Goodwill, Non-Compete Provisions & the Federal Trade Commission
By Barbara Sicalides and Frank Griffin, IV, Troutman Pepper Hamilton Sanders, LLP
On June 13, 2022, as a condition to allowing ARKO Corp. to acquire indirectly certain retail fuel assets, including sixty Express Stop retail locations from Corrigan Oil Company, the Federal Trade Commission (“FTC”) reduced the duration of the non-competition provision. In addition to duration, the FTC challenged the geographic scope of the non-compete. The proposed consent decree also required the parties to rescind parts of their asset purchase agreement so as to release back to Corrigan five local retail fuel locations in Michigan. The vote of the commissioners was unanimous.
Although commissioners expressly acknowledged that non-compete clauses may protect a legitimate business interest, such as the goodwill acquired in a transaction, they made clear that such clauses must be “appropriately limited in geographic scope and duration.” They further noted “that noncompete clauses in a merger agreement may unduly and illegitimately restrain competition when both of the parties remain competitors in other markets.”
The FTC consent decree limited the ARKO/Corrigan non-compete to a duration of no longer than three years. Additionally, the offending non-compete covered a geography broader than that of the business sold; instead, the scope was coextensive with the buyer’s business. The consent decree, therefore, required that the non-compete cover only the geography of the assets being sold.
The FTC’s consent decree goes beyond the asset purchase agreement that was the subject of the investigation. The settlement prohibits the buyers from entering into or enforcing any non-compete agreement related to acquisitions of any retail business that restricts competition solely around a retail fuel business already owned or operated by the acquiring company and mandates that buyers notify third parties subject to similar non-compete agreements of the acquiring company’s obligations under the consent decree.
Accordingly, in transactions involving competitors, the parties should take into consideration the FTC’s recent action when crafting the scope of any non-compete provisions—the time required to protect the value of the goodwill and coverage should be coextensive with and based on the business being sold.
FTC Requires Divestitures in Gasoline Terminal Deal
By Barbara Sicalides, Daniel Anziska, and Leah Katz, Troutman Pepper Hamilton Sanders, LLP
The Federal Trade Commission (“FTC”) is increasingly focused on competition in gasoline and fuel markets, and it has “redoubl[ed] its commitment” to “aggressive antitrust enforcement” in these areas. The most recent example of this renewed commitment came June 2, 2022, with the announcement of a consent agreement requiring the divestiture of petroleum terminals in two states.
The proposed transaction involved petroleum terminal and pipeline companies Buckeye Partners and Magellan Midstream Partners. Buckeye sought to acquire twenty-six Magellan-owned light petroleum product terminals largely located in the Southeast for approximately $435 million. The FTC alleged that the proposed acquisition would substantially lessen competition for terminaling services for light petroleum products and gasoline in three markets in South Carolina and Alabama, increasing the likelihood of collusion between competitors and increasing prices.
The terminals, which dispense fuel into tanker trucks for delivery, are a “critical” aspect of the gasoline supply chain, and the FTC’s announcement of the consent agreement reiterated its commitment to ensuring competitive gasoline and diesel markets. This announcement follows similar recent statements by the FTC and calls from President Biden for the FTC to more aggressively monitor oil and gas transactions.
In addition to requiring the divestiture of five terminals in the three markets in South Carolina and Alabama, the consent agreement also contains a prior approval provision requiring Buckeye to seek prior approval from the FTC before acquiring any light petroleum products terminal within a sixty-mile radius of the divested terminals for a period of ten years. U.S. Venture, the divestiture buyer, must also seek prior approval before transferring any of the divested terminals to any buyer.
The Commissioners’ Statement accompanying the announcement of the consent agreement drew attention to the inclusion of the prior approval provision, noting that the inclusions of such provisions in consent agreements is now standard, but acknowledging that such provisions might not always benefit competition or consumers. The Statement noted that the FTC received numerous informative comments regarding potentially harmful effects of a prior approval provision included in another recent oil and gas transaction, and it encouraged stakeholders to provide feedback on the Buckeye prior approval provision and those that appear in future consent agreements.
Will the Push for a Bank Safe Harbor on Cannabis Succeed?
