Buyer (and Seller) Beware: The FTC Is And Will Come For Your M&A Non-Competes

• Published date: 22 June 2022
• Subject Matter: Corporate/Commercial Law, Anti-trust/Competition Law, Employment and HR, M&A/Private Equity, Antitrust, EU Competition , Contract of Employment
• Law Firm: Sheppard Mullin Richter & Hampton
• Author: Mr Kevin Cloutier, Thomas Dillickrath and Victoria Hubona

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 60 of Corrigan's locations for $94 million. 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...