatory and legal process to come.

Note: The FTC took further action on Feb. 3, 2023, withdrawing what it described as “outdated” enforcement policy statements. Included in the withdrawn enforcement policy statements was one that provided a safe harbor allowing associations like MDA to gather and distribute fee and compensation surveys. Until the effect of the withdrawal of this enforcement policy is known, the MDA has ceased distribution of its fee and compensation surveys.

1.The FTC took further action on February 3, 2023, withdrawing what it described as “outdated” enforcement policy statements. Included in the withdrawn enforcement policy statements was one that provided a safe harbor allowing associations like MDA to gather and distribute fee and compensation surveys. Until the effect of the withdrawal of this enforcement policy is known, MDA has ceased distribution of its fee and compensation surveys.

This article first appeared in the March 2023 issue of The Journal of the Michigan Dental Association.