FTC Action Limits Scope of Non-Compete Agreement in Sale of Business

We have previously written about President Biden’s Executive Order in which he encouraged the Federal Trade Commission (FTC) to crack down on the “unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Since the issuance of that Executive Order the FTC has ramped up its efforts to curtail the use of such restrictive covenants using existing antitrust and unfair competition laws. Additionally, the FTC held a two-day workshop in December 2021, called “Making Competition Work: Promoting Competition in Labor Markets,” at which industry leaders and professionals held panel discussions on antitrust and labor issues.

However, until recently, the FTC had not issued any formal guidance outlining its strategy for accomplishing the outcome sought in the President’s Executive Order. Recently the FTC began to articulate a unified strategy to respond to the President’s challenge. Last month, we began to see the agency’s execution of that strategy.

In June, the FTC published an administrative complaint challenging an acquisition by Arko Corporation and its subsidiary GPM Investments, LLC of 60 gasoline and diesel fuel outlets located in Michigan and Ohio from the Corrigan Oil Company. As part of the sale, Corrigan agreed not to compete against Arko and GPM in the areas surrounding the 60 fuel outlets included in the sale, as well as other GPM locations encompassing in total more than 190 locations. The restrictive covenant part of the sales agreement precluded Corrigan from participating in the sale, marketing, and supply of gasoline and diesel fuel in the territory surrounding these locations.

The FTC’s complaint challenged the sale as anticompetitive because of the particulars of the non-compete provisions in the sales agreement and its anticompetitive effect on the impacted markets. As mentioned, the fuel outlets being acquired are located in Michigan and Ohio. However, the FTC has alleged that the non-compete provisions reduced (or eliminated) GPM’s competitors in market territories throughout Michigan, and lacked any “reasonable procompetitive justification” for their application to the GPM locations unrelated to the transaction. The FTC alleges that these covenants not to compete violate Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.

In response to the complaint, Arko, GPM and Corrigan agreed to a settlement and entry of a Consent Order to resolve the case. As part of the Consent Agreement and proposed Decision and Order, Arko and GPM agreed to:

  • return five of the acquired outlets to Corrigan;
  • limit the terms of the agreement not to compete so that they apply only to the retail outlets acquired by GPM, excluding the 5 being returned to Corrigan;
  • restrict the duration of the non-compete agreement to 3 years and limit the geographic territory to a 3-mile area surrounding the acquired outlets;
  • obtain prior approval from the FTC before acquiring retail fuel assets within 3 miles of the outlets returned to Corrigan at any time within the next 10 years;
  • not enter into or enforce any agreement not to compete related to acquisitions of a retail business that restricts competition solely around a retail fuel business already owned or operated by GPM; and
  • notify third parties subject to similar agreements not to compete of GPM’s obligations under the order.

In a statement released alongside the FTC’s complaint, FTC Chair Lina Khan indicated that the FTC’s enhanced scrutiny of covenants not to compete would not be limited to the employment context, but also to those included in agreements involving the sale of a business, particularly where the two parties are “actual and potential rivals” who will “remain competitors in other markets” after the sale.  The Chair warned businesses that they may not use restrictive covenants in connection with a merger or sale of a business as a vehicle to implement “a thinly veiled market allocation scheme” and promised that the FTC will continue to “evaluate agreements not to compete in merger agreements with a critical eye.”

Super Lawyers named Illinois commercial law trial attorney Peter Lubin a Super Lawyer and Illinois business dispute attorney Patrick Austermuehle a Rising Star in the Categories of Business Litigation, Consumer Rights and Class Action Litigation. The complex commercial trial attorneys at Lubin Austermuehle have over three decades of experience litigating emergency business litigation, non-compete agreement, intellectual property theft, and complex class-action lawsuits. Our Oak Brook and Evanston business dispute lawyers handle emergency business lawsuits involving copyrights, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist Chicago and Wheaton area businesses and business owners who are victims of fraud. You can contact us by calling (630) 333-0333. You can also contact us online here.

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