Transaction-Related Noncompete Agreements Face FTC Fire | New York Law Journal

Karen Hoffman Lent and Kenneth Schwartz

The Federal Trade Commission (FTC) has filed at least three administrative complaints in the last year challenging transaction-related noncompete agreements. These actions have important ramifications that antitrust and M&A practitioners must be aware of when drafting such agreements.

Noncompete agreements are quite common and generally enforceable so long as they are reasonable in scope and necessary to protect a legitimate business interest. Yet the FTC alleged that noncompete agreements entered into as part of three separate transactions violated the antitrust laws—namely the FTC and Clayton Acts. Of note, a senior representative at the FTC wrote that while many practitioners assume noncompete agreements are enforceable when they are ancillary to a legitimate business transaction, the FTC nonetheless will evaluate non-compete agreements to ensure they are not overly broad. The FTC’s most recent challenges show that no agreements are immune from scrutiny even when a deal is closed or the transaction value is relatively small.

‘In the Matter of DTE Energy’

The first of the FTC’s recent challenges to non-compete agreements was filed in August 2019 against DTE Energy, Enbridge and Nexus Gas Transmission. Complaint, In the Matter of DTE Energy, No. 1910068 (F.T.C. filed Aug. 2019). Nexus Gas Transmission, a joint venture between DTE Energy and Enbridge, sought to acquire Generation Pipeline from North Coast Gas Transmission (NCGT) and its majority stakeholders. The FTC alleged the parties’ non-compete agreement substantially lessened competition in violation of the FTC and Clayton Acts but did not otherwise challenge the underlying transaction on the merits.

The noncompete agreement at issue restricted NCGT’s ability to compete with the combined entity post-transaction. Specifically, the agreement prohibited NCGT from operating part of its 280-mile long natural gas pipeline in the Toledo, Ohio area. The FTC alleged that NCGT’s pipeline, which spans 13 counties in Ohio, competed with Generation’s 23-mile long pipeline for customers in Toledo, Ohio, including parts of Lucas, Wood and Ottawa counties. The noncompete agreement barred NCGT from competing in part of these three counties for three years following the transaction. While a three-year noncompete agreement is likely to be viewed as reasonable with respect to its duration, it must also be necessary to protect a legitimate business interest and reasonable in geographic scope.