FTC Targets M&A Agreements in Continued Campaign Against Noncompete and No-Poach Clauses

Noncompete, No-Poach and Nonsolicitation Agreements in the Transaction Context: What Are They, and When Are They a No-No?

Noncompete, no-poach and nonsolicitation agreements can arise under a variety of circumstances, but one of the most frequent backdrops for these agreements is corporate transactions. In transaction documents, these agreements often take the form of either a clause in an underlying acquisition agreement or a standalone agreement that is ancillary to the main transaction agreement. A noncompete typically restricts the seller’s ability to compete with the purchaser⁶ in a defined economic activity for a set period of time after closing.⁷ A no-poach or nonsolicitation agreement, by contrast, typically restricts one party’s ability to hire or solicit certain employees of its counterparty.

Though these agreements can serve to protect legitimate business interests, they also can serve as restraints on the ability of the restricted party to compete in the market for either certain products or services (in the case of a noncompete) or employees (in the case of a no-poach or nonsolicitation agreement). Accordingly, they are subject to antitrust scrutiny. Antitrust authorities and courts recognize that many such agreements are lawful when they are reasonably ancillary or necessary to achieve an otherwise legitimate business interest such as a merger, joint venture or other collaboration. But it falls to the parties to the agreement to show that (i) their interest is legitimate, (ii) the restrictive provision is sufficiently ancillary to achieve it and (iii) the provision is narrowly tailored in duration and geographic scope to be successful. The FTC’s recent complaints provide guidance as to what authorities view as acceptable noncompete and no-poach agreements in the context of a transaction.

Recent FTC Challenges to Noncompete and No-Poach Clauses in Acquisition Agreements

In September 2019, the FTC filed a complaint alleging that the acquisition of Generation Pipeline LLC (Generation Pipeline) by NEXUS Gas Transmission LLC (Nexus) would harm competition due to a noncompete clause that the parties included in their underlying acquisition agreement.⁸ The noncompete clause restricted North Coast Gas Transmission LLC (NCGT), one of the minority owners of Generation Pipeline, from competing with Nexus to provide natural gas transportation services within a restricted area encompassing three Ohio counties for three years following closing.⁹ According to the complaint, Generation Pipeline and NCGT were two of few competitive options for certain customers within the restricted area, and the noncompete would eliminate that competition.¹⁰

On January 3, 2020, the FTC filed an administrative complaint challenging the consummated acquisition of VieVu, LLC (VieVu), by Axon Enterprise, Inc. (Axon),¹¹ as well as certain noncompete clauses contained within the parties’ transaction documents. In connection with their transaction, the parties entered into a series of noncompete, customer nonsolicitation and employee nonsolicitation agreements. The noncompetes included provisions that prohibited VieVu’s owner, Safariland, LLC (Safariland), from competing (i) for various products and services that Axon supplies, some of which the FTC alleged to have no relation to the business being sold as part of the transaction, and (ii) for Axon’s customers.¹² In addition, Axon and Safariland agreed not to hire or solicit each other’s employees.¹³ These agreements each lasted 10 or more years and, in some cases, were worldwide in scope.¹⁴

In both of these complaints, the FTC cast similar allegations to characterize the illegal aspects of the noncompete clauses:¹⁵

• The noncompetes were “not reasonably limited in scope to protect a legitimate business interest,” and “[a] mere general desire to be free from competition is not a legitimate business interest.”
• The noncompetes did not protect “any intellectual property, goodwill, or customer relationship necessary to protect” the purchaser’s investment.
• Even if a legitimate interest existed, in Nexus/Generation Pipeline, the geographic scope of the noncompete was “broader than reasonably necessary” because “it prevent[ed] NCGT from competing for any opportunity in the restricted area, even for opportunities that were unforeseen at the time of the Transaction,” and, in Axon/Safariland, the noncompetes, all of which were 10 or more years, were “longer than reasonably necessary.”¹⁶

Notably, in both matters, the clauses at issue were ancillary to underlying business transactions. According to the FTC, however, they were not reasonably related to protecting the acquirer’s investment. In Nexus/Generation Pipeline, the FTC alleged that the noncompete affected the operations of a pipeline that was not related to the pipeline being sold in the underlying transaction aside from the fact that its owner held a minority stake in the entity that was purchased.¹⁷ In Axon/Safariland, the FTC alleged that the noncompetes extended to products that were unrelated to the products involved in the underlying transaction and products that the seller had not yet developed.¹⁸ Additionally, the clauses at issue in both matters contained limitations on their duration and geographic scope, but the FTC reviewed those limitations in light of market conditions and determined they were broader than reasonably necessary.

No bright-line rules emerge from these enforcement actions regarding noncompetes in the context of transaction documents. To the contrary, they indicate that agency assessment of these provisions in acquisition agreements is both thorough and highly fact-specific.

Practice Tips

Companies considering the use of a noncompete, no-poach or clause with similar effect — whether in connection with a transaction or otherwise — should consult with antitrust counsel to ensure the clause is consistent with both federal and state antitrust laws. Acceptable clauses will be closely related to the purpose of the underlying acquisition agreement and limited in scope and duration. To arrive at a clause that is reasonable, companies should consider why they need the contemplated protection and how they can tailor the clause to achieve that end. Companies should be prepared to justify to authorities both the rationale for the agreement itself as well as its duration and scope. In addition, their contemporaneous business records should reflect those motivations because, as evidenced by the FTC’s recent challenges in this area, the specific facts and circumstances surrounding these clauses will be the ultimate arbiters of enforceability.

