The Federal Trade Commission and the Antitrust Division of the Department of Justice are making clear that noncompete agreements embedded in any kind of transaction under their review will be closely scrutinized. Close examination of proposed noncompetes is now yet another item to consider in the negotiation of any deal. Specifically, the FTC recently agreed to clear a deal for Nexus Gas Transmission to buy a pipeline in Ohio from North Coast Gas Transmission. But the FTC only did so after the parties themselves agreed to nix a noncompete provision in the agreement that prohibited the seller from competing with the buyer.
Specifically, the agreement[1] provided that Nexus would buy one of two regional pipelines owned by North Coast, and that North Coast would then be barred from competing with Nexus to provide natural gas pipeline transportation services in the area for three years after the acquisition closed. According to the FTC, the noncompete at issue was impermissible because it would result in a lessening of competition, and the noncompete was not reasonably limited in scope to protect a legitimate business interest, such as intellectual property, goodwill or customer relationships, that would protect the buyer’s investment.
Of course, not all noncompetes are problematic. Under the antitrust laws, noncompete provisions are reviewed for their reasonableness[2], which includes scrutinizing their product and geographic scope, duration, and whether they are reasonably related to a legitimate business purpose. One of the commissioners picked up on this point, issuing a concurring statement to note that the noncompete the buyer sought was simply too broad in this instance.
With all of that in mind, the takeaway here is that transactions reviewed by the federal antitrust agencies will continue to face multidimensional scrutiny, and, specifically, noncompete covenants included as part of our clients’ transactions are NOT per se lawful. In analyzing noncompete agreements, we encourage you to keep the following points in mind and discuss with us as needed:
- Narrowly Tailored. Noncompetes should be necessary and narrowly tailored to help achieve the procompetitive benefits of the business agreement. The broader the terms, the more likely the provision will be deemed unreasonable.
- Limited in duration. Noncompetes must be limited in duration to a length reasonably tied to the industry and products implicated by the transaction. While there is no clear rule, generally one to three years is appropriate but this is a fact-specific analysis and longer or shorter durations may be reasonable under certain circumstances.
- Identity Matters. If a party to the agreement can be considered to have market power, there is an increased risk that a noncompete will be challenged and potentially found unreasonable.
- States vary. State laws, which can be even more restrictive, may also be in play.
We encourage you to consult our Antitrust & Competition team whenever considering insertion of a noncompete agreement, and we are always happy to review such covenants as part of our normal review of your transactional agreements.
[1] Note that form matters less here – a formal agreement is not required in order to draw attention. Regardless of whether the noncompete is found in a transactional agreement, a side letter, a peripheral writing such as an email, or even a so-called oral or implicit “meeting of the minds,” it potentially is subject to scrutiny.
[2] It is important to remember that if the noncompete is a “naked” restraint that has no purpose or effect other than to restrict competition, the provision might be found unreasonable on its face – or “per se illegal” – without any further analysis.