November 13, 2014
New Guidance on Gun Jumping
DOJ Antitrust Division Settlement Clarifies the Risks of Pre-Closing
Coordination, while Simultaneously Expanding the Reach of the Division’s
By David L. Meyer
Just five weeks after the Antitrust Division of the U.S. Department of Justice announced that Flakeboard America
had abandoned its plan to acquire a medium-density fiberboard (MDF) mill and two particleboard mills from
SierraPine in the face of the Division’s competitive concerns, the Division has settled separate gun-jumping and
Section 1 claims against the same parties relating to their conduct during the course of the Division’s review of the
This enforcement action is a reminder that parties to mergers and acquisitions – whether or not reportable under
the Hart-Scott-Rodino Act (“HSR Act”) regime – need to exercise care both in structuring the terms of the
transaction agreement that affect conduct prior to deal closing, and in their interactions with one another before
the deal is closed or abandoned. The Division’s settlement, however, provides some useful guidance on when
deal terms and party interactions will (and will not) raise red flags, while simultaneously raising the specter of
more frequent demands for disgorgement when lines are crossed.
KEY TAKE AWAYS
• When parties are competitors, agreements to implement desired plant closings and other business
restructuring steps before the underlying transaction is closed run the risk of being treated as per se
unlawful under Section 1 of the Sherman Act.
• While a deal is undergoing antitrust review under the HSR Act, coordination around competitive actions
runs a high risk of being treated as unlawful gun jumping; the DOJ’s consent decree here, however,
makes clear that many customary covenants regarding pre-closing activities will not run that risk.
• The Division’s demand for the disgorgement of over a million dollars in profits earned by the buyer as a
result of the parties’ alleged agreement to shift customers to the buyer prior to closing implies that the
Division may seek disgorgement more often – perhaps whenever injunctive relief is unlikely to be
effective in restoring the competitive status quo ante, and not solely when private damages claims are
1 See Division Press Release (Nov. 7, 2014), available at http://www.justice.gov/atr/public/press_releases/2014/309786.pdf; see also
Complaint, U.S. v. Flakeboard America Ltd., Case No. 3:14-cv-4949 (N.D. Cal filed Nov.7, 2014), available at
http://www.justice.gov/atr/cases/f309700/309788.pdf, and Proposed Final Judgment (N.D. Cal. filed Nov. 7, 2014), available at
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In January 2014, SierraPine reached an agreement to sell one MDF mill and two particleboard mills to
Flakeboard, which operated competing MDF and particleboard mills. The transaction required notification under
the HSR Act. Flakeboard planned to close one of SierraPine’s two particleboard mills – located in Springfield,
Oregon – but wanted the mill’s closing to occur before it took ownership of the SierraPine assets. The transaction
agreement therefore specified that SierraPine would close the mill before closing but after the expiration of the
HSR waiting period.
That plan changed within days of the deal’s announcement, however, when SierraPine determined that a labor
issue at the Springfield mill would require either keeping the mill open or announcing its closure before the HSR
waiting period would expire. SierraPine consulted Flakeboard, and the parties (allegedly) reached an
understanding that (a) SierraPine would announce the closure of the mill promptly (during the HSR waiting period)
and proceed to close the mill within weeks of that announcement; and (b) even before that announcement the
parties would begin to cooperate in securing a transition of Springfield mill customers to Flakeboard’s competing
particleboard mill in Albany, Oregon.
Meanwhile, the Division’s antitrust review of the overall transaction proceeded apace. An HSR notification was
filed on January 22, and the Division issued a Second Request seeking additional information (likely focused on
issues raised by the parties’ competing MDF operations). The parties complied with the Second Request on July
28, and the HSR waiting period accordingly expired on August 27. The Division continued to have concerns
about the impact of the deal for the production of MDF sold to West Coast customers, and the parties ended up
abandoning their deal on September 30, 2014.2
The deal’s death came more than six months after SierraPine
had completed the shut-down of the Springfield mill, and after SierraPine and Flakeboard had already undertaken
to transition that mill’s customers to Flakeboard. The Division’s Section 1 and gun-jumping complaint followed
five weeks after the deal had been abandoned.
