Cross-border employers should be cautious with non-competes even with block on FTC ban, lawyers say
As the future of a broad US ban on non-competes remains uncertain, lawyers are advising Canadian companies with cross-border operations to be sparing with such restrictions on employee conduct – even in cases where they’re still legal.
In April, the US Federal Trade Commission voted to proceed with a proposed nationwide rule on non-compete agreements. This rule would ban any employment contract that prevents workers from looking for or accepting work with another company or starting their own business after leaving the employer.
The rule was slated to go into effect in September but was promptly challenged by multiple lawsuits in Texas, Pennsylvania, and Florida.
The lawsuits have seen mixed results this summer. While the Pennsylvania court rejected the allegation that the FTC lacks authority to ban non-competes, the Florida court temporarily blocked the federal agency from enforcing the ban against the plaintiff who filed the lawsuit.
Last week, however, a Texas court addressed the ban’s applicability nationwide, ruling the FTC did not have the authority to promulgate the prohibition.
Had the ban gone into effect, Canadian companies with US subsidiaries would have been required to withdraw any non-compete agreements they had in place for employees of those subsidiaries, says George Eydt, Hodgson Russ LLP's Toronto office managing partner who leads the firm's Canada/US cross-border practice. Canadian companies that send employees to work across the border – like salespeople – would also have had to rescind the US portion of existing non-compete agreements.
“The FTC basically has said for a long time that their power extends to foreign companies, to the extent that what they're doing impacts US commerce,” Eydt says. “So, if you're trading or doing business in the US, and you're foreign, you're still impacted by the laws.
“There was every indication that [the FTC] would, in theory, take action against foreign companies that were trying to restrict folks… in the US,” Eydt adds.
The FTC has indicated it is considering appealing the Texas court’s block on the agency’s non-competes ban, but it faces several obstacles. With the US presidential election approaching, there is the possibility that the FTC could change its stance on non-competes in a few months under a new presidential administration.
In June, the US Supreme Court also issued a landmark decision in a case called Loper Bright Enterprises v. Raimondo, overturning the so-called Chevron deference doctrine. Under the 40-year-old Chevron precedent, courts deferred to interpretations of the law by federal agencies, which were presumed to have specialized expertise. The Texas court’s block on the FTC ban is part of a broader shift – accelerated by the US Supreme Court’s Loper Bright Enterprises ruling – questioning “how far federal agencies can go with their rulemaking,” Eydt says.
If the FTC appeals the Texas ruling, the case may end up before the US Supreme Court. Given the high court’s recent stance on the authority of federal agencies, Eydt says an appeal before the same bench would not likely produce a different outcome.
Still, Canadian companies with cross-border operations should be mindful of requiring employees to sign non-compete agreements. Regarding Canadian employees, it can be challenging to enforce such contracts, said Jordan Epstein, an associate at Gowling WLG who specializes in employment law. That’s because Canadian courts are generally “cautious against implementing non-competes that can be viewed as a restraint of trade,” Epstein says. This is the case even outside Ontario, where an explicit ban on non-compete agreements was enacted in 2021.
“Employers really should not be using a non-competition agreement for all employees,” Epstein says. “It should only really be reserved for particular circumstances where an employer might be vulnerable to potential competition… because of the employee's position or the particular industry.”
As for employees in the US, Eydt has been telling his clients to hold off on implementing any non-compete requirements until the legal landscape has settled. “My advice going back a few months was, let's wait and see what happens with the Texas case,” he said. “My advice now is, let's wait and see what happens with the appeal.” There’s still the possibility the FTC could rework its ban so that it better survives court challenges, too, he says, adding he wouldn’t want to tell clients a ban “doesn’t apply and then say, ‘Oops, it does.’”
Like Epstein, however, he recommended seriously considering non-competes in cases where the threat of competition is high. “I think it's worthwhile where it's critical and in those jurisdictions where you can,” he said. “You still have to look at the schemes individually and decide what you can do.”
