On July 9, 2021, President Biden issued an Executive Order, in which he described the nation’s antitrust laws as the “first line of defense against the monopolization of the American economy” and encouraged the Federal Trade Commission (“FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”  Until recently, the FTC had not issued any formal guidance on its plans to act upon the President’s Order, but has informally signaled enhanced attention and scrutiny of non-competition agreements, including by holding a two-day workshop in December 2021, titled “Making Competition Work: Promoting Competition in Labor Markets,” where industry leaders and professionals presented panels on antitrust and labor issues.

Now, however, the FTC is beginning to act in accordance with the President’s Executive Order.  On June 14, 2022, the FTC published an administrative complaint challenging an acquisition by Arko Corporation (“Arko”) and its subsidiary GPM Investments LLC (“GPM”) to purchase 60 gasoline and diesel fuel outlets from Corrigan Oil Company (“Corrigan”) as anticompetitive because of the inclusion of certain non-compete provisions in the asset purchase agreement.  All 60 fuel outlets that are part of the purchase are located in Michigan and Ohio.   However, as part of the $94 million transaction, Corrigan agreed not to compete in the sale, marketing, and supply of gasoline and diesel fuel in the areas surrounding the 60 purchased fuel outlets, as well as more than 190 additional GPM locations.  The FTC 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 190 GPM locations unrelated to the transaction, in violation of Section 7 of the Clayton Act and Section 5 of the Federal Trade Commission Act.

As part of a Consent Agreement and proposed Decision and Order published alongside the FTC’s complaint, Arko and GPM agreed to: 1) return five of the acquired outlets to Corrigan; 2) limit the non-compete provisions to apply only to the retail outlets acquired by GPM, and exclude the returned outlets and the 190 additional GPM locations; 3) restrict the duration of the non-compete to 3 years following the transaction and its geographic scope to 3 miles surrounding the acquired outlets; 4) for a period of 10 years, obtain prior approval from the FTC before acquiring retail fuel assets within 3 miles of the outlets returned to Corrigan; 5) in connection with other retail fuel business acquisitions, not enter into or enforce any non-competition provisions that would restrict competition in areas other than those surrounding the acquired locations; and 6) notify third parties subject to similar non-competition agreements with GPM of GPM’s obligations under the Order.  The Decision and Order will be made final following a period for public comment.

In a statement released alongside the FTC’s complaint, FTC Chair Lina Khan noted that recent discussion surrounding non-compete clauses have focused on their use in employment contracts, particularly for low-wage workers.  The Chair indicated that the FTC’s enhanced scrutiny of non-competes would not be limited to the employment context, but also to business sales and mergers, particularly where the two parties are “actual and potential rivals” who will “remain competitors in other markets” after the transaction.  The Chair further stated that “firms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors. The Commission will evaluate agreements not to compete in merger agreements with a critical eye.”

Historically, non-compete provisions contained in corporate acquisition agreements have been subjected to less scrutiny compared to similar provisions in employment contracts.  See e.g., E.T. Products, LLC v. D.E. Miller Holdings, Inc., 872 F.3d 464 (7th Cir. 2017).  This is because in a sale transaction, one of the transferred assets is typically “goodwill,” or the value of a company’s reputation and customer relationships.  However, this value is diminished for the buyer if the seller, who developed that “goodwill,” is subsequently able to compete with the buyer in the same market. Thus, a buyer commonly requires that, as part of the transaction, the seller, often including its executives and key employees, will not compete with the business they just sold.

The FTC’s recent action against Arko is a significant departure from court precedents which have typically enforced non-competes related to the sale or dissolution of a business.  Even California, which generally invalidates non-compete agreements under state law, maintains a limited exception related to the “sale of goodwill of business or ownership interest.”  See Cal. Bus. & Prof. Code §16601.  The FTC’s action illustrates that sale-related non-competes are not immune from scrutiny, and must still be reasonably necessary to protect a legitimate business interest and appropriately limited in geographic scope and duration.

The FTC’s use of its Section 7 and Section 5 powers to try and rewrite asset purchase agreements due to the inclusion of overbroad non-compete provisions represents a notable shift from how these types of agreements have been treated historically.  We expect that noncompetition agreements will continue to be a priority of the FTC during the Biden administration, which may take shape in the form of further enforcement actions or potential rulemaking.  We will continue to monitor developments in this area.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Scott Tan Scott Tan

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters…

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters, including employment discrimination, retaliation, breach of contract, whistleblower claims, restrictive covenants, and wage & hour claims.  Scott also counsels clients on a diverse array of employment matters, including accommodations requests, reductions-in-force, pay equity, wage and hour issues, and compliance with federal, state, and local laws.  Scott’s recent work has involved advising and representing clients across industries such as financial services, sports, news and media, healthcare, legal services, and real estate, in matters ranging from single and multi-plaintiff lawsuits to class and collective actions.

Scott has an active pro bono practice and advises non-profit organizations on employee separations and other employment issues.  He recently secured a favorable judgment in New York state court on behalf of a charitable foundation.  Scott also co-leads Proskauer’s Moot Court Program, where he introduces local high school students to appellate advocacy and coaches them to participate in an annual competition against other New York City high schools.

Scott received his J.D. from UCLA School of Law, where he served on the Moot Court Honors Board and worked as a research assistant for Professor Jennifer Mnookin and Professor Hiroshi Motomura.

Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice.

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice. Steven’s national practice focuses on defending companies in federal and state courts and arbitration against claims of: discrimination, retaliation and harassment, including claims brought by high-level executives; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations (including class, collective and PAGA actions).

Illustrating his versatility, Steven has successfully handled bench and jury trials in multiple jurisdictions (e.g., Illinois, California, Florida and Texas); defended one of the largest Illinois-only class actions in the history of the federal courts in Chicago; and prevailed following his oral arguments before the Seventh Circuit and state appellate courts. Steven brings his litigation experience to bear in counseling clients to minimize risk and avoid or prepare for success in litigation.

Investigations. Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Thought Leadership and Accolades. Steven was named Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He was also named as One of the Top 10 Impactful Labor & Employment Lawyers in Illinois for 2023 by Business Today. He is a Fellow of the College of Labor and Employment Lawyers. Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Chambers also reports that “He is someone who can navigate the twists and turns of litigation without difficulty. Steven is great with brief-writing, crafting arguments, and making sure the client is always happy.”

Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven was appointed to Law360’s Employment Editorial Advisory Board and selected as a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is often quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC, and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

In 2024, Steven received the Excellence in Pro Bono Service Award from the United States District Court for the Northern District of Illinois and the Chicago Chapter of the Federal Bar Association.