THE DIVISION’S COMPLAINT AND CONSENT DECREE
The Division viewed SierraPine and Flakeboard’s conduct as illegal for two independent reasons. First, it violated
Section 1 of the Sherman Act, because SierraPine and Flakeboard remained competitors until the transaction
closed, and their agreement to shut down SierraPine’s mill and move its customers to Flakeboard therefore was
viewed as a per se unlawful output reduction and customer allocation. The Division regarded these steps as not
being reasonably necessary to carry out their asset purchase agreement or any other lawful collaboration, since
they were undertaken “without any assurance that their transaction would be consummated.”3
Second, the conduct was illegal gun-jumping under the HSR Act (Clayton Act, Section 7A) because, before the
waiting period expired, Flakeboard exercised operational control of SierraPine’s business when it coordinated with
SierraPine on the closing of the Springfield mill and the move of customers to Flakeboard.
The parties resolved the Division’s claims via a consent decree that requires each of them to pay $1.9 million
2 See Division Press Release (Oct. 1, 2014), available at http://www.justice.gov/atr/public/press_releases/2014/309005.pdf.
3 Competitive Impact Statement (N.D. Cal filed Nov. 7, 2014) (“CIS”), p. 7, http://www.justice.gov/atr/cases/f309700/309790.pdf.
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each in HSR penalties; imposes behavioral injunctions designed to prohibit inappropriate coordination in future
transactions, whether or not HSR-reportable; and requires Flakeboard to disgorge $1.15 million in profits it earned
during the six months leading up to the settlement from the customers that were illegally shifted to Flakeboard’s
The Division did not require that the SierraPine mill be reopened – the Division viewed doing so as
impractical and the consent decree also did nothing to prevent Flakeboard from retaining (and continuing to
earn profits from) all of its newly-obtained customers.
Flakeboard/SierraPine is yet another in a long line of reminders that the antitrust agencies will be on the lookout
for inappropriate coordination that takes place during the HSR merger review process. The Division’s action in
this case is particularly noteworthy for at least three reasons:
Section 1 Risks. First, the action underscores that when the buyer and seller are competitors, the Division will
continue to view the parties as capable of engaging in per se unlawful horizontal agreements, notwithstanding the
pendency of the transaction. This risk can arise in any deal, including when no HSR notification is required. Just
as parties to a deal cannot fix prices with one another before the deal closes, so they may not agree to reduce
capacity or output, or to allocate customers, at least unless and until the transaction has progressed to the point
where those steps are part and parcel of carrying out the parties’ underlying transaction.
Two factors likely strengthened the Division’s resolve to view the mill closing and customer shift as insufficiently
tethered to the underlying asset sale to avoid per se condemnation: (a) the fact that it took place so many months
before the deal could have closed, given the pendency of the Division’s Second Request investigation; and (b) the
uncertainty whether it would close at all, given the deal’s substantive antitrust concerns, as driven home by the
deal’s ultimate abandonment.
On the other hand, the Division’s analysis does not preclude parties from undertaking needed restructuring or
rationalization of their business during the pendency of merger review. Had SierraPine made a purely unilateral
decision to close its Springfield mill – exercising flexibility it had negotiated up-front in the transaction agreement –
that step should not have raised Section 1 concerns. Likewise, if parties agree as part of their transaction that
certain steps will take place, there should normally be flexibility to have such steps taken by one party prior to
closing, as evidenced by the Division’s apparent lack of concern about the transaction agreement’s stipulation
that SierraPine would close its mill in the interval between HSR expiration and the deal’s consummation.
the Division’s ability to assess whether the planned mill closure would be anticompetitive as part of its review of
the overall transaction surely influenced the Division’s perspective,6 pre-closing steps that appear disconnected
from an overall deal will face high risks even if the Division is otherwise informed of them. The degree of risk will
4 The HSR penalties were a compromise of the statutory maximum penalty of $3.568 million for the 223 days (at $16,000/day) between the
time the parties began to coordinate regarding the closure of the Springfield mill and the expiration of the HSR waiting period. See CIS, pp.
5 The Division’s CIS stated explicitly that “an agreement to close a production facility before a transaction is consummated may be permissible
under certain circumstances.” CIS, p. 12.
6 As one illustration, the Division’s Consent Decree prohibits Flakeboard and SierraPine from entering into agreements involving facility
closings prior to consummation absent the Division’s prior approval. See Proposed Final Judgment, Para VII.A.4; CIS, p. 12.
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depend entirely on the facts, especially the scope of the underlying agreement and the relationship between the
deal rationale and the nature of the agreed pre-closing conduct.
HSR Gun-Jumping Risks. Second, Flakeboard/SierraPine provides some further clarity as to the lines the
Division will draw in assessing whether pre-closing coordination rises to the level of impermissible gun-jumping.
