Just because it’s ancillary doesn’t make it legal

By Brian Telpner, Bureau of Competition 

In The Wizard of Oz, Dorothy was told to ignore the man behind the curtain. Some may argue that the same guidance applies to ancillary parts of a merger or joint venture agreement. These can include non-solicitation and non-compete provisions. Even when such provisions are ancillary to an otherwise legitimate business transaction, we will still make a determination that the restraints do not independently violate the antitrust laws by being overly broad. Ancillary provisions in these agreements will be assessed to determine if they are reasonably necessary for accomplishing the benefits of the transaction, and narrowly tailored to the circumstances surrounding the transaction.

What one means by narrowly tailored depends on the competition that is restrained by the agreement and how it relates to a legitimate business concern. If you are selling three gas stations in Los Angeles but the non-compete bars the seller from operating gas stations in California for seven years, such a provision is unduly broad and would raise significant antitrust concerns, due both to its geographic scope and its term. If, on the other hand, the non-compete applied to a one or two-mile radius around each station for a couple of years, this appears more tailored to address the potential concerns about loss in value by the buyer. But Staff would still have to evaluate the provision, even though the more limited term and scope evidence an intent to narrowly tailor the effect of the non-compete. The same approach applies to non-solicitation clauses: restrictions on soliciting employees must be narrowly tailored to protect the value to the business of the personnel at issue; they should not act as a de facto no-poach agreement.

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. This analysis will help guide parties to reaching a reasonable scope and term. Where, however, the terms distort competition and the principle of ancillarity is used to mask an otherwise anticompetitive agreement, the Bureau will not be willing to ignore the man behind the curtain.

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