On July 9, 2021, President Biden issued an executive order in which he described the country’s antitrust laws as the “first line of defense against monopolization of the American economy” and encouraged the Federal Trade Commission (“FTC”) to ” reduce the unfair use of non-competition clauses and other clauses or agreements that may unfairly limit worker mobility. Until recently, the FTC had not issued any formal guidance on its plans to follow through on the President’s order, but informally signaled increased scrutiny and scrutiny of non-competition agreements, including holding a two-day workshop in December 2021, titled “Making Competition Work: Promoting Competition in Labor Markets,” where industry executives and professionals presented panels on antitrust and labor issues.
Now, however, the FTC is beginning to act in accordance with the executive order. On June 14, 2022, the FTC issued an administrative complaint challenging an acquisition by Arko Corporation (“Arko”) and its subsidiary GPM Investments LLC (“GPM”) to purchase 60 gasoline and diesel fuel outlets from Corrigan Oil Company (“Corrigan”) as anti-competitive due to the inclusion of certain non-competition clauses in the asset purchase agreement. The 60 fuel outlets included in the purchase are located in Michigan and Ohio. However, as part of the $94 million transaction, Corrigan agreed not to compete in the sale, marketing and supply of gasoline and diesel fuel in the areas surrounding the 60 purchased fuel outlets, as good as over 190 additional GPM slots. The FTC alleged that the non-compete clauses reduced (or eliminated) GPM’s competitors in Michigan’s market territories and lacked a “reasonably pro-competitive rationale” for their application to non-GPM 190 GPM locations. transaction, in violation of Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.
As part of a consent agreement and a proposed decision and order issued with the FTC’s complaint, Arko and GPM have agreed to: 1) return five of the outlets acquired to Corrigan; 2) limit the non-competition clauses only to the points of sale acquired by GPM, and exclude the returned points of sale and the 190 additional locations of GPM; 3) limit the duration of the non-competition to 3 years following the operation and its geographical extent to 3 miles around the points of sale acquired; 4) for a period of 10 years, obtain FTC pre-approval before acquiring fuel retail assets within 3 miles of retail outlets returned to Corrigan; 5) in connection with other fuel retail business acquisitions, refrain from entering into or enforcing non-competition clauses that would restrict competition in areas other than those surrounding the acquired locations; and 6) notify third parties subject to similar non-competition agreements with GPM of GPM’s obligations under the Order. The decision and order will be made final after a public comment period.
In a statement released alongside the FTC’s complaint, FTC Chair Lina Khan noted that recent discussions regarding non-competition clauses have focused on their use in employment contracts, particularly for employees. low-wage workers. The president indicated that the FTC’s scrutiny of non-competition would not be limited to the employment context, but also corporate sales and mergers, particularly where the two parties are “actual rivals and potential” who “will remain competitors in other markets. after the transaction. The president further stated that “companies cannot use a merger as an excuse to impose overly broad restrictions on competition or competitors. The Commission will critically assess non-competition agreements in merger agreements.”
Historically, non-competition clauses in business acquisition agreements have received less scrutiny than similar provisions in employment contracts. See, for example, ET Products, LLC v. OF Miller Holdings, Inc., 872 F.3d 464 (7th Cir. 2017). Indeed, in a sale transaction, one of the assets transferred is usually “goodwill”, or the value of a company’s reputation and customer relationships. However, this value is diminished for the buyer if the seller, who has developed this “goodwill”, is then able to compete with the buyer in the same market. Thus, a buyer generally requires that, as part of the transaction, the seller, often including its officers and key employees, not compete with the business it has just sold.
The recent FTC action against Arko is a significant departure from court precedents that have typically imposed non-competition clauses tied to the sale or dissolution of a business. Even California, which generally invalidates non-competition agreements under state law, maintains a limited exception related to the “sale of goodwill of a business or property interest.” See Cal. Bus. & Code Prof. §16601. The FTC’s action illustrates that sale-related non-competitions are not immune to scrutiny and must always be reasonably necessary to protect a legitimate business interest and appropriately limited in geographic scope and their duration.
The FTC’s use of its powers under Sections 7 and 5 to try to rewrite asset purchase agreements due to the inclusion of overly broad non-competition clauses represents a notable departure from the how these types of agreements have been treated historically. We anticipate that non-competition agreements will continue to be a priority for the FTC during the Biden administration, which could take the form of further enforcement action or possible regulation. We will continue to monitor developments in this area.[View source.]