On July 9, 2021, President Biden issued an executive order in which he described the nation’s antitrust laws as the “first line of defense against the monopolization of the American economy” and encouraged the Federal Trade Commission (“FTC”) to “curb the unfair use of non-competes and other clauses or agreements that may unfairly restrict worker mobility.” Until recently, the FTC had not issued any formal guidance on its plans to act on the president’s order, but it has informally signaled increased attention and scrutiny of non-compete agreements, including by holding a two-day workshop in December 2021 titled “Creating Jobs in Competition: Fostering Competition in Labor Markets,” where industry leaders and professionals presented panels on antitrust and labor issues.
Now, however, the FTC is beginning to act in accordance with the president’s executive order. On June 14, 2022, the Federal Trade Commission published an administrative complaint challenging the acquisition by Arko Corporation (“Arko”) and its subsidiary GPM Investments LLC (“GPM”) to purchase 60 gasoline and diesel fuel stores from Corrigan Oil Company ( “Corrigan” ) as anti-competitive due to the inclusion of certain non-compete provisions in the asset purchase agreement. All 60 fuel stations that are part of 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 delivery of gasoline and diesel fuel in the areas around the 60 purchased fuel stations. as well as more than 190 additional GPM locations. The FTC alleged that the non-compete provisions reduced (or eliminated) GPM’s competitors in Michigan market territories and lacked “reasonable pro-competitive justifications” for applying them to GPM’s 190 locations unrelated to the transaction, in violation of Section 7 of the Act. Clayton and Section 5 of the FTC Act.
As part of a consent agreement and proposed judgment and order published with the FTC’s complaint, Arko and GPM agreed to: 1) return five of the acquired properties to Corrigan; 2) limiting the non-compete provisions to apply only to the retail locations acquired by GPM and excludes the returned retail locations and GPM’s 190 additional locations; 3) limiting the duration of the non-compete to 3 years after the transaction and its geographic scope to 3 miles around the acquired commercial establishments; 4) for a period of 10 years, obtain prior approval from the FTC before acquiring retail fuel assets within 3 miles of retail locations returned to Corrigan; 5) in connection with other acquisitions of retail fuel businesses, not to enter into force or enforce non-competition provisions 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 become final after a public comment period.
In a statement released with the FTC’s complaint, FTC Chair Lina Khan noted that recent discussions surrounding non-compete clauses have focused on their use in employment contracts, particularly for low-wage workers. The chairman indicated that the FTC’s increased non-compete scrutiny would not be limited to the employment context, but also to business sales and mergers, particularly where the two parties are “actual and potential rivals” who “will remain competitors in other markets ” after the deal. The chairman further stated that “firms cannot use a merger as an excuse to impose overly broad restrictions on competition or competitors. The Commission will assess agreements not to compete in merger agreements with a critical eye.”
Historically, non-competition provisions contained in corporate acquisition agreements have been subject to less scrutiny than similar provisions in employment contracts. See, e.g., ET Products, LLC v. DE Miller Holdings, Inc., 872 F.3d 464 (7th Cir. 2017). This is because in a sale transaction one of the assets transferred is usually “goodwill” or the value of the company’s reputation and customer relationships. However, this value is diminished for the buyer if the seller who developed this “goodwill” is subsequently able to compete with the buyer in the same market. Thus, the buyer typically requires, as part of the deal, that the seller, often including its executives and key employees, not compete with the business it has just sold.
The FTC’s recent action against Arko is a significant departure from court precedents that typically mandate non-competes related to the sale or termination of a business. Even California, which generally voids non-compete agreements under state law, maintains a limited exception related to “the sale of business goodwill or an ownership interest.” look mud bus. and Prof. Code §16601. The FTC action illustrates that non-competes related to the sale are not immune from scrutiny and must still be reasonably necessary to protect a legitimate business interest and appropriately limited in geographic scope and duration.
The FTC’s use of its Section 7 and Section 5 powers to try to rewrite asset purchase agreements for including overly broad non-compete provisions represents a marked change from how these types of agreements have been treated in the past. We expect that non-compete agreements will continue to be a priority for the FTC during the Biden administration, which may take the form of additional enforcement actions or potential rulemaking. We will continue to monitor developments in this area.