By Aaron P. Kouhoupt, Robert W. Savoie, Heidi Urness, McGlinchey Stafford, PLLC
For nearly a decade, financial institutions operating in states with regulated cannabis markets (whether medicinal or recreational) have struggled with their ability to offer banking services to entities legally operating within their respective state. With only eleven states remaining that prohibit either medicinal or recreational use of cannabis, this issue has only grown more prevalent.
The Conference of State Bank Supervisors (CSBS) has now weighed in, sending letters to both the United States House of Representatives and the Senate, stressing the importance of providing safe harbor for financial institutions offering financial products and services to cannabis or cannabis ancillary businesses under the proposed Secure and Fair Enforcement (SAFE) Banking Act.
In the letters, CSBS CEO James M. Cooper focused on the importance of the regulatory clarity the SAFE Banking Act would provide to the financial services industry. Cooper further noted the SAFE Banking Act would address public safety concerns that result from state-compliant marijuana businesses’ lack of access to financial services. CSBS’s letters also request and encourage the House and Senate to extend the safe harbor to all financial services, including state-licensed money transmitters used by businesses nationwide to transfer funds from one party or business to another and accept customer payments for consumer purchases. According to the letters, failing to include these service providers would perpetuate the adverse impacts of regulatory uncertainty surrounding cannabis financial services, not the least of which is the significant public safety issues associated with cash-only operations.
The SAFE Banking Act has historically had success in the U.S. House, having been passed in the House six times as of the date of this article, and most recently in February 2022, while continuing to stall in the Senate. Whether CSBS’s letters offering public and forceful support of the SAFE Banking Act will ultimately contribute to the eventual success of the bill in the Senate is an issue well worth following. However, under the current regulatory framework, financial institutions will continue to confront complex regulatory issues and remain in an awkward limbo when faced with customers seeking cannabis-related financial products and services from companies operating in compliance with state (and even federal, with respect to hemp and cannabinoids derived therefrom) cannabis rules and regulations.
Congress Introduces the American Data Privacy and Protection Act
By Sanford Shatz, McGlinchey Stafford, PLLC
On June 23, 2022, Representatives Pallone, Rodgers, Schakowsky, and Bilirakis introduced the American Data Privacy and Protection Act, HR 8152. This Act represents an effort to create a comprehensive federal privacy law. Information that could be linked to a person or a device would be covered, and the Act would provide extra protections for sensitive covered data. The Act would not cover publicly available data or de-identified data.
The Act provides certain exceptions to permit covered entities to use data to complete transactions and customer requests, maintain products and services, respond to “security incidents,” conduct internal research and analysis, and comply with legal requirements. In addition, the Act may exempt smaller entities that do not meet revenue or data thresholds.
The Act would be enforced by the FTC, state actors including Attorneys General, and individuals through a private right of action.
The bill passed the House Subcommittee on Consumer Protection and Commerce and is moving to the House Committee on Energy and Commerce, where it is expected to pass. The bill faces significant headwinds in the Senate.
OCC Reports Quarterly Improvement in Mortgage Performance
By Sanford Shatz, McGlinchey Stafford, PLLC
On June 27, 2022, the Office of the Comptroller of the Currency (OCC) released its First Quarter 2022 Mortgage Metrics Report on the status of first-lien home mortgages held by seven national banks with large servicing portfolios. This quarter, the reporting banks serviced approximately 12.2 million first-lien residential mortgages, with an unpaid principal balance of $2.6T, representing 22% of all outstanding residential mortgage debt.
The OCC reported that mortgage performance continued to improve. 96.9% of all mortgages were current and performing, an increase from 94.2% the year earlier. Seriously delinquent mortgages—those sixty or more days past due, or thirty or more days past due for borrowers in bankruptcy—declined to 1.8% from 2.3% in the prior quarter and 4.6% a year earlier. The servicers modified 42,427 mortgages, a 10.7% decline from the prior quarter, with most modifications reducing the borrowers’ payments by reducing the interest rate or increasing the loan term. Finally, servicers reported an increase in beginning foreclosure activity, to pre-pandemic levels, and an increase in home forfeiture completions, foreclosures, short sales, and deeds-in-lieu, to 2,410, a 26.8% increase from a year earlier.