By Whitney Downard
Indiana Capital Chronicle
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%.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
