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

Moving Forward Despite FTC Scrutiny

The FTC’s recent challenges show that no transaction agreements are immune from scrutiny, and all five FTC commissioners appear to agree that enforcement of noncompete agreements is necessary. The FTC is likely to continue investigating noncompete agreements even where the value of the transaction is relatively small or the transaction has already closed. The five FTC commissioners unanimously voted to issue each of the aforementioned administrative complaints, which is particularly noteworthy as the FTC commissioners have split along party lines in many other recent decisions. Their unanimity shows this is not a bipartisan issue that is likely to change based on a change of administration. A FTC senior representative provided the following guidance to parties’ seeking to avoid an FTC challenge: “In considering the scope of these types of restrictions, consider what you are trying to protect or guard against, why you need that protection, and the scope of the protection you actually need (as opposed to want), given the value invested in the transaction.”

As with any noncompete agreement, the parties must be able to show that it is reasonable in scope. The FTC did not challenge the duration of the parties’ noncompete agreement in DTE Energy, suggesting that a three-year noncompete is likely to be reasonable so long as it also reasonably (and minimally) restricts competition within a geographic and product market. In all of the complaints addressed above, competition was restricted absolutely within the FTC’s defined market. While parties can challenge the FTC’s market definition, they should endeavor to limit competition only in products or geographic areas where absolutely necessary. And it would help if the parties face aggressive or numerous competitors in the areas where they agree to restrict competition, which would limit the likelihood of anticompetitive effects and FTC scrutiny.

Parties should also be sure to document the legitimate business interest for their noncompete agreements. In Altria, the FTC alleged that the parties could not show “the transaction resulted in cognizable efficiencies sufficient to outweigh the competitive harm caused by Altria’s agreement to exit the relevant market.” It also noted in the Axon complaint that the parties could not demonstrate efficiencies that would offset the transaction’s anticompetitive effect. And the case was further complicated by evidence from Axon’s president that Axon did not consider potential efficiencies in evaluating the transaction. If the parties’ documents show that an agreed-upon noncompete is necessary to realize cognizable efficiencies, they may be able to show a legitimate business interest that alleviates the FTC’s concerns. And even where cognizable synergies cannot be proven, it is important that parties’ documents do not suggest an unlawful or anticompetitive reason for having a non-compete agreement.