Overview
A New York State judge recently faced a rare situation: in New York v. Intermountain Management, Inc., the New York Attorney General (NYAG) brought an antitrust case where a dominant ski resort operator purchased a competitor’s ski mountain, only to immediately shut it down, explicitly to drive customers to his own properties. While the court's decision focuses primarily on the capture-and-kill acquisition as an antitrust violation that concentrated the market, more impactful on general M&A practice is the court’s finding that the noncompete clauses in the merger agreement constituted a per se antitrust violation. In light of this case, there is more risk for companies using noncompete terms in their acquisition agreements.
Acquisition Strategy and Noncompete Agreement
This case revolved around the Toggenburg Mountain Ski Resort in the Syracuse, New York area. Intermountain owned two nearby ski mountains. Toggenburg's owner, John Meier, also owned Greek Peak, another mountain not too far away in driving distance but considered to be in a separate geographic market for skiing. In 2021, Intermountain acquired Toggenburg, immediately shutting it down. The acquisition concentrated the market: one of the defendants admitted that the closing of Toggenburg allowed Intermountain to "capture 90% market share."
Following the merger agreement, the parties entered into a noncompete agreement, that prohibited Meier from competing within a 30-mile radius of Toggenburg for five years. This noncompete agreement also had a no-poach clause that prohibited Meier from soliciting any of Intermountain’s customers or employees. While the noncompete provided an exception for operation of Greek Peak, the exception did not clearly permit Greek Peak to solicit Intermountain employees.
Court's Analysis
The NYAG alleged, in addition to antitrust theories regarding the acquisition, that the noncompete agreement violated the Donnelly Act, New York's antitrust statute. The court agreed, finding that the no-poach agreement was per se unlawful because it furthered the competitive suppression for which Intermountain was explicitly paying, removing any efficiencies argument for an ancillary restraint claim. During the NYAG’s investigation, Intermountain had sent a letter to Meier asserting that the no-poach did not apply to Greek Peak and did not prevent Greek Peak from hiring Intermountain employees. But the court, noting that this may have been a strategy to avoid litigation, also found that the noncompete clause was vague on this issue.
Key Takeaways for M&A Noncompetes
While the facts – market concentration and damaging statements by the defendants – may have made the result preordained, companies should focus on the court’s rejection of a noncompete related to an acquisition contract. For M&A in many industries, such as ones where a founder may have close relationships with the clients or where the industry requires specialized knowledge, noncompetes are standard. The court here dismissed the legal argument for a noncompete in two sentences and focused its analysis on the facts, which persuaded it that there was no procompetitive reason for the restriction.
While companies do not necessarily need to jettison noncompete terms of their acquisition agreements, companies should consider the following steps to reduce antitrust risk in light of this decision.
- Draft with narrow, unambiguous scope. Here, the court found the agreement was unclear whether it carved Greek Peak out of the no-poach term, and therefore considered it applicable to Greek Peak, harming competition. Companies should be precise about the scope of any noncompete or non-solicitation clause, ensure that it narrowly addresses protection of the acquired asset without sweeping in other existing competition.
- Integrate the noncompete into the overall agreement. In this case, the parties entered the noncompete agreement separately from the acquisition agreement, complete with a separate $200,000 payment for the noncompete. This separate agreement with a separate payment gave rise to the court’s suspicion that it was not necessary for the purchase. To take full advantage of the ancillary restraints defense, any noncompete term should be part of the acquisition agreement itself.
- Document the procompetitive rationale. Courts look beyond the agreement’s text to understand the parties’ true intent. Here, the absence of stated procompetitive rationales for the transaction led the court to focus on the damaging evidence. Companies should include whereas clauses in the acquisition agreement that expressly explain why the noncompete term is required to obtain the agreement’s procompetitive objective.
The case also demonstrates that state attorneys general may aggressively pursue antitrust violations even if federal enforcement priorities shift. Therefore, to the extent there is any slowdown in merger enforcement in the new Trump administration (and to date, there is little indication there will be), state attorneys general may be there to pick up the slack.
