For the first time, US courts have ordered a divestiture in response to a private claim challenging a consummated merger. The US Court of Appeals for the Fourth Circuit recently upheld a trial court’s order requiring a vertically integrated door maker to unwind its 2012 acquisition of an upstream doorskins competitor and divest the acquired facility. Notwithstanding the DOJ had cleared the deal twice, the appeals court upheld the jury verdict requiring the defendant to unwind the prior acquisition. An interesting fact is that the DOJ intervened in the appeal as part of its active amicus program to support the rights of plaintiffs to bring private merger challenges.

The ruling threatens new post-closing risks for consummated deals, reaffirms that prior agency review is not a safe harbor, and poses new questions on deal risks posed by potential complainants. These issues will particularly come into the spotlight with the focus on past acquisitions in digital markets.

Background

How we got here

The challenged transaction saw JELD-WEN, Inc. acquire a competing door manufacturer, Craftmaster. Steves and Sons – a customer and downstream competitor of JELD-WEN – filed suit seeking to unwind the acquisition, four years after the deal had closed. Steves argued that the acquisition combined two of the only three manufacturers operating in a concentrated US market for doorskins (an upstream input into manufactured molded doors). Independent downstream door manufacturers relied on these manufacturer suppliers for doorskins as key inputs and also competed against the two remaining suppliers downstream.

Steves presented evidence at a rare jury trial that the transaction removed the only independent alternative supplier for doorskins, while Steves was tied-up in a long-term supply contract with JELD-WEN. Steves alleged that the transaction led to anti-competitive foreclosure because JELD-WEN was able to raise prices and reduce the quality of supply for several years despite internal documents showing JELD-WEN lowered their costs.

The trial court jury found for Steves on all counts, including those claims based on §7 of the Clayton Act (the same basis for the DOJ’s review and subsequent non-action): (i) requiring JELD-WEN to divest the acquired facility; (ii) granting Steves $36.4 million in treble damages; and (iii) awarding Steves $139.4 million in future lost profits should the divestiture not occur.

Appeal

On appeal, JELD-WEN tried to argue that the case brought by the competitor was untimely as the merger was consummated four years earlier. The Fourth Circuit panel rejected arguments that Steves waited too long to bring their claims and affirmed the lower court’s order to unwind the deal:

• On timing, the panel found that Steves was not unreasonably delayed in bringing their merger challenge. According to the panel, the measurement for delay is not from the date of the acquisition but instead when a plaintiff discovers the facts giving rise to the cause of action. While the consummated merger occurred in 2012, Steves’ only became aware in 2014 that JELD-WEN intended to cease supplying door skins to Steves. The panel found that this loss of supply and threat to Steves’ survival in the door manufacturing business is what supported the divestiture claim it brought in 2016.
• On the remedy to unwind, the panel was skeptical of divestiture orders, noting the lost-profits award could be an adequate remedy and expressing concerns about implementation. In their ruling, however, the Fourth Circuit panel nevertheless went so far as to call the transaction “the poster child for divestiture” pointing to what they described as a record of evidence that the market was reduced to a vertically integrated duopoly with the remaining firms threatening the survival of independent door suppliers. Notably, however, the implementation of the sale and the potential for finding a suitable buyer remains uncertain (notwithstanding Steve’s offer to purchase the assets).

The panel did deny the trial jury’s award of future lost profits ($139.4 million), noting that damages for antitrust injuries must be claimed for actual and “not merely threatened injury”. Because Steves has not suffered the injury yet, the panel found that the claim wasn’t ripe for adjudication and was dismissed without prejudice.

Takeaways

This case represents a novel development for private merger control litigation. There are some important points that firms should consider as a result of this ruling:

• Post-transaction enforcement is growing: This case stresses the growing risk of post-closing enforcement action by government agencies and private litigants. From this precedent, courts may be more willing to “unscramble the eggs” in consummated deals – even years after closing. The court’s focus on the competitive harm as a basis for timely enforcement creates lingering uncertainty for parties to consummated deals. This decision may support challenges brought either by the agencies under their residual jurisdiction or by private plaintiffs with standing to sue. This takes on particular importance in the context of digital markets, for example, where the FTC, DOJ, and state attorneys general have laid the groundwork to seek to unwind high profile transactions in the sector.
• The decision may incentivize more private challenges: How emboldened potential private plaintiffs will be by the Fourth Circuit’s decision will need to be watched in the coming years. The plaintiff here was in the position of being both a customer and an excluded competitor. Given restrictions on standing, this scenario would be the most likely situation in which such challenges arise.
• Prior agency review is not a safe harbor: In responding to JELD-WEN’s arguments that the DOJ had reviewed the deal twice and brought no enforcement proceedings in either instance, the DOJ was quick to reject assertions that lack of enforcement meant the agency approved of the deal and note the value of post-closing evidence in supporting the challenge. The Fourth Circuit’s ruling affirms that agency inaction does not grant firms a defense against private litigants. Similar arguments may be tested even for an agencies’ own actions to later unwind deals, as in the current suit by the FTC and several state attorneys general against Facebook.

What’s next

JELD-WEN has vowed it will exhaust all legal remedies to contest the divestiture order, which could see this issue being escalated to the Supreme Court in the coming months. Any resulting ruling could have significant implications for other challenges to consummated deals and give further clarity on standing to seek a divestiture. In the meantime, the risks of private merger enforcement will need to be considered in future deals.