The U.S. Court of Appeals for the Fourth Circuit recently issued a groundbreaking decision that could significantly impact antitrust risk analysis for companies contemplating a merger or acquisition. In a February 18, 2021, opinion, the Fourth Circuit upheld a private antitrust challenge to the legality of a completed acquisition. It is the first time that a court has unwound a completed transaction in a private merger challenge, rather than a challenge brought by government enforcers.
DOJ Twice Fails to Challenge the Acquisition
Prior to the challenged merger, JELD-WEN, Inc. and Craftmaster International (CMI) were vertically integrated competitors in the markets for door skins and finished molded doors, respectively. Most homes in the United States use molded doors that are comprised, in part, of door skins that make up the front and back of the finished molded door. Before the merger, JELD-WEN, CMI and a third competitor supplied door skins for sale of their own molded doors and for sale to other molded door manufacturers, including the plaintiff in this case, Steves and Sons, Inc. In 2012, JELD-WEN acquired CMI. Around that time, Steves and Sons had a long-term agreement for door skin supply with JELD-WEN and did not oppose the transaction. The Antitrust Division of the U.S. Department of Justice (DOJ) investigated the merger but decided not to challenge it and closed the investigation, in part due to Steves and Sons having no objection. In the years that followed, Steves and Sons encountered problems with the quality and price of JELD-WEN's door skins. The DOJ opened a second investigation of the merger in December 2015 after receiving a complaint from Steves and Sons, but the DOJ closed that investigation in April 2016. Steves and Sons then brought suit in 2016 raising both legal claims, based on contract and antitrust principles and equitable claims.
District Court Orders Divestiture
First, a jury trial was held on the legal claims. The jury found, among other things, that JELD-WEN's acquisition of CMI violated Section 7 of the Clayton Act. After trebling the jury's awards consistent with the Clayton Act, the district court awarded Steves and Sons $36.4 million for past damages plus $139.4 million for future lost profits.
A three-day bench trial was subsequently held on Steves and Sons' equitable claims, including whether a divestiture of certain assets would be appropriate. JELD-WEN argued that divestiture would be inappropriate because Steves and Sons waited until roughly two years after the merger to seek relief. The DOJ filed a statement of interest disagreeing with JELD-WEN's argument regarding the timeliness of seeking divestiture and argued that there are good reasons why private litigants should be able to seek equitable relief after mergers are consummated. The district court concluded that divestiture of a door skin factory that had been operated by CMI pre-merger was the most effective way to protect Steves and Sons and to restore competition in the market.
Fourth Circuit Upholds the Divestiture
In its February 18, 2021, ruling, the Fourth Circuit agreed with the district court that divestiture is necessary and appropriate even though the suit was brought roughly two years after the merger was consummated. A special master will oversee the divestiture process, and JELD-WEN will have the right to challenge whether a sale to a particular buyer serves the public interest. With respect to the award of $139.4 million for future lost profits, however, the Fourth Circuit found for JELD-WEN, concluding that the issue of future lost profits was not ripe for adjudication.
The Fourth Circuit's decision should be a warning sign for companies contemplating a merger or acquisition. Even though a transaction is not likely to be challenged by government enforcers, it may invite a challenge from private parties even years after the deal is consummated. Now that a federal appellate court has upheld such a challenge, we can expect to see more private antitrust challenges to consummated transactions.
For More Information
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