June 24, 2022
FTC Takes Action Limiting Overbroad M&A Non-Compete
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WHAT HAPPENED
- GPM Investments (GPM) acquired 60 gas stations from Corrigan Oil (Corrigan).
- As part of the acquisition agreement, Corrigan agreed not to compete for a period of time with the gas stations purchased from Corrigan. In addition, Corrigan agreed not to compete with GPM for another 190 gas stations that GPM already owned.
- Few of the 190 existing GPM locations were "anywhere near an acquired Corrigan" gas station.
- Because the transaction would reduce the number of competitors from 3-to-2 or fewer in five areas, the Federal Trade Commission (FTC) required divestitures in those areas.
- Additionally, the FTC determined that the non-compete was overbroad, noting that the non-compete was "untethered to protecting goodwill acquired in the acquisition" because it affected gas stations in "areas geographically distinct from the acquired" gas stations. For this reason, the non-compete was highly suspect and warranted FTC scrutiny.
- The FTC required the parties to revise the transaction agreement non-compete such that it was no longer in duration than 3 years and impacted an area no greater than 3 miles from each acquired gas station.
WHAT'S NEXT
- FTC Chairwoman Lina Khan confirmed that some non-compete agreements that are part of a transaction agreement are "necessary to protect a legitimate business interest in connection with the sale of a business, such as the goodwill acquired in a transaction."
- Here, the non-compete terms were determined, however, to be "facially" overbroad in scope and unrelated to protecting any goodwill GPM was acquiring with the Corrigan stations.
- The FTC's action suggests that it is on the lookout for overbroad non-competes that are not reasonably related to a legitimate purpose even if part of a legitimate transaction agreement.
- The action by the FTC provides sellers with an example to argue that onerous non-competes demanded by buyers have the potential to raise antitrust issues that could slow deal timelines, particularly if a non-compete is overbroad in relation to the products impacted, the duration of the non-compete, and/or the breadth of the geography covered.
Alex Grayson, a summer associate in the Washington, DC, office, also contributed to this article.
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