In what it has coined “a poster child for divestiture,” the Fourth Circuit affirmed a trial court’s decision to unwind a merger after a private plaintiff, which was both a customer and competitor of the merged firm, sued four years post-consummation and after federal enforcers had twice cleared the deal. The ruling sets groundbreaking new precedent for competitors and customers to break up acquisitions years after completion, and serves as a cautionary tale to merging parties that agency merger clearance does not immunize anticompetitive deals from private antitrust actions that, if successful, will expose firms to hefty treble damages and once-rare structural remedies like divestiture.
The appellate decision follows a jury trial in 2018 finding that JELD-WEN, a vertically-integrated molded door and doorskin maker, violated Section 7 of the Clayton Act, which prohibits transactions that may substantially lessen competition, by acquiring a rival, Craftmaster International (CMI), in 2012. Steves and Sons Inc., an independent molded doormaker that purchases doorskins from, and then uses them to make doors that compete with, JELD-WEN, sued in 2016 for treble damages and to unwind the deal. The district court ordered divestiture of JELD-WEN’s Towanda, Pennsylvania, manufacturing plant, representing the first time a private plaintiff has broken up a merger under the Clayton Act. JELD-WEN appealed to the U.S. Court of Appeals for the Fourth Circuit, which upheld the divestiture order but determined that the award of future lost profits to Steves was premature.
In rejecting most of JELD-WEN’s broad challenges on appeal, the Fourth Circuit made the following key holdings regarding Steves’s antitrust claims:
- Divestiture applies with “equal force” in “both government and private suits” even absent a potential buyer: Citing the seminal Supreme Court case, Brown Shoe Co. v. United States, the Fourth Circuit held that a two-step divestiture process—in which an auction for the sale of the assets is deferred until all appeals have concluded—applies with “equal force” in both private and government actions. If divestiture is “needed to ‘restore competition,’ i.e., to ‘protect the public interest,’” the Panel held, and a “court can properly assess the public interest in a government suit without having found a buyer, it can also do so in a private suit.” Indeed, the court said, the threat of an appeal may deter potential buyers from placing bids earlier and a delay may later attract more prospects and serve the public interest.
- Threatened antitrust injury necessary for divestiture may not ripen until years after a merger: Unlike past damages claims under breach of contract, for example, which do not support divestitures, whether a private litigant waited too long to seek merger relief depends on when it had “notice of the threatened injury on which [a] divestiture claim is based”—which may arise years after the merger is completed. Cases involving contractual and antitrust claims, however, can present unique challenges in determining whether the requisite antitrust injury exists, and courts will need to consider whether the plaintiff would have suffered an identical loss absent the merger. Steves, for example, showed that the merger had foreclosed access to other doorskin suppliers and in fact incentivized the only remaining vertically-integrated alternative, Masonite, to stop selling to independent sellers like Steves altogether. But even if Steves had known about potential problems earlier, it was not until 2014—when Steves learned it might lose access to doorskins in 2021 under the JELD-WEN contract—that it had notice of a threat to its future viability. The court considered whether Steves was diligent in exhausting alternative remedies before resorting to the judicial process to assess the reasonableness of any further delay. The DOJ, which filed an amicus in the appellate proceedings, argued that “laches [(an unreasonable delay)] does not categorically bar divestiture in a private suit filed after a merger is consummated, particularly where (as here) the plaintiff cooperated with the Department’s review before suing.” Any delay by a private plaintiff in challenging a merger is measured from the time it discovers the facts giving rise to the injury, not from the date that the acquisition was completed.
- Government inaction to block a merger is not a sword against divestiture in private actions. The Fourth Circuit agreed with the DOJ that the agency’s decision not to challenge the JELD-WEN merger is not proof that the deal was not anticompetitive. Thus, no presumption of legality exists for mergers that escape agency challenge, and merging parties should have no expectation of immunity against private enforcement actions on this basis.
- Successful “weakened-competitor” defenses remain “rare.” Known as “the Hail-Mary pass of presumptively doomed mergers,” the weakened-competitor defense allows merging parties to rebut the presumption of an illegal merger if they “can prove that the acquired firm’s current market shares overstate its future competitive significance due to its weak financial condition.” But the defense has typically been unsuccessful and never been asserted in a jury trial before the Steves case. The Panel agreed that the defense failed for two reasons. First, other serious buyers besides JELD-WEN and Masonite were interested in buying CMI pre-merger, which would have “preserved competition” by keeping a third competitor in the market. And second, though declining “precipitously” pre-merger, CMI’s doorskin business had remained profitable until the merger—showing “convincing prospects for improvement” and that the company did not face inevitable doom had JELD-WEN not acquired it.
The Steves case sets a strong precedent for court-ordered divestitures in private enforcement actions challenging mergers. With this decision, and in an era where many are calling for increased antitrust enforcement even though federal and state enforcers' budgets remain limited, competitors and customers of merging parties may feel emboldened to seek significant structural relief previously considered rare. While such private suits require time and expense and could compromise business relationships, merging parties should be aware that consummated mergers can face further scrutiny by private challengers should the deal—years later—be found to harm competition and consumers. This new risk can be mitigated in various ways, including careful consideration of post-closing conduct that could appear blatantly anticompetitive.