September 26, 2019

Antitrust: FTC Conditions Merger Clearance on Non-Compete Termination

It’s pretty common for a buyer to seek some sort of non-competition protection from a seller in connection with an acquisition. But this Goodwin memo points out that non-competes are attracting increased scrutiny from antitrust regulators. The memo highlights a recent deal in which the FTC required the parties to terminate a non-compete provision in order to obtain antitrust clearance.  Here’s the intro:

The Federal Trade Commission and the Antitrust Division of the Department of Justice are making clear that noncompete agreements embedded in any kind of transaction under their review will be closely scrutinized. Close examination of proposed noncompetes is now yet another item to consider in the negotiation of any deal. Specifically, the FTC recently agreed to clear a deal for Nexus Gas Transmission to buy a pipeline in Ohio from North Coast Gas Transmission. But the FTC only did so after the parties themselves agreed to nix a noncompete provision in the agreement that prohibited the seller from competing with the buyer.

Specifically, the agreement provided that Nexus would buy one of two regional pipelines owned by North Coast, and that North Coast would then be barred from competing with Nexus to provide natural gas pipeline transportation services in the area for three years after the acquisition closed. According to the FTC, the noncompete at issue was impermissible because it would result in a lessening of competition, and the noncompete was not reasonably limited in scope to protect a legitimate business interest, such as intellectual property, goodwill or customer relationships, that would protect the buyer’s investment.

Non-competes are not per se unlawful under the antitrust laws. Instead, the memo notes that these provisions “are reviewed for their reasonableness, which includes scrutinizing their product and geographic scope, duration, and whether they are reasonably related to a legitimate business purpose.” The memo also provides some advice on key points to keep in mind when negotiating these provisions in order to reduce antitrust risks.

John Jenkins