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Noncompete agreements have been a longstanding topic of debate in employment law, with arguments hinging on the balance between protecting businesses’ legitimate interests and preserving employee rights and job mobility. Traditionally the domain of states, the law concerning noncompete agreements has been in an active state of flux. Several states and the District of Columbia have imposed new restrictions over the last several years on the enforceability of such agreements.
In 2023, however, the federal government has inserted itself into the debate, seeking to impose national restrictions, or even a complete ban, on noncompete agreements in employment. Specifically, in January, the Federal Trade Commission issued a proposed rule that could ban the use of noncompetes in employment at the national level. Then in May, the general counsel for the National Labor Relations Board issued a memorandum asserting that noncompete agreements may violate the rights of employees protected by the National Labor Relations Act.
Current law on the enforceability of noncompete agreements in Indiana
Indiana courts take a case-by-case approach when evaluating the enforceability of noncompete agreements. Although disfavored, under Indiana law noncompete agreements are generally recognized and enforceable if they meet certain criteria:
1. Reasonableness: Noncompete agreements must be reasonable in terms of their geographic scope, duration and the activities they seek to restrict.
2. Legitimate business interest: The employer must have a legitimate business interest that justifies the enforcement of the noncompete agreement. This may include safeguarding trade secrets, confidential information, customer relationships or specialized training provided to the employee.
3. Good consideration: Noncompete agreements in Indiana must be supported by adequate consideration. In the context of employment, continued new or continued at-will employment itself may serve as consideration, but additional benefits or compensation can bolster enforceability.
4. Written and signed: To be valid and enforceable, noncompete agreements should be in writing and signed by both parties.
5. No violation of statute or public policy: Noncompete agreements must not violate statute or public policy and must be reasonable in light of the circumstances and the public interest. For example, Indiana will not enforce noncompetes involving lawyers, as public policy dictates that a client should be able to choose its own legal counsel. Likewise, Indiana adopted a statute effective July 1 that renders physician noncompetes unenforceable if the doctor terminates employment for cause.
Impact of the proposed FTC rule
The FTC’s proposed rule, however, essentially seeks to ban noncompete agreements in employment nationally. The primary asserted justification behind the proposed ban is to promote competition and ensure a fair labor market. The FTC argues that noncompete agreements can lead to decreased job mobility, reduced wage growth, and hinder economic growth and innovation. By eliminating these barriers, the FTC intends to foster a more competitive environment, encourage entrepreneurship and empower employees to make choices that align better with their career goals. If implemented, the FTC’s proposed rule would supersede state laws, including Indiana’s, regarding the enforceability of noncompete agreements. This could lead to a blanket prohibition of noncompete agreements at the federal level, both prospectively as to new noncompetes and by rendering already existing agreements unenforceable, regardless of whether they meet Indiana’s state-specific criteria.
While the proposed rule has garnered support from many labor advocates, it has also faced pushback from business interests, including the U.S. Chamber of Commerce, which have called on the agency to abandon the rule. Critics argue that noncompete agreements are essential for protecting proprietary information and trade secrets, which, in turn, drive innovation and competitiveness. Opponents of the proposed rule also argue that the FTC is “out of its lane,” seeking to impose a rule where it has no jurisdiction.
The public comment period on the proposed rule, which closed in April, resulted in roughly 27,000 comments. The agency is not expected to issue a final version, if it does, until at least April 2024. Should a final rule be issued, expect to see immediate lawsuits to block it, including citation to the “major questions” doctrine as well as the nondelegation doctrine. Those doctrines, respectively, hold that an administrative agency should not be able to regulate subjects of major importance upon which Congress has not spoken, and that Congress may not delegate authority to write laws (as opposed to implementing or interpreting them) to executive branch agencies.
Impact of NLRB general counsel’s memorandum
Meanwhile, the May 30 NLRB general counsel’s memorandum seeks to implement more immediate restrictions on noncompete agreements nationally, albeit for a narrower class of employees covered by the NLRA (which does not apply to “supervisors,” as defined by the act). The memorandum asserts, under a novel “interpretation” of the law, that “except in limited circumstances … the proffer, maintenance, and enforcement of such agreements” violates the NLRA. Specifically, the general counsel believes that noncompetes “chill” the exercise of protected activity under the act, rendering the noncompetes unenforceable. Elaborating, the general counsel asserts, “Non-compete provisions are overbroad, that is, they reasonably tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”
Thus, the general counsel asserts that noncompete agreements are invalid when applied to NLRA-covered employees unless they are “narrowly tailored to special circumstances justifying the infringement on employee rights. In this regard, a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Likewise, the general counsel asserts that business interests in retaining employees or protecting special investments in training employees are unlikely to ever justify noncompetes because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus. She also argues that employers’ legitimate business interest in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests.
The memorandum instructs NLRB regional offices to be vigilant in scrutinizing noncompete agreements and their impact on employees’ rights under the NLRA and to refer cases of potentially unenforceable noncompetes to the NLRB’s Division of Advice for possible enforcement action.
Conclusion
The enforceability of noncompete agreements in Indiana is currently governed by specific state-law criteria, emphasizing reasonableness, legitimate business interests, good consideration, written form and adherence to public policy. However, the proposed FTC rule and the NLRB general counsel’s memo could significantly impact enforceability of noncompete agreements at both the federal and state levels.
If the FTC’s proposed rule is enacted, it could lead to a nationwide ban on noncompete agreements, potentially superseding Indiana’s existing rules. The NLRB memorandum, on the other hand, may offer additional protection to nonsupervisory employees, resulting in increased challenges against restrictive noncompete agreements. As these developments unfold, businesses in Indiana will need to closely monitor changes in the law and seek legal counsel to ensure compliance with the evolving legal landscape.•
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Ted Hollis is a partner in the Indianapolis office of Quarles & Brady LLP. Opinions expressed are those of the author.
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