Direct sellers in the United States could soon faceupdated rules which would ban businesses from relying on non-competition clauses in worker contracts. This parallels recent moves in certain Canadian provinces to further restrict same and is a perfect opportunity for direct sellers in Canada to review their own non-competition clauses in anticipation of potential changes.

Background

Direct sellers in both Canada and the US have traditionally used non-competition clauses to restrict the behaviour of current and former plan participants (who are usually engaged independent contractors). These restrictions typically come in the form of prohibitions against joining or operating a competing direct selling business during their engagement and for a certain period of time after the end of their contractual relationship (typically ranging from several months to years).

In the US, the US Federal Trade Commission (“FTC”) recently proposed new rules which seek to ban non-competition clauses in both existing and future worker contracts (announced January 5, 2023). The new rules are at the proposal stage and the FTC has planned to host a public forum on February 16 to solicit feedback from members of the public.

American legal commentary on the proposal has focused on how the new rules may be applied broadly beyond the scope of employee-employer relationships and potentially including independent contractor situations. (The issue appears to be with how the new rules define “worker” which is written to include an individual which includes “without limitation, an employee… [and an] individual classified as an independent contractor”).

This is of course directly relevant to direct selling companies operating in the US, but these same sorts of challenges already exist in Canada!

Canadian Context

In Canada, the issue of non-competes for employees (and potentially independent contractors) has been percolating at the provincial level, with a number of Canadian provinces seeking to ban different forms of non-competition arrangements.

Canadian courts have historically closely scrutinized any application of non-compete clauses and most applications of non-solicitation clauses (i.e., clauses which seek to prevent a former worker from soliciting their former coworkers or customers for new business opportunities).

The general Canadian rule is that courts will not enforce clauses that are overly broad or unreasonable in terms of their length and/or scope (which includes both the nature of the prohibited activities and the geographic area the activities are prohibited in). The effect has been that Canadian courts have applied an “all-or-nothing” approach to the enforcement and will generally refuse to “write down” vague or unreasonable clauses in favour of ruling them entirely unenforceable.

A somewhat open issue is the treatment of non-compete clauses in “independent contractor” contexts, with Canadian courts usually taking the position that a similarly strict review is warranted regardless of the worker’s status (see the leading Winnipeg Livestock Sales Ltd. v. Plewman, 2000 MBCA 60 (CanLII) at paras 22 to 24).

This same judicial scrutiny also applies to non-solicitation clauses, but these are generally viewed as more reasonable when drafted properly.

More recently, provinces like Ontario have legislatively codified rules which override the common law and provide outright bans on non-compete clauses in “employment” situations, with limited exceptions (e.g., the sale of a business).

Bottom Line

The bottom line is that like in the US, Canada is gradually tightening the use of non-competition clauses. Now is probably a good time for Canadian Direct Selling Companies to be reviewing their Distributor Agreement and Policies & Procedures for legal compliance purposes.

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