October 9, 2020
Antitrust: Mitigating the Risk of Non-Competes
Non-competition agreements are often a key component of an M&A transaction. But as discussed in this McDermott Will memo, they are also an enforcement priority for antitrust regulators. The memo reviews recent FTC challenges to the terms of non-competition agreements entered into as part of an acquisition, and offers some tips to help mitigate the risk of these arrangements. This excerpt lays out a couple of them:
The purpose of a non-compete is to protect the buyer’s investment in the acquired business by preventing the seller from immediately re-entering the business following the sale. A non-compete should therefore be necessary to protect the buyer’s legitimate business interest in intellectual property, goodwill, or customer relationship related to the acquisition. The non-compete should protect against the risk that the seller will appropriate the goodwill it is selling to the buyer.
A non-compete should apply only to the primary product or service transferred in the deal. The parties cannot simply agree “to be free from competition” in products unrelated to the transaction at hand. In some cases, a non-compete may restrict competition in ancillary products where the seller has concrete plans to enter or expand into the product and retains a business interest similar to the product being sold. In such cases, the antitrust agencies would likely carefully scrutinize the non-compete to determine whether or not the broad scope appropriately protects against a legitimate concern that the seller could easily re-enter the business being transferred in the sale and compete against the buyer.
Other issues for parties to be mindful of when drafting non-competes include the reasonableness of their geographic scope & duration. The memo also points out that the FTC commissioners are divided on the issue of non-competes, and that since this is an election year, parties need to keep in mind that the FTC’s views on non-competes could become more hostile should the balance of the Commission change.
– John Jenkins