On April 23, 2024, the United States Federal Trade Commission announced its Final Non-Compete Clause Rule (the "FTC Rule"), establishing a nationwide prohibition against non-compete agreements in employment relationships. Once effective, the FTC Rule is expected to have a widespread impact on American workers and business operations.
The FTC Rule is a ban against post-employment non-compete clauses. It defines a non-compete clause as:
A term of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking, working, or operating a business in the United States following the conclusion of employment.
The FTC Rule is intended to be considered broadly and could apply to other contract terms as well, such as overly restrictive confidentiality and non-solicitation agreements. It also imposes pro-active obligations on employers to notify employees that their current non-competition agreements will no longer be enforceable.
While the FTC Rule will impact the majority of working Americans, there are several categories of employees that are exempt from its protections. It is not intended to apply to: (a) "Senior Executives," (b) non-competes entered into following the sale of a business, (c) ongoing lawsuits, (d) situations where there is a good-faith basis to believe that the rule does not apply, and (e) industries that fall outside the FTC's jurisdiction, like healthcare, nonprofits and franchise relationships.
The announcement of the FTC Rule has been met with divisive reactions. Supporters boast that it will protect the freedom of workers to change jobs and generate new businesses activity. Others argue that the FTC does not have the unilateral authority to implement such a significant policy change, which could invalidate millions of non-competition agreements across the country.
Several lawsuits have already been filed in the US to delay and stop the FTC Rule from becoming effective. It is possible that the final version of the FTC Rule may be modified from its current form if it withstands the legal challenge at all.
The progression of the FTC Rule demonstrates a broader policy shift against the enforceability of non-competes, and in favour of promoting employee mobility in the labour market. The same trends and principles are apparent in Canada.
Non-competes in Canada
There is no nationwide ban against employment non-competes in Canada, but it is extremely difficult for Canadian employers to enforce such restrictions.
The non-competition covenants of an employment agreement are presumptively unenforceable. Canadian courts are particularly cautious about enforcing non-competes because they are viewed as a restraint of trade that can potentially limit an individual's ability to earn a living in their area of expertise.
The court will only look to enforce non-competes in rare circumstances when: (a) the employer has a genuine proprietary interest that needs to be protected, (b) the employer is vulnerable due to the employee's position, and (c) the language of the non-competition clause is drafted in a manner that is clear, unambiguous, reasonable and narrow as possible to expressly protect the employer's genuine business interests.
Prohibition against non-competes in Ontario
On October 25, 2021, Ontario became the first province to pass legislation prohibiting the use of post-employment non-competes.
The Ontario legislation is similar in principle to the FTC Rule. It prohibits employers from trying to prevent their employees from performing competitive work following the end of the employment relationship.
There are also similar exceptions in Ontario to the FTC Rule. The Ontario ban does not apply to employees who occupy "chief executive" positions or following the sale of the business. Unlike the FTC Rule, however, an Ontario non-compete could still be potentially valid if it existed prior to the effective date of the law.
The legislation in Ontario has formally codified the practical understanding that a non-compete will not actually be legally enforceable against most employees. Although the attempts to enforce non-competition clauses through litigation in Ontario has notably declined since the legal changes, most of those claims were unlikely to succeed in any event.
Takeaways: Employment law
The legal landscape regarding the use of non-competes underscores the importance of carefully drafting employment contracts and implementing reasonable measures to protect business interests.
Canadian employers should proceed cautiously when considering the use of non-competes in their employment agreements. Employers in Ontario should not include such contractual restrictions at all unless their employees meet the narrow exemption categories.
Although non-competition agreements are presumptively unenforceable, Canadian employers can still utilize other types of restrictive covenants to protect their business interests, such as non-solicitation agreements and confidentiality agreements. These provisions may be more narrowly tailored to protect legitimate business interests, such as client relationships and confidential information, without unduly restricting employee mobility.
The law may not effectively stop an employee from competing following employment but, if the contractual restrictions are reasonably drafted, the courts will take steps to prevent an employee from competing unfairly.
Takeaways: Trade secrets and intellectual property
Non-competition provisions have historically been one way to protect and maintain the value of intellectual property assets, especially non-registered intellectual property assets, such as confidential information and trade secrets, and certain aspects of know-how. This is so whether one is dealing with employees or contractors in day-to-day operations or as a provision in larger third party transactions, such as a merger, acquisition or license.
As is evident by the noted exemptions in the United States and Canadian legislation discussed above, the restrictions on non-competition agreements are not intended to prevent a business from protecting its legitimate proprietary assets and interests. What the legislation does do, is accentuate the importance of properly drafted confidentiality, non-solicitation and intellectual property clauses and policies, as well as the importance of adopting operational practices that includes identifying, marking and tracking one's intellectual property, reviewing access permissions to its proprietary information, and employee training.
Clarity in the assets, and clarity in the obligations with respect to the assets, assists in both employee (and ex-employee) compliance and the ability of a business to meet legal requirements for enforcement.
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