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FTC Considers Banning Covenants Not to Compete

March 22, 2023

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 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 standalone 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.

Read the complete Q&A in the Journal of the Michigan Dental Association on page 22.