In its action against ARKO, the Federal Trade Commission (FTC) announced it “took action to restore competition in gasoline and diesel markets” in two states by intervening in a completed, non-reportable transaction. In the transaction, only 60 gas stations changed hands, but the parties had agreed to a non-compete covering more than 190 locations where the buyer had existing operations. The FTC alleged the underlying transaction violated antitrust law in five local markets and ordered that gas stations in those markets be returned to the seller. More significantly, the FTC alleged that the non-compete provision in the purchase agreement was overly broad, and thus sought to limit the terms of the non-compete to three years and three miles from the acquired locations only, and to invalidate all similarly overbroad non-competes in favor of the buyer arising out of any other transaction.
The Bottom Line:
Since 2019, the FTC has repeatedly demonstrated the agency’s willingness to challenge certain non-compete provisions in M&A agreements. Non-competes serve important purposes in M&A transactions. Nevertheless, buyers relying on non-competes to protect investments should be aware of potential antitrust scrutiny and consider whether it may be advisable to narrowly tailor these provisions.
The Full Story:
In the context of buying a business or assets, a buyer is often acquiring the goodwill, intellectual property, and customer and supplier relationships of the seller. Buyers often seek protection of their investment by requiring the seller to agree to non-compete provisions as ancillary to the underlying M&A agreement. While common and often procompetitive, non-compete clauses in M&A deals are not immune from antitrust scrutiny. Parties to non-compete agreements can mitigate their risk by narrowly tailoring the scope (product and geographic) and duration of such restrictions.
The FTC has attacked a number of transactions based on non-compete agreements entered into by the parties to facilitate the acquisition.
In the most recent example, ARKO Corp.’s 2021 acquisition of 60 Express Stop retail fuel outlets from Corrigan Oil Company was “roll[ed] back” by the FTC more than one year after closing. In June 2022, the FTC alleged that the non-compete entered into by the parties, which restricted the seller’s ability to compete not only around the locations that were sold but also in more than 190 locations operated by the buyer, “bears no relation” to the acquisition and was not reasonably limited in scope to protect a legitimate business interest. The proposed consent order requires ARKO to amend the non-compete in several ways, including that:
- the non-compete apply only to the gas stations that were acquired in the transaction (vs. all 190 locations);
- the duration of the non-compete last no longer than three years; and
- the geographic scope of the non-compete be limited to no more than three miles from the acquired stations.
In addition, the proposed order requires ARKO to: (1) return five gas stations to Corrigan in the local markets where competition was reduced; (2) obtain prior approval from the FTC before acquiring gas stations within three miles of these five returned stations for 10 years; (3) not enter into or enforce any similar agreement not to compete that restricts competition solely around a retail fuel business already owned or operated by ARKO prior to the acquisition; and (4) notify third parties subject to similar non-compete agreements that it cannot enforce those provisions.
It is also notable that ARKO completed the transaction more than a year ago and was not required to file a Hart-Scott-Rodino (HSR) pre-merger notification and observe the requisite waiting period before closing. Companies should be on notice that the agencies (FTC and Department of Justice) may not shy away from taking enforcement action in non-reportable, closed deals. It is unclear whether the FTC became aware of the non-compete agreement in connection with its investigation of the underlying transaction; for reportable transactions, non-compete agreements are required submissions as part of HSR filings.
In January 2020, the FTC challenged non-compete agreements between Axon Enterprise and Safariland related to Axon’s consummated acquisition of body-worn camera systems competitor VieVu, LLC. The non-competes were to last at least 10 years and some of which covered business areas that were not related to the acquired business, which the FTC alleged were overbroad and longer than reasonably necessary to protect a legitimate business interest. While litigation on the underlying transaction continues, in June 2020, the FTC and parties entered a settlement that eliminated the non-competes.
In September 2019, the FTC challenged non-compete agreements related to the acquisition of a natural gas pipeline. Notably, the FTC did not challenge the merits of the underlying transaction and instead challenged only the non-compete which prohibited the seller from competing in a local area for three years. The FTC considered the geographic scope to be too broad because it prevented the seller from competing for opportunities that were unforeseen at the time of the transaction. The parties agreed to rescind the non-compete in response to the FTC challenge.
Non-competes are highly contextual based on the specific facts and circumstances confronting M&A parties. Companies contemplating including non-compete provisions in their M&A agreements should weigh the likelihood of an enforcement action and consider:
- whether the restriction is tied to the buyer’s legitimate interest in protecting its investment in the acquisition and allows for the seller to operate any retained businesses in the future unrelated to buyer’s legitimate interest;
- whether the scope is limited to the products or services acquired in the underlying transaction;
- whether the geographic scope is reasonably tailored to the business or assets being acquired;
- whether the duration of the restriction is reasonable; and
- whether an overbroad non-compete might raise scrutiny and risk invalidating other similar existing agreements.
Finally, note that non-compete agreements can be subject to state law. In general, state laws typically recognize that obtaining non-competes from sellers is an important part of M&A transactions. Nevertheless, there is wide variation of state law treatment of non-competes.