In general, the use of non-compete agreements in many contracts is coming under increased scrutiny from the Biden administration. One of the recent salvos in the campaign against non-competes has been launched by the Federal Trade Commission. In a recent consent order, the FTC ordered changes to a non-compete clause that was included in an asset sale of fuel outlets. According to the FTC, the non-compete agreement was overbroad in several respects. This particular consent order represented a departure from longstanding policies at the federal regulator.
Non-Compete Agreements Are Included in Many Mergers
Non-compete agreements are a common feature in many mergers and acquisitions and should be reviewed by a Houston employment lawyer. A company or individual who buys a business should have the right to expect that the sellers will not start a new company that will directly compete with them. As such, the merger agreement will often include a clause that restricts the ability of the sellers to compete with the buyers. These clauses are often heavily negotiated in the merger agreement. The buyers want to obtain the maximum possible protection. The scope and extent of the non-compete provision will depend on the industry and how capital-intensive it is
In most cases, the non-compete clause will be limited to a certain time period and geographic area. The broader the restrictions, the more likely it is that the federal government will investigate and take action under antitrust laws. It does not matter that the merger itself is legal and does not present antitrust concerns. Ancillary clauses – such as a non-compete clause – will draw their own independent scrutiny based on their terms. However, as noted in further detail below, the FTC’s actions here represent an expansion of federal enforcement power compared to previous practices.
The Biden Administration Has Generally Disfavored Non-Compete Agreements
This particular case follows in the path of a two-year-long effort by the FTC to curtail the use of non-compete agreements in various circumstances. In July 2021, President Biden issued an Executive Order encouraging the FTC to look at ways to curtail the use of non-compete agreements. This order was one of the first manifestations of the new policy. Recently, the FTC also acted in line with this policy by proposing a rule to ban non-compete agreements as a condition of employment.
In a statement released alongside this consent order, FTC chairwoman Linda Kahn explained that the regulator would not limit the implementation of the executive order to just the employment context. In her role, Kahn has taken a much harder line with regard to mergers and antitrust issues. According to the statement:
“[F]irms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors. The Commission will evaluate agreements not to compete in merger agreements with a critical eye.”
This Merger Agreement Stretched the Non-Compete Beyond the Geographic Area Affected by the Deal
In this particular case, ARKO Corp. and its subsidiary GPM purchased retail fuel outlets from Corrigan Oil. The service stations were located in 60 different local markets. As part of the merger agreement, the seller agreed not to compete—not only in the markets affected by the deal, but also in 190 other markets where the buyer had fuel outlets.
Even though the merger transaction was not large enough to be reported to the FTC under the Hart-Scott-Rodino Act, the commission still chose to launch an investigation in conjunction with the Michigan Attorney General.
The result of the investigation was that the FTC issued an order that invalidated parts of the non-compete clause. Specifically, the FTC found that the agreement violated the following federal laws:
- Section 7 of The Clayton Act, which prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”
- Section 5 of the Federal Trade Commission Act, which prohibits ”unfair or deceptive acts or practices in or affecting commerce.”
According to the FTC, the non-compete clause harmed competition by barring one potential competitor from certain markets. Note that the non-compete clause still survived in some format, as there are valid reasons for its inclusion in a merger agreement. However, the FTC placed the public on notice that it will not tolerate unfettered and overbroad non-compete agreements.
The FTC Ordered Changes to the Non-Compete Clause
In the ARKO Corp./Corrigan Oil deal, the FTC imposed the following changes on the non-compete clause:
- The clause could not apply to areas that are outside of the locations where the fuel outlets were located.
- The clause was only allowed to apply within three miles of each geographic location of a fuel outlet.
- The part of the clause that survived the FTC order was limited in duration to three years.
In addition, both parties to the transaction also agreed not to enter into any mergers in the future that included a similar non-compete clause to the one the FTC found objectionable.
The FTC’s Order Broke New Ground in Several Respects
The FTC’s order was unusual in that while it did not completely bar the merger transaction, it used federal law as a justification for rewriting individual terms of the transaction. In addition, the FTC’s position is a departure from the way that non-compete clauses and merger agreements have previously been viewed. In the past, the ability of the purchaser to realize the benefit of their transaction was viewed as a legitimate business interest. The purchaser was seen as buying the goodwill that was created by the seller. If the seller was permitted to turn around and compete with the purchaser, the value of the goodwill would be diminished.
While this particular consent order placed businesses on notice of how the FTC may view non-compete clauses in future transactions, companies can expect increased scrutiny of all non-compete clauses as part of merger agreements. This is certainly the case for those that are required to be reported to the FTC under the Hart-Scott-Rodino Act. In addition, companies can also expect that non-reportable transactions may come under scrutiny when state attorneys general launch their own investigations and report the matters to the FTC. Contact Feldman & Feldman, P.C. to find out how we can help your business.