Employment Noncompete Agreements Under Attack
By Donald S. Smith - RBE PartnerNoncompete agreements have been used for years by employers to protect themselves from employees who might otherwise hurt their business by working for competing businesses, using trade secrets or confidential information, stealing customers, and taking groups of employees (such as “corporate raiding”). The agreements have been governed by state law, and Indiana employers have been successful in seeking enforcement of such agreements as long as they can demonstrate a “legitimate business interest” in keeping a former employee from competing. The legitimate business interest has been analyzed using a reasonableness standard for:
1) the length of time for the noncompete agreement;
2) the geographic area being restricted; and
3) the activities proscribed by the agreement.
A typical employer/employee noncompete agreement is likely to be enforced by an Indiana court if the agreement limits itself to:
1) no more than two years after the employment;
2) no greater geographic limitation beyond where the employee worked and dealt with customers; and
3) jobs that are similar to what the employee did for the original employer.
In 2020, and again in 2023, the Indiana legislature reined in noncompete agreements in the health care business. Now, noncompete agreements with physicians and their employers must contain certain provisions that:
1) allow the physician to receive notices sent to patients;
2) require the employer to notify patients of the physician’s new contact information;
3) provide access to patient records; and
4) allow the physician to “buy out” a release from the agreement. Ind. Code § 25-22.5-5.5-2.
And now, as of July 1, 2023, it is unlawful for an employer and a primary care physician (someone practicing in family medicine, general pediatric medicine, or internal medicine) to enter into a noncompete agreement. Ind. Code § 25-22.5-5.5-2.5. An amendment to Ind. Code § 25-22.5-5.5-2 further prohibits enforcement of a noncompete agreement if the employer terminates the physician’s agreement without cause, the physician terminates it for cause, or the agreement expires.
Further, despite what has traditionally been a matter of state law, the federal government is now seeking to assert its authority to outlaw noncompete agreements. In January of this year, the Federal Trade Commission issued a proposed rule that could ban the use of noncompete agreements in employment nationwide. The claimed justification is to promote competition and ensure a “fair labor market.” The public comment on the proposed rule closed in April amid widely diverse opinions. Obviously, it is a hotly debated political issue. A final version of the rule is not expected before April 2024.
More recently, another federal administrative agency, the National Labor Relations Board (“NLRB”), jumped into the fray in May when its general counsel issued a memorandum to implement restrictions on noncompete agreements nationally for nonsupervisory employees. The NLRB’s general counsel claims that a desire to avoid competition from a former employee is not a “legitimate business interest.” It is anticipated that any decisions from the NLRB that enforce the general counsel’s memorandum will be subject to challenge by affected employers.
What does this all mean for employment noncompete agreements in Indiana?
It signals that employers and employees should review their noncompete agreements even as businesses wait for court decisions on the enforceability of these potential federal administrative rules limiting such agreements. Noncompete agreements should be narrowly tailored to the individual situation. In addition, parties should consider different forms of restrictive agreements, such as nonsolicitation and nondisclosure agreements, which have not yet been the subject of attempted federal regulation and may be more likely to be enforced by courts as they address legitimate business interests but do not keep employees from working elsewhere.
If you or your business would like a legal review of your employment agreements, please consult with a member of the Riley Bennett Egloff employment law team.
Donald S. Smith – Attorney at Law
Donald Smith limits his practice to representing employers and executives in labor and employment matters. He defends employers in cases pending before state and federal courts, the National Labor Relations Board, Equal Employment Opportunity Commission, Indiana Civil Rights Commission, U. S. Dept. of Labor, OSHA, IOSHA, Indiana Dept. of Workforce Development, and Indiana Worker’s Compensation Board. Don advises employers concerning various employment issues such as employee handbooks, employment agreements, severance agreements, covenants not to compete, restrictive covenants, wrongful termination, collective bargaining, labor arbitration, unions, discrimination, harassment, wage and hour matters, unemployment compensation and worker’s compensation.
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Posted October 2, 2023, by Donald S. Smith