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Do three rights make a wrong? Private party challenging consummated merger can obtain divestiture years later

February 25, 2021
W. Todd Miller and Erin Glavich

Introduction

For the first time in history, a private party has successfully challenged an acquisition and obtained an order requiring a divestiture of a company that had been acquired years before the case was filed. In a highly anticipated decision, a court of appeals has affirmed that order.

Even though this case, Steves & Sons, Inc. v. JELD-WEN, Inc., is a first-of-its-kind result, the decision is centered on principles of antitrust law and procedure that are unremarkable:

  • Private parties can sue for divestiture. This has been a well-known principle based on Supreme Court precedent since at least the early 1990s.
  • There is no specific statute of limitations to challenge an acquisition.
  • A private party’s challenge to an acquisition is subject to the equitable defense of laches, a fact-based inquiry that has resulted in dismissals of private challenges that have been made.

This unprecedented decision appears to be the result of just the right mix of facts, but the implications go far beyond this case’s fact pattern. The decision serves as a stark reminder of the antitrust litigation risk that the acquiring party to a transaction faces, potentially even years after the transaction closes.

However, the question of how this decision ended up as the first of its kind – particularly given that the basic principles on which the decision is based are uncontroversial – remains. A partial answer may lie in how the acquiring party, JELD-WEN, acted after the acquisition, combined with other factors.

Facts

The facts of the case are straightforward. Prior to 2012, there were three major US door skin manufacturers: JELD-WEN, Masonite and CraftMaster, Inc (CMI). Door skins are molded materials formed into a panel used over a hollow or solid door core to create the residential doors that are widely seen in large hardware stores, lumberyards and elsewhere. JELD-WEN uses its door skins to make its own molded doors and also sells its door skins to other door manufacturers, including Steves & Sons, the plaintiff in the case.

In 2012 JELD-WEN acquired CMI, including its Towanda, Pennsylvania, plant, at which door skins were made. Immediately prior to that acquisition, Steves entered into a long-term supply contract with JELD-WEN. After the acquisition, the relationship between JELD-WEN and Steves became acrimonious at best. JELD-WEN increased its prices, while quality and service decreased. Compounding Steves’s difficulties, in 2014 Masonite, the other US door skin manufacturer, announced that it would no longer sell door skins to others, but instead intended to use all of its production for internal purposes. Steves attempted to encourage action by the US Department of Justice, but to no avail. In 2016 it filed suit under Section 7 of the Clayton Act, seeking a divestiture of the Towanda plant.

A jury found the merger anti-competitive and the lower court ordered JELD-WEN to divest the Towanda plant. In ordering divestiture, the lower court sought to restore competition for the public interest and rejected JELD-WEN’s argument that the lawsuit had been filed too late to permit such relief.

JELD-WEN appealed to the Fourth Circuit and the divestiture was stayed pending appeal.

Fourth Circuit affirms

The Court of Appeals for the Fourth Circuit (which sits in Richmond, Virginia) affirmed the order of divestiture. It recognised the well-established principle that divestiture is a form of ‘equitable’ remedy that must be granted where damages cannot cure the harm. In Steves, while money damages or a conduct order requiring JELD-WEN to supply Steves may have addressed the needs of Steves’s business, neither would address competition in the market as a whole nor in the longer run. This is consistent with the position taken by the United States in an amicus brief filed in the case, in which the United States argued that divestiture is the preferred remedy for what is an otherwise anti-competitive merger.

The Fourth Circuit rejected JELD-WEN’s argument that Steves unreasonably delayed bringing suit because Steves knew at the time of the CMI acquisition in 2012 that the number of suppliers would be reduced from three to two. In rejecting JELD-WEN’s laches argument, the court stated that the number of years passing between the consummation of the merger and the lawsuit is not determinative of unreasonable delay.

Instead, the court focused on when Steves could reasonably expect that the merger would cause it irreparable harm, even if that event occurred years after the merger. The court of appeals found that Steves’s clock did not start ticking until in 2014 when Masonite, JELD-WEN’s competitor, declared that it would not sell to Steves, thereby eliminating that option for door skin supply.

Steves waited until 2016 to file suit. However, the court found that Steves did not unreasonably delay filing suit because:

  • it attempted to resolve the matter directly with JELD-WEN, and the court was hesitant to punish private resolution of disputes; and
  • some of the period was consumed by Steves’s complaint to, and the subsequent investigation by, the Department of Justice as the parties’ negotiations broke down.

Implications: antitrust litigation risk remains years after mergers

This case underscores that there is no specific statute of limitations for challenges to anti-competitive acquisitions. This doctrine is well known and secured by Supreme Court precedent. The recent Federal Trade Commission challenge to Facebook’s acquisitions of WhatsApp and Instagram is testament to this principle. This lack of a statute of limitations injects some uncertainty with regard to acquisitions and perhaps to post-merger business decisions which were facilitated by the acquisition.

However, the door is not open forever, particularly for private parties. Private challengers face a laches defense. Until JELD-WEN, most cases that have addressed the timing issue have either imported the four-year statute of limitations from damages actions or have dismissed actions on laches grounds with much shorter delays because the challenging party had had no good reason for that delay.

The Fourth Circuit’s decision does not upset this precedent even if individuals disagree with its application of the law to the facts at hand. The decision’s key potential vulnerability appears to revolve around the use of a competitor’s action as a trigger for the threat of harm sufficient to seek divestiture. Why should it be Masonite’s behavior that created the environment for Steves to seek equitable relief? While perhaps Masonite’s behavior alone would likely not have been enough to trigger the threat of harm to Steves without JELD-WEN’s own actions towards its customer, JELD-WEN will undoubtedly seek US Supreme Court review on this (and other) grounds.

Do not ignore customer complaints

As noted above, the Fourth Circuit found that Steves had not unreasonably delayed its lawsuit because it had tried to find an alternative solution, largely through negotiation with JELD-WEN, its supplier. There is an important lesson there as well about underestimating complaints by customers.

Steves had complained to JELD-WEN about its conduct on multiple occasions. Those complaints were never addressed. The Fourth Circuit seems on sensible footing to proclaim that any delay in filing is warranted where the putative plaintiff attempted to resolve the matter without resort to the courts. The consequences felt by JELD-WEN are then not out of the blue. JELD-WEN knew that it had an upset customer, and it did not resolve that customer’s complaint. It should have expected litigation as the only alternative that it was offering the customer and it could have set itself up better in anticipation of that litigation. Stated differently, complaints are the early warning system for litigation – they should not be taken lightly or dismissively but should be scrutinized, analyzed and responded to in a way that reduces litigation risks.

Anticipate reactions to post-merger conduct

Changes in behavior attract attention. Antitrust practitioners often point to Aspen Skiing as the best example of a change in a longstanding practice creating antitrust liability. JELD-WEN changed its marketplace behavior in a way that the jury found was inappropriate and anti-competitive. As with addressing complaints from customers, major changes to important sales policies should not be undertaken lightly since any change will create winners and losers. Where do the losers go? Often, they head to the court for redress.

JELD-WEN underscores that there is no hard and fast timeline for action in merger cases. There is a theoretical risk of an antitrust challenge to an acquisition even well after it has been consummated. However, companies are well-counselled to anticipate that risk, be careful in what they do and say post-acquisition and prepare accordingly.