I recently blogged about the FTC’s increasing focus on non-competes in its merger review process. Earlier this week, the FTC underscored the point that these arrangements are on the front burner by blogging guidance on their use in M&A transactions. The FTC emphasized that in reviewing ancillary provisions like these, it will assess whether “they are ‘reasonably necessary’ for the deal & whether they are ‘narrowly tailored’ to the circumstances surrounding the transaction.” Here’s what the FTC had to say about what it thinks “narrowly tailored” means:
What one means by narrowly tailored depends on the competition that is restrained by the agreement and how it relates to a legitimate business concern. If you are selling three gas stations in Los Angeles but the non-compete bars the seller from operating gas stations in California for seven years, such a provision is unduly broad and would raise significant antitrust concerns, due both to its geographic scope and its term.
If, on the other hand, the non-compete applied to a one or two-mile radius around each station for a couple of years, this appears more tailored to address the potential concerns about loss in value by the buyer. But Staff would still have to evaluate the provision, even though the more limited term and scope evidence an intent to narrowly tailor the effect of the non-compete. The same approach applies to non-solicitation clauses: restrictions on soliciting employees must be narrowly tailored to protect the value to the business of the personnel at issue; they should not act as a de facto no-poach agreement.
In crafting non-solicits & non-competes, the FTC advises parties to focus on what they are trying to guard against, why that protection is needed, and the scope of the protection that is needed – as opposed to “wanted” – given the value invested in the deal.
– John Jenkins