On February 18, 2021, the U.S. Court of Appeals for the Fourth Circuit upheld the first divestiture order in an antitrust suit brought by a private plaintiff which challenged its rival’s acquisition four years after the transaction. Post-consummation merger challenges are rare and—until now—have only been successful when brought by the government. Indeed, the Fourth Circuit remarked that “no court had ever ordered divestiture in a private suit before this case,” but held that the district court did not abuse its discretion in doing so here: “this case is a poster child for divestiture.” Private parties, while permitted under §16 of the Clayton Act to sue to block or unwind mergers, seldom do so, typically opting instead to participate in the pre-closing investigative review process conducted by the Federal Trade Commission or Department of Justice, Antitrust Division (“DOJ”) (collectively, “Antitrust Agencies”).
The Fourth Circuit’s ruling could open the door for private parties to challenge consummated deals years after-the-fact, even when those deals have been cleared by the Antitrust Agencies, raising a significant risk that a consummated transaction will be re-opened and, ultimately, scuttled by a private plaintiff. Transacting parties now have to remain vigilant for the potential threat of their deal unwinding long after it is finalized. The risk is especially high in industries where injury to competition may only become apparent years down the road. We expect the parties will petition the Supreme Court for certiorari—JW has already announced its plans to pursue an appeal—and we anticipate some strong arguments for reversal, as explained below.
Background and District Court Ruling
This unicorn of a case began in 2012 when the plaintiff, Steves and Sons, Inc. (“Steves”), a seller of molded interior doors, contracted for the supply of doorskins with its vertically integrated competitor, JELD-WEN (“JW”). At the time, the doorskins market had three players: Masonite, JW, and CMI. In 2012, after financial difficulty, CMI’s owners sold the business to JW. DOJ cleared the deal, creating a duopoly in the market for doorskins in the U.S. Notably, Steves had told DOJ that it did not object to the merger at the time.
After the transaction, Steves and JW’s relationship deteriorated as JW raised prices and eventually gave notice of termination in 2014. Termination would not take effect until seven years later in September 2021. Also in 2014, Masonite announced it would no longer serve companies like Steves. At Steves’s request, DOJ re-examined the JW/CMI merger, but closed its investigation in April 2016 without further action. So Steves filed suit in June 2016. According to Steves, JW’s merger with CMI substantially lessened competition for interior molded doorskins in violation of §7 of the Clayton Act, and empowered JW to breach its supply agreement, raise prices, lower the quality, and reduce the supply of doorskins.
In addition to damages for breach of contract and future lost profits—based on the theory that Steves would lose access to doorskins and go out of business—Steves took an unusual step and sought to force JW to unwind the merger. No court had ever ordered divestiture in a private suit before. Of course, as noted, such suits are permitted by statute, and the last time the Supreme Court addressed the question in its 1990 California v. American Stores decision, it held that divestiture is a remedy available to both states and private plaintiffs under §16 of the Clayton Act. Congressional intent envisioned a robust antitrust enforcement structure that includes private policing in addition to government action.
JW moved to dismiss Steves’s antitrust claim at the pleading stage, arguing that a four-year gap between the merger and the lawsuit was too long. The district court denied the motion. The case proceeded to trial where a federal jury found that JW’s merger with CMI violated §7 of the Clayton Act and awarded Steves the trebled amounts of $36.4 million in past damages and $139.4 million for future lost profits. In a parallel proceeding, a different jury awarded JW $1.2 million in compensatory damages for trade-secrets counterclaims, finding that Steves had misappropriated JW’s protected information regarding the production of doorskins when it hired a former JW executive in 2015 as it evaluated building its own doorskin-manufacturing plant.
After the jury verdict, the district court ordered JW to divest its CMI assets in lieu of the jury’s award of future lost profits—only should the divestiture fail, would JW be obligated to pay these damages. The district court reasoned that Steves had satisfied the test set by the Supreme Court in eBay v. MercExchange for granting equitable relief such as a divestiture. In the context of a Clayton Act claim, this required Steves to show that: (1) it had suffered a significant threat of an antitrust injury; (2) no amount of money could compensate it for that injury; (3) its hardships sufficiently outweighed those of JW; and (4) the divestiture would be in the public interest. In ordering the divestiture, the district court highlighted Steves being a relatively small 150-year-old family-owned business that would likely collapse, the possibility of mitigating JW’s hardships by mandating the divested entity sell to JW for two years, and divestiture being the only means to create a third supplier to restore competition for doorskins. This structural fix, the district court found, could not be accomplished by other means.
Fourth Circuit Decision
On appeal, the Fourth Circuit affirmed the bulk of the district court’s rulings, including the first of its kind divestiture order. Private suits, the Fourth Circuit emphasized, are an integral part of the framework for antitrust enforcement in the U.S. And structural remedies are preferable per long-standing policy. A behavioral remedy would have proven a temporary solution, benefitting only Steves rather than competition overall. As such, it would have run counter to the Clayton Act’s purpose of preserving competition. The Fourth Circuit vacated the jury’s award of future lost profits to Steves because the injury on which it was premised cannot occur until the supply agreement terminates. In the court’s eyes, JW may still choose to supply Steves after their agreement ends in September.