Section 7A, of course, applies whether or not the parties are competitors, and precludes the buyer from exercising
beneficial ownership or control of the seller’s business prior to the expiration of the statutory waiting period. The
Division’s consent decree carves out for the parties several safe harbors for customary deal terms and due
diligence processes, and those same categories of conduct should generally pose little risk for other transaction
parties. Among the categories of permissible conduct:7
• Due diligence disclosures “reasonably related to a party’s understanding of future earnings and
prospects” undertaken pursuant to an appropriate non-disclosure agreement that, inter alia, prohibits
access to competitively sensitive information by employees who are “directly responsible for the
marketing, pricing, or sales” of competing products;
• Covenants requiring the seller’s business to be operated in the ordinary course of business;
• Covenants requiring the seller to avoid conduct that would cause a material adverse change in the
transaction value; and
• Entry into buyer-seller agreements that would be lawful in the absence of the planned acquisition.
Pre-closing coordination of competitive conduct, by contrast, will almost always fall on the other side of the legal
line. In this light, the Division’s conclusion that Flakeboard jumped the gun when it insisted that the Springfield
mill be shut down prior to the expiration of the waiting period, and its demand for cooperation in shifting the mill’s
customers to Flakeboard’s Albany mill, should not be seen as controversial. Decisions about capacity reductions,
output levels, and marketing activities are very likely to be regarded as “ordinary course” conduct even when they
might be material to the seller’s business and the value of the assets being acquired.9
Disgorgement. Finally, the Division’s settlement here marks an expansion of the circumstances under which the
Division will demand disgorgement. The Division pioneered use of that remedial tool in the 2006 Keyspan case.
There, the Division emphasized that it would not routinely seek disgorgement, but would do so when other
remedies were ineffective. That was the case in Keyspan because the unlawful conduct had ceased and the
filed-rate doctrine likely would have precluded injured consumers from recovering damages.10 Only the first of
7 Proposed Final Judgment, § VIII.
8 Id., § VIII(C). This carve-out does not represent an exhaustive list of the types of information sharing that can be undertaken without
meaningful gun-jumping risk. For example, pre-closing activities related to the planning of post-closing integration and merger
implementation are generally permissible so long as they are structured appropriately.
9 As the Division’s enforcement action in Smithfield shows, the buyer’s right of approval over large, multi-year contracts can trigger gunjumping
concerns because, even though material, they are entered into in the ordinary course. See Morrison & Foerster client alert, “DOJ
Alleges HSR Gun-Jumping When Seller Submits Multi-Year Procurement Contracts for Buyer’s Approval” by David Meyer (Jan. 21, 2010),
available at http://www.mofo.com/resources/publications/2010/01/doj-alleges-hsr-gun_jumping-when-seller-submits-__.
10 See Plaintiff United States' Response to Public Comments, U.S. v. Keyspan Corp., Civ. Action No: 1:10-cv-01415-WHP (S.D.N.Y. filed June
11, 2010), p. 15 (“[A]bsent disgorgement, KeySpan likely would retain all the benefits of its anticompetitive conduct because the filed rate
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these factors was arguably present in Flakeboard/SierraPine; the plant was closed and the customers shifted, and
the Division did not view a restoration of the status quo ante via injunctive relief as practical. But the Division did
not make any public statement suggesting that private damages relief would be unavailable here, as the Division
perceived it to be in Keyspan.
11 It is possible that the Division reached a somewhat different conclusion – that
private claims would be unlikely given that the closing of the Springfield particleboard plant did not actually harm
competition. The Division did not view the underlying transaction as anticompetitive with respect to particleboard,
and likely saw continued competition in that market (despite the illegal closing and customer shift) as disciplining
Flakebaord’s conduct vis-à-vis its newly acquired customers.12 Unfortunately, though, if the only predicate for
disgorgement is the absence of ongoing conduct to enjoin – without any special circumstances precluding private
damages claims – we might expect to see the Division seeking this remedy with increasing frequency.
David L. Meyer
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Because of the generality of this update, the information provided herein may not be applicable in all situations
and should not be acted upon without specific legal advice based on particular situations. Prior results do not
guarantee a similar outcome.
doctrine creates significant obstacles to the collection of damages.”), available at http://www.justice.gov/atr/cases/f259700/259704.pdf. In
fact, the Division’s view turned out to be correct. Simon v. Keyspan Corp., 694 F.3d 196 (2d Cir. 2012) (holding private damages claims
barred by filed rate doctrine).
11 See CIS, pp. 10-11.
12 The Division explained that it had expressed concerns about the impact of the deal in the MDF market, not the particleboard market. See
Division Press Release (Oct. 1, 2014), available at http://www.justice.gov/atr/public/press_releases/2014/309005.pdf.
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