Since President Biden’s July 2021 direction to the Federal Trade Commission (“FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” the FTC has ratcheted up its scrutiny of and investigations into non-compete agreements and other restrictive covenants. Now, the FTC has expanded beyond post-employment restrictive covenants to tackle “sale of business” non-competes. Most recently, the FTC voted in favor of a deal-changing proposed order against ARKO Corp. related to its 2021 acquisition of sixty fuel outlets from Corrigan Oil Company.
Traditionally, agreements not to compete by sellers in the context of a sale of business engender less scrutiny from agencies and courts than post-employment restrictions. This is understandable: a buyer should be permitted to protect the business (assets, goodwill, etc) it has purchased. As the Sixth Circuit explained in Hall v. Edgewood Partners Insurance Center, Inc., “where the restrictive covenant is bargained for as part of an asset sale—rather than an employment agreement—the courts will typically enforce it” to protect “the integrity of the transaction.” F. App’x 392, 396 (6th Cir. 2018). As with all restraints of trade, restrictive covenants like non-competes (even deal-based non-competes) must be ancillary to an employment relationship or a legitimate business transaction and reasonably necessary to protect legitimate business interests. This standard is consistent with the centuries-old “Rule of Reason” law underpinning modern antitrust law (and modern restrictive covenant law), which requires a plaintiff (or an agency) to establish the challenged acts are unreasonably restrictive of competitive conditions in the relevant market. See Eichorn v. AT&T Corp., 248 F.3d 131, 138 (3d Cir. 2001).
In the ARKO/Corrigan matter, the FTC initiated a 2022 complaint against ARKO and its subsidiaries, including GPM (collectively, “Respondents”), related to ARKO’s purchase of sixty of Corrigan’s locations for $94MM. The transaction’s Asset Purchase Agreement included a covenant not to compete in the sale, marketing, and supply of gasoline and diesel fuel around the acquired locations as well as at approximately 190 additional GPM locations. The FTC claimed the non-compete violated Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce” and Section 7 of the Clayton Act, which prohibits mergers and acquisitions where the effect of the transaction “may be substantially to lessen competition, or to tend to create a monopoly.” Specifically, the FTC alleged the acquisition and non-compete resulted in “a highly concentrated market in each local market,” where Corrigan, but for the non-compete, could have competed with Respondents and other competitors. As a result, the FTC claimed the acquisition and corresponding non-compete obligation gave Respondents the ability to raise prices unilaterally in the relevant markets and also reduced competition for the retail sale of gas in five local markets in Michigan.
Recently, the FTC voted 5-0 to issue the complaint and accept the proposed Agreement Containing Consent Order (“Consent Agreement”) for public comment. The Decision and Order in the Consent Agreement require the following from Respondents:
- to return to Corrigan the retail locations acquired in the five local markets in Michigan;
- to amend the non-compete obligation in the Asset Purchase Agreement to:
- only apply to retail fuel businesses acquired by GPM through the acquisition at hand, excluding the five locations to be returned to Corrigan, and
- limit the non-compete terms relating to each acquired fuel outlet to no broader than three years in duration and no more than three miles from each acquired fuel outlet;
- to obtain prior approval from the FTC before acquiring retail fuel assets within a three-mile driving distance of any of the returned locations for ten years;
- to not enter into or enforce any non-compete agreement related to acquisitions of a retail fuel business that restricts competition around a retail fuel business already owned by GPM, as opposed to the acquired retail fuel business; and
- to notify third parties subject to similar non-compete agreements of GPM’s obligations under the order.
In many respects, the Decision and Order effectively rewrote the ARKO/Corrigan Asset Purchase Agreement. By materially changing the terms of the acquisition, such as by requiring ARKO to return to Corrigan locations it has already purchased, the FTC has signaled it may challenge the autonomy of sellers and buyers in negotiating an asset purchase. The FTC’s additional “competition” requirements, such as imposing a ten-year waiting period to obtain fuel assets within a certain geographic radius without the FTC’s prior approval, are rooted in extreme concepts of local market competition. While the deal-based non-compete at issue in the ARKO/Corrigan Asset Purchase Agreement was overbroad to the scope of the acquired assets, the FTC’s response is notable and seemingly disproportionate to the revisions it could have imposed to blue-pencil unenforceable terms and/or to protect the local market from any potential monopolization.
In this respect, the Commission’s actions augur more deal scrutiny in the months to come. As Lina Khan, Chair of the FTC, shared in her statement on the matter, “[F]irms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors. The Commission will evaluate agreements not to compete in merger agreements with a critical eye.” Lina M. Khan, Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya In the Mater of ARKO Corp./Express Stop (June 10, 2022). As sellers and buyers begin negotiations related to M&A activity, they should take special care to ensure any non-compete agreements are narrowly tailored to only the purchased assets and further tailor the terms to avoid the perception of a concentrated local market. Otherwise, the deal parties run the risk that the FTC may materially alter the terms of their bargained-for exchange after the fact.