(As first published in nvla LeaseWire)
Non-compete agreements have always been part of the tool kit for leasing and finance companies to deal with their employees, especially the sales team. To prevent the sales team from hopping to another business, quite often employers enter into employment agreements that restrict the employee’s ability to compete with the leasing or finance company for a period of years after he/she leaves the company. These restrictions are usually coupled with prohibitions against soliciting the employer’s customers and other employees as well. Combined with a non-disclosure agreement covering company proprietary information, this is thought to be a good way to protect the business from being pillaged by its employees. Some states have laws prohibiting non-competes: California, North Dakota, Minnesota and Oklahoma; others permit non-competes for employees that earn over a certain amount, such as Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington.
Step in the Federal Trade Commission (“FTC”). On April 23, 2024, the FTC published a final rule banning employers from entering into, enforcing or attempting to enforce non-competes post-employment and preventing enforcement of any existing non-competes except those for certain senior executives that earned at least $151,164 in the prior year. The effective date of the rule will be September 4, 2024 if it is not delayed due to legal challenge.
The rule does not apply to a bona fide sale of a business which is a common deal term in the sale of a company, including leasing or finance companies. Nor does the rule affect valid causes of action to enforce non-compete agreements that accrued prior to the effective date of the rule. The rule is not just limited to employees, it also covers independent contractors, interns, externs and volunteers.
Employers are required to give notices to their employees covered by non-competes advising that the non-competes are no longer effective with exception to senior executives.
Entities exempt from this prohibition are those over which the FTC does not have jurisdiction: banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.
The FTC justified the ban in part on the basis that non-competes squelch free competition and result in U.S. workers receiving lower remuneration for their work. Certainly, many states have banned or limited the practice. Whether the rule will stand up in court remains to be seen. The U.S. Chamber of Commerce brought an action against the FTC immediately when the rule was adopted alleging the FTC lacks the power to adopt such wide-ranging regulation. The retroactive nature of that part of the regulation invalidating existing non-competes likely will be challenged as destroying the bargain the employer made when it entered into the employment agreement. Stay tuned…
Sloan Schickler is a partner in the commercial finance law firm, Schickler & Schickler PLLC. Schickler, a veteran vehicle leasing, finance and bank attorney and the attorneys in her firm have decades of experience representing and protecting lessors, banks, captive and independent finance companies in all facets of the vehicle leasing and financing business. She has served as the NVLA Legal and Legislative counsel since 2017, is currently the only woman on the board of directors and is a supporter of Leasing News and sits on its Advisory Board.
Sloan can be reached at: sloan.schickler@schicklerlaw.com or 212-262-5297.