FTC Challenges Long-Term Non-Competes in Connection with Merger
The Federal Trade Commission has issued an administrative complaint challenging Axon Enterprise, Inc.’s consummated acquisition of its body-worn camera systems competitor VieVu, LLC from parent company from Safariland. Before the acquisition, the two companies competed to provide body-worn camera systems to large, metropolitan police departments across the United States.
According to the complaint, Axon’s May 2018 acquisition reduced competition in an already concentrated market. Before their merger, Axon and VieVu competed to sell body-worn camera systems that were particularly well suited for large metropolitan police departments. Competition between Axon and VieVu resulted in substantially lower prices for large metropolitan police departments, the complaint states. Axon and VieVu also competed vigorously on non-price aspects of body-worn camera systems. By eliminating direct and substantial competition in price and innovation between dominant supplier Axon and its closest competitor, VieVu, to serve large metropolitan police departments, the merger removed VieVu as a bidder for new contracts and allowed Axon to impose substantial price increases, according to the complaint.
As part of the Merger, Safariland entered several non-compete and customer non-solicitation agreements covering products and services not related to the merger, and both Axon and Safariland entered into company-wide non-solicitation agreements that all run for 10 or more years (together, “Non-Competes”). According to the FTC the Non-Competes are not reasonably limited to protect a legitimate business interest. Some of the provisions of the Non-Competes include:
- Safariland agreed not to engage in (a) body worn video products and services, (b) in-car video products and services, (c) digital evidence management products and services provided to third parties that ingest digital evidence audio and video files, and (d) enterprise records management systems provided to third parties, anywhere in the world for 10 years.
- In an ancillary exclusive supply agreement for conducted electrical weapons, Safariland agreed not to compete in the conducted electrical weapons industry, body worn camera industry, fleet or vehicle camera industry, surveillance room camera industry, and digital evidence management system and storage industry, with regard to law enforcement, military, security or consumers, anywhere in the world for 12 years.
- Safariland agreed not to solicit or entice any of Axon’s customers or potential customers for purposes of diverting business or services away from Axon, for 10 years.
- Safariland agreed not to hire or solicit any of Axon’s employees, or encourage any employees to leave Axon, or hire certain former employees of Axon, except pursuant to a general solicitation for a period of 10 years. Axon agreed to a similar prohibition.
According to the FTC, by prohibiting Safariland from competing against Axon–in terms of products and services Safariland can offer as well as customers Safariland can solicit–these provisions harm customers who would otherwise benefit from potential or actual competition by Safariland. By prohibiting Axon and Safariland from affirmatively soliciting each other’s employees, these provisions eliminate a form of competition to attract skilled labor and deny employees and former employees of Axon and Safariland access to better job opportunities. They restrict workers’ mobility, and deprive them of competitively significant information that they could use to negotiate better terms of employment.
The FTC also alleged the Non-Competes are not reasonably limited in scope to protect a legitimate business interest. A mere general desire to be free from competition is not a legitimate business interest. The Non-Competes go far beyond any intellectual property, goodwill, or customer relationship necessary to protect Axon’s investment in VieVu. Moreover, even if a legitimate interest existed, the lengths of the Non-Competes are longer than reasonably necessary, because they prevent Safariland from competing for products and services, customers, and employees for 10 years or longer.
The conduct is merely alleged in a complaint and no court or administrative tribunal have found the parties violated any law.
Contact Steve Quinlivan for more information.