July 20, 2022

Antitrust: FTC Challenges M&A Non-Compete

This Fenwick memo discusses a proposed FTC consent order involving a completed acquisition that targets the terms of the non-competition language included in the acquisition agreement. Here’s the intro:

Last month, in a proposed consent order settling a challenge to a previously consummated transaction, the Federal Trade Commission not only succeeded in partially unwinding the transfer of certain assets but also secured a victory in substantially narrowing the scope of the noncompete provisions of the parties’ asset sale agreement.

The challenge thus underscores the commitment of FTC leadership to aggressively pursue consummated transactions it believes to be anticompetitive, but it is most noteworthy for its focus on the parties’ noncompete provisions, which historically have received little attention from the antitrust agencies. Moreover, existing federal court precedent arguably supports the legality of the specific provisions challenged by the FTC.

As such, this action is entirely consistent with FTC Chair Lina Khan’s stated intention to aggressively expand the reach of existing antitrust law, even when doing so potentially entails litigation risks. Going forward it also serves as a warning that, as noted in a joint statement by Khan and the FTC’s two other Democratic commissioners, the agency will scrutinize mergers and acquisitions agreement noncompete provisions “with a critical eye.”

The FTC’s press release announcing the proposed consent order highlighted the aspects of the non-competition provision that it found objectionable. It said that the non-compete that the seller was required to sign as part of the deal not only prohibited the seller from competing in the markets in which the gas stations it sold operated, but in many other markets as well.  Even in the markets where the acquired gas stations operated, the FTC’s complaint alleged that the non-compete was “unreasonably overbroad in geographic scope and longer than reasonably necessary to protect a legitimate business interest.”

The memo provides additional background on the case and offers up some key takeaways from the case, including the need to appropriately calibrate a non-compete’s scope to the business being acquired, and the importance of being prepared to defend the duration of any non-compete provisions related to an acquisition.

John Jenkins