 

 

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¹ Complaint, In the Matter In the Matter of NEXUS Gas Transmission LLC, et al., FTC File No. 191-0068 (Sept. 13, 2019), available at https://www.ftc.gov (hereinafter Nexus/Generation Pipeline Complt.). The FTC ultimately settled with the parties and allowed the underlying transaction to proceed, subject to the removal of the noncompete clause and certain other conditions. See Decision, In the Matter of NEXUS Gas Transmission LLC, et al., FTC File No. 191-0068 (Dec. 13, 2019), available at https://www.ftc.gov.

² Complaint, In the Matter of Axon Enterprise, Inc. and Safariland, LLC, FTC File No. 181-0162 (Jan. 3, 2020), available at https://www.ftc.gov/system/files/documents/cases/d09389_administrative_part_iii_-_public_redacted.pdf (hereinafter Axon/Safariland Complt.). The FTC’s complaint also challenges the consummated acquisition itself. The matter remains pending.

³ Bruce Hoffman, “All” means All: Submit side agreements with an HSR filing, Competition Matters Blog (Dec. 20, 2017 3:08 PM), https://www.ftc.gov/news-events/blogs/competition-matters/2017/12/all-means-all-submit-side-agreements-hsr-filing; see also Premerger Notification; Reporting and Waiting Period Requirements, 81 Fed. Reg. 60258 (Sept. 1, 2016).

⁴ The FTC has challenged noncompete agreements pursuant to transactions in the past. See, e.g., Complaint, In the Matter of Oltrin Solutions, LLC; JCI Jones Chemicals, Inc.; Olin Corp.; and Trinity Manufacturing, Inc., FTC File No. 111-0078 (Mar. 7, 2013), available at https://www.ftc.gov/sites/default/files/documents/cases/2013/03/130308oltrincmpt.pdf.

⁵ For several years, the Department of Justice (DOJ) has been making headlines in its pursuit of illegal no-poach agreements, which are agreements between or among employers not to compete for talent or employees. The DOJ has made clear that naked no-poach agreements may be considered per se illegal and subject to criminal prosecution. See, e.g., United States v. Knorr-Bremse AG, No. 1:18-cv-00747-CKK, 2018 U.S. Dist. LEXIS 142125 (D.D.C. July 11, 2018) (DOJ challenged naked no-poach agreements as per se illegal in a civil action); Statement of Interest of the United States of America, Seaman v. Duke Univ., No. 1:15-CV-462 (M.D.N.C. Mar. 7, 2019) (No. 325) (DOJ intervened in private litigation to reiterate its position that naked no-poach agreements are per se illegal); Barry Nigro, Deputy Assistant Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Keynote Remarks at the ABA’s Antitrust in Healthcare Conference: A Prescription for Competition (May 17, 2018) (“We are investigating other potential criminal antitrust violations in this industry, including . . . no-poach agreements restricting competition for employees. We believe it is important that we use our criminal enforcement authority to police th[is] market[].”), www.justice.gov/opa/speech/deputy-assistant-attorney-general-barry-nigro-delivers-keynote-remarks-american-bar.

The FTC recently held a daylong workshop evaluating the effects of noncompete clauses on labor market participants and examining whether the FTC should address potential harm caused by these clauses through its rulemaking, law enforcement or advocacy authority. See Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues (Jan. 9, 2020), https://www.ftc.gov/news-events/events-calendar/non-competes-workplace-examining-antitrust-consumer-protection-issues. It is likely the FTC will release a report on the workshop later this year.

At the state level, authorities have been targeting illegal no-poach agreements between franchisors and franchisees. See, e.g., Settlement Agreement Between the States of Massachusetts, California, Illinois, Iowa, Maryland, Minnesota, New Jersey, New York, North Carolina, Oregon, and Pennsylvania and Arby’s Restaurant Group, Inc. In addition, Attorneys General in at least two states have stated that under certain circumstances, no-poach agreements can be per se unlawful. See Complaint for Civil Penalties, Injunction, & Other Relief Under the Washington State Consumer Protection Act, RCW 19.86, State v. Jersey Mike’s Franchise Sys., Inc., No. 18-2-25822-7-SEA at ¶¶ 65–66 (King Cty. Super. Ct. Oct. 18, 2018) (Washington Attorney General); Max Fillion & Joshua Sisco, Franchise No-Poach Agreements Likely per se Antitrust Violations in California, State Official Says, MLEX (Mar. 28, 2019) (California Attorney General).

⁶ In limited instances, the purchaser may be prohibited from competing with the seller if the seller continues to operate other lines of business that are not being sold as part of the transaction.

⁷ Noncompetes can also arise pursuant to agreements between a manufacturer and distributor, licensor and licensee, or among parties to a joint venture. See, e.g., Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185 (7th Cir. 1985). These noncompetes are also subject to antitrust scrutiny, but this note does not address their treatment in detail.

⁸ See Nexus/Generation Pipeline Complt. at ¶ 14.

⁹ See id. at ¶ 7.

¹⁰ See id. at ¶ 12.

¹¹ The FTC alleged that the merger reduced competition in the sale of body-worn cameras used primarily by law enforcement and the military. See Axon/Safariland Complt. at ¶ 2.

¹² See Axon/Safariland Complt. at ¶¶ 44-48.

¹³ See id. at ¶¶ 49-51.

¹⁴ See id. at ¶¶ 44-51.

¹⁵ Future references to noncompetes also encompass the no-poach and nonsolicitation clauses in the Axon/Safariland complaint.

¹⁶ Compare Axon/Safariland Complt. at ¶ 53 with Nexus/Generation Pipeline Complt. at ¶ 15.

¹⁷ See Nexus/Generation Pipeline Complt. at ¶ 6.

¹⁸ See Axon/Safariland Complt. at ¶¶ 12, 44, 46.