Remarkably, the Fourth Circuit, like the district court, rejected JW’s argument that four years is an unreasonably long time to bring a merger challenge. DOJ also filed an amicus brief in which it urged the court not to apply strict time limits to private-party antitrust claims seeking divestiture post-closing of a merger. The agency explained that the threat of antitrust injury may not always materialize until some time after a merger has closed, which would justify a plaintiff’s reasonable delay in filing. DOJ further cautioned that applying such limits would unjustly limit the rights of prospective private plaintiffs to file an antitrust divestiture claim to a short period of time, decreasing incentives to cooperate with the agency’s merger investigations.
The Fourth Circuit held that unlike other cases where courts had relied on laches to dismiss post-consummation challenges to mergers, Steves had a good excuse for its delay. To succeed on a laches defense—a case-by-case analysis—JW must have proved both that Steves unreasonably delayed in bringing the suit and then that Steves’s delay prejudiced JW. The Fourth Circuit held that delay is measured not from the date of the challenged action—here the JW/CMI merger—but rather from when the plaintiff discovers or could have discovered the facts giving rise to the cause of action and could pursue the claim—here, JW’s termination in 2014. Any subsequent delay in filing its complaint from 2014 to 2016 was explained by Steves’s exploring alternative sources of doorskin supply and the parties’ efforts to resolve their dispute without litigation—an important policy goal not to be undermined.
The Fourth Circuit distinguished Steves’s claims for past and future damages. It held that while Steves was aware of its past damages at the time of the merger, Steves lacked notice of the future threatened injury on which its divestiture claim is based. Steves could not have known of its potential loss of access to doorskins until JW provided notice in 2014 it was terminating the supply agreement and would no longer supply doorskins to Steves. According to the Fourth Circuit, that post-merger unilateral decision caused Steves’s antitrust injury, not the merger itself. The court also noted that the only other remaining supplier, Masonite, had also declined to supply manufacturers like Steves and, thus, that Steves had no supply options. Of course, typically, a company’s unilateral decision whom to sell to is protected under the Colgate doctrine. And any duty to deal under antitrust law is intentionally narrowly construed. Here, it seems that in the court’s eyes, JW’s independent decision, two years after it closed its acquisition of CMI, was sufficient under §7 of the Clayton Act, even though that statute provides a narrow cause of action to challenge acquisitions that may substantially lessen competition or tend to create a monopoly. Prior to JW’s post-merger decision to terminate, the Fourth Circuit acknowledged, Steves would not have been able to satisfy all the eBay factors.
JW argued that it had already made a major capital investment in the CMI plant it had acquired, which will now be lost in a forced divestiture. But the Fourth Circuit emphasized the hardships of unwinding a completed merger do not bear on the reasonableness of the delay analysis—they are only relevant to the prejudice factor, which the court did not reach. The Fourth Circuit did later address JW’s hardship arguments under the third eBay factor, concluding JW was able to bear the financial costs of divestiture and had sufficient alternate doorskin manufacturing capacity. Any hardship to JW was outweighed by the harm to Steves. Thus, the Fourth Circuit held that the district court did not abuse its discretion in ordering a divestiture. However, the Fourth Circuit expressly reserved JW’s rights to challenge the terms of any potential divesture such as whether a particular divestiture buyer will serve the public interest. It also raised the possibility that the district court revisit the divestiture order in the future if no satisfactory buyer can be found.
As the Fourth Circuit remanded the case, litigation will resume in district court, and appeals are fairly certain. Beyond this case, the Fourth Circuit’s opinion creates uncertainties for businesses engaging in M&A requiring Antitrust Agency approval and the financial entities that support them. Practically, the decision could threaten to undermine the confidence the HSR process is intended to provide to merging parties. And while the Antitrust Agencies can sue to unwind consummated deals, they have used this recourse judiciously and for the most part with respect to non-reportable deals. If successful challenges to unwind a merger can also be brought by customers seeking to undo a hard-fought deal years later, parties may pass up efficient mergers for fear of later litigation and potentially a costly divestiture. That’s exactly what’s at stake.
The Fourth Circuit’s decision undermines certainty and predictability. It could spur more private suits seeking to unwind transactions even years down the road where now emboldened private plaintiffs might disagree with the Antitrust Agencies’ expert decisions to clear certain transactions—especially in an environment where the Antitrust Agencies rarely issue public closing statements revealing their rationale. Of course, there are several reasons an agency may choose not to prosecute, including resource allocation. DOJ indicated as much in its amicus as it gave the green light for private plaintiffs to pursue court-ordered divestitures after having itself evaluated the challenged transaction in this case twice without further action. Consumer class action plaintiffs also may try to bring suit going forward. Businesses will be well served to carefully consider dealings with customers and customer-competitors in the post-merger process and beyond, especially if the particular industry has become more concentrated years after the transaction or is subject to heightened government scrutiny such as the tech sphere currently.
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