FTC noncompete agreement rule ripples out into Indiana

Decades ago, when Kenneth Dau-Schimdt first started teaching about labor and employment law, he said noncompete agreements weren’t all that common. But over time, as their use has grown, so too has the scrutiny of the practice, which now extends beyond specialized positions down to employees at sandwich shops.

State lawmakers have been wrestling with the agreements for several years. And now a “huge” ruling from the Federal Trade Commission could ban the use of noncompetes for all but the highest earners if it survives legal scrutiny.

Doing so would reduce the number of Americans employed under such a contract from roughly 19% — though some research suggests that number is closer to 50% — to 1%.

“So there are certainly, in the economy, some legitimate cases where an employer can say, ‘If you don’t let me have non competes here it will actually decrease my investment in a company.’ The problem is, is that those are a small minority of the cases where non competes are currently currently applied,” said Dau-Schmidt, the Carr professor of labor and employment law at Indiana University.

“If they had if they had just kept non competes to those employees. I don’t think there would have been a problem but the problem is that non competes have spread much more broadly … (and) the bad cases are outweighing the good cases in terms of the economy as a whole.”

Noncompete agreements are contracts that prevent employees from leaving their jobs to work in similar positions with competitors. Businesses often say the agreements protect trade practices while workers chafe at the restrictions. Meanwhile economists say the agreements have become anticompetitive, stifling the free market.

But not everyone is pleased with the agency’s move, including the U.S. Chamber of Commerce and state affiliates like the Indiana Chamber of Commerce. The national organization sued the Federal Trade Commission (FTC) shortly after the rule announcement in a business-friendly Texan court.

Aside from questions raised by its national counterpart about whether the federal agency has the authority to enforce such a rule, Greg Ellis, the Indiana Chamber vice president of energy/environmental policy and federal affairs, said the organization opposes intervention in private employer-employee contracts.

“We think, primarily, that business should have the opportunity to contract with its employees and if they reach some sort of agreement and one signs a noncompete agreement — generally, there’s a reason why they sign it. They want a job and it pays well enough that they decided to do that or whatever it may be,” Ellis said. “… we think the business community, the employer, should have the ability to contract with its employees.”

Debate over noncompete agreements

Several sectors have come to rely on non-competes as a way to protect company investments, whether it’s medical training, sales client lists or even on-air media personalities. While the particulars vary from position to position, a non-compete can limit an employee from leaving a company — and taking valuable knowledge — to a competitor. Such impositions can be confined to a geographical area or to a set amount of time.

“If I’m a research scientist and I make discoveries when I’m working for you and then I go work for your competitor … or if I’m a salesman and we develop a customer list and I take that with me … noncompetes were supposed to protect that,” Dau-Schmidt said.

Ellis noted other forms of intellectual property, including trade secrets, and the training employers give their employees as reasons why a business might require such a contract.

“You don’t want to spend all this money and train somebody up for three months, six months, a year, whatever it is. And then they say, ‘Oh, we’re just going to take our skills that you’ve given us and you paid for to your competitor,’” Ellis said, speaking from the perspective of an employer.

But sometimes, Dau-Schmidt said, companies might require employees to sign noncompetes that are unenforceable — defined as an employer having a “legitimate interest” — and employees don’t know that unless they decide to break it.

“Not all noncompetes are unenforceable but the only way to find out is to try to take a job. And then if your employer sues you, you find out later whether (it’s) successful in court or not,” Dau-Schmidt said. “And so these noncompetes can have a real dampening effect on people looking for jobs.”

Another place where the contracts can stifle markets: employers trying to lure an employee from another company to work for theirs — something that he observed hurt small businesses the most. Often, these potential employers have to pay that employee more to cover penalties for breaking the agreement.

Dau-Schmidt said economists have found noncompetes suppressed market competitiveness, effectively discouraging employees from seeking other employment opportunities that might pay more. In the release accompanying the ruling, the FTC said it believed the average worker would earn $524 more each year and an estimated 8,500 new businesses would form each year.

The ruling won’t take effect for a few months, even if it survives a legal challenge. Notably, some fields have blanket noncompete exemptions at the state level, such as lawyers, because the public interest outweighs that of an employer.

Where Indiana has taken action

While some states have completely banned noncompete agreements, Indiana has taken smaller steps to regulate the contracts. In the 2023 legislative session, the General Assembly discussed a ban for the health sector but limited it only to primary care physicians — a follow-up to earlier action to allow physicians a buy-out option to break a noncompete.

Testimony for the ban pointed to ever-rising health care costs due to noncompete agreements, proponents said. According to the FTC, the new noncompetes rule “is expected to lower health care costs by up to $194 billion over the next decade.”

Gabriel Bosslet, a pulmonary critical care physician and clinical medicine professor with Indiana University Health, said his own noncompete agreement limited him from taking another position at a competitor within a 20- or 30-mile radius for the next two years.

“I like my job, but if I was going to leave I would probably have to move,” Bosslet said.

Part of that is the contract but his specialty also requires support from a large institution, ruling out many of Indiana’s smaller hospital chains. But with more corporate firms entering the health care space, Bosslet said other physicians don’t have control over their offices.

“If my employer fires all the health care staff in my office and wants me to run on a really lean crew of people and that doesn’t work — which it doesn’t work — and I want to leave … I would have to move,” said Bosslet, describing a hypothetical doctor. “So it’s a big deal.”

Notably, the noncompetes rule doesn’t necessarily apply to nonprofit organizations, which don’t all fall under the FTC’s purview. That potentially carves out a lot of physicians like Bosslet, who are employed at one of the state’s non-profit hospital systems.

“I think that the ruling is still important in that, I think, a lot of hospital systems are realizing that noncompetes are not needed for a lot of specialties. Frankly, there are a lot of health care organizations that have gotten rid of noncompetes because physicians don’t like them and it’s worked out fine for them,” Bosslet said. “I really don’t think it’s probably going to wind up being as big of a deal for health care institutions as they make it out to be.”

At least one Indiana hospital system has already banned the use of the contract: Eskenazi Medical Group, Indiana’s sixth largest provider coalition. Back in September, Indiana University Health said it too was considering the move but as of April the entity said it hadn’t yet reached a decision.

When Indiana considered its law, one of the biggest opponents were hospitals and their lobbying organization, the Indiana Hospital Association.

In a statement, IHA reiterated that striking noncompetes makes it “more difficult to recruit and retain health care professionals,” especially with a nationwide shortage.

“Noncompete agreements play an important role in health care because they are a standard business practice to protect an organization’s investment in time and training in its workforce,” the statement read. “… if the ban remains in place, hospitals, and all organizations who employ health care professionals, will face yet another challenge in providing access to care for patients.”

But Dau-Schmidt said that a legal defeat for the FTC wouldn’t spell the end of noncompete discussions, especially as more state move to ban them within their own borders.

“There was a lot of movement in the states on this recently and the FTC could end that movement because, of course, none of it is necessary if the FTC rule is upheld. But if the FTC rule is struck down, then I would expect to see that kind of movement happening again,” Dau-Schmidt said. “You could have a state law that said all noncompetes are unenforceable unless the employee makes over $150,000 a year and they’re a CEO or they’re a research scientist or they’re a salesperson who has access to a sales list. Or whatever. But you could limit it.”