Groundbreaking Fourth Circuit Decision Upholds Private Plaintiff’s Successful Effort to Unwind a Consummated Merger
Federal antitrust enforcers have long succeeded at unwinding consummated mergers.1 By contrast, private antitrust plaintiffs have not successfully forced companies to break up a completed acquisition. Until now.
On February 18, 2021, the U.S. Court of Appeals for the Fourth Circuit issued a historic decision in Steves and Sons, Inc. v. JELD-WEN, Inc., affirming a district court’s remedy of divestiture after a jury found a violation of Section 7 of the Clayton Act in the door manufacturing industry. To the Fourth Circuit’s knowledge (and the consensus of the antitrust bar), the Steves and Sons case is the first time a private plaintiff has secured a federal court order compelling a defendant to divest assets acquired through a past merger.
Absent further appellate relief, the Fourth Circuit’s opinion will require that the defendant unwind a 2012 acquisition of a doorskin manufacturing plant through an auction process supervised by a court-appointed special master. The decision has put parties to corporate merger and acquisition activity firmly on notice that private antitrust litigation may lead to unscrambling the eggs of a merger years after consummation, even when federal and state antitrust enforcers do not move to block the transaction as anticompetitive.
In 2012, JELD-WEN, Inc., one of the world’s largest door and window manufacturers, acquired Craftmaster International (CMI), a competing manufacturer. Before the combination, JELD-WEN and CMI each manufactured both interior molded doors and doorskins, which are veneers that are glued to the front and back of a frame to make a molded door. CMI produced doorskins at its plants in Towanda, Pennsylvania. Before the merger was consummated, it was investigated, but not challenged, by the Antitrust Division of the Department of Justice (DOJ). After the transaction closed, only two doorskin manufacturers remained in the U.S. market (JELD-WEN and Masonite). A JELD-WEN investor later noted that this duopoly “over time will improve our pricing power.”
Based on a long-term supply contract, JELD-WEN sold doorskins to Steves and Sons (Steves), an independent door manufacturer owned and operated by the same family for 150 years. In 2014, Masonite announced it would stop selling doorskins to independent door manufacturers like Steves. Shortly thereafter, JELD-WEN exercised its right to terminate the supply contract with Steves, effective in September 2021. As JELD-WEN’s prices increased and quality issues arose, Steves asked the DOJ to reexamine JELD-WEN’s merger with CMI. In 2016, the DOJ closed its investigation. Unable to secure any enforcement action, Steves filed a complaint in the U.S. District Court for the Eastern District of Virginia, alleging, among other things, that the JELD-WEN/CMI acquisition violated Section 7 of the Clayton Act.2 Steves asked for equitable relief to unravel the CMI acquisition and to divest JELD-WEN’s doorskin plant in Towanda.
At the conclusion of a 2018 trial, the jury found that JELD-WEN had violated Section 7 and awarded damages that were trebled to approximately $180 million. The trial court then held additional hearings on the request for equitable relief and the DOJ filed a statement of interest regarding the proposed divestiture remedy. As a result, the trial court granted the equitable remedy of the sale of the CMI doorskin manufacturing plant in Towanda through a public auction, pending any JELD-WEN appeal, because it was the “most effective way of restoring the substantially lessened competition brought about by the merger” and in the public interest to create a third doorskin supplier.
On appeal, the Fourth Circuit vacated much of the antitrust damages award, but rejected JELD-WEN’s numerous arguments related to antitrust injury, “antitrust impact,” evidentiary rulings, and the propriety of divestiture as a remedy, and held that the district court did not abuse its discretion by ordering divestiture of the Towanda plant.3 The appeals court noted that private lawsuits under the Clayton Act “seeking divestiture are rare and, to our knowledge, no court had ever ordered divestiture in a private suit before this case,” but that divestitures in private Clayton Act actions are based on well-established U.S. Supreme Court precedent.4 Ultimately, the court concluded that the Steves case “is a poster child for divestiture” given that the 2012 CMI merger had created a duopoly and the remaining suppliers “used their market power to threaten [the] survival” of independent door manufacturers like Steves.
In its balancing of equity factors, the court noted that the loss of a 150-year-old family business like Steves could not be fully compensated by monetary damages or less drastic conduct remedies, and concluded that divestiture would promote competition, as Congress had made a policy judgment that divestiture was “the remedy best suited to redress the ills of an anticompetitive merger.” The court found no error in the district court’s view that JELD-WEN would be able to “weather” the significant cost of divestiture and resulting reduction in its doorskin output, and that the potential harm to Steves of extinction outweighed any harm to JELD-WEN.
While JELD-WEN has vowed to appeal and criticized the Fourth Circuit’s decision as “unprecedented and fundamentally incorrect as a matter of law,”5 the DOJ filed an amicus brief in support of Steves urging the appeals court to reject two of JELD-WEN’s key arguments, and hold that the doctrine of laches should not be uniformly applied to prevent private lawsuits seeking divestiture of a consummated merger, even when the merger occurred years before the lawsuit was initiated. The DOJ further argued that no inference should be drawn from its closing of any merger investigation.6
What does the Fourth Circuit’s decision in JELD-WEN mean for businesses today? Most importantly, it means that, now more than ever, federal courts are willing to entertain unwinding a consummated merger in the name of protecting competition, regardless of whether the plaintiff is a private party or government enforcer, even a decade after the merger was completed. Indeed, the DOJ’s Merger Remedies Manual recently explained that, “[i]f the acquired assets are integrated, crafting an effective divestiture to eliminate the anticompetitive effects may be difficult, but nonetheless necessary to undo the illegal effects of the merger.”7 Notably, the DOJ’s recent antitrust complaint against Google asks for “structural relief as needed,”8 while the Federal Trade Commission’s complaint against Facebook seeks “divestiture of assets, divestiture or reconstruction of businesses (including, but not limited to, Instagram and/or WhatsApp)” to restore competition.9 Based on recent trends, it appears that antitrust litigation will be on the rise in the coming years as private plaintiffs join government enforcers to employ antitrust principles to revisit and reconsider prior corporate combinations.
The antitrust laws are nuanced and complex, and their application to particular business situations is a fact-specific inquiry. Businesses concerned about how recent developments will impact their antitrust risks are strongly advised to consult with legal counsel.
See, e.g., Polypore Int’l, Inc. v Fed. Trade Comm’n, 686 F.3d 1208 (11th Cir. 2012); United States v. Bazaarvoice, Inc., No. 13-cv-00133-WHO, 2014 WL 203966 (N.D. Cal. Jan. 8, 2014).
The litigation also involved a breach-of-contract claim and a trade secrets counterclaim.
Notably, the appeals court ruled that the district court had properly excluded evidence that the DOJ had twice investigated the merger without challenging it, reasoning that the DOJ’s “decision not to pursue the matter isn’t probative as to the merger’s legality because many factors may motivate such a decision, including the Department’s limited resources.”
See, e.g., California v. Am. Stores Co., 495 U.S. 271 (1990).
JELD-WEN press release, Feb. 18, 2021.
Brief for the United States of America as Amicus Curiae in Support of Appellee Steves and Sons, Inc., No. 19-1397, Dkt. 41-1 (4th Cir. Aug. 23, 2019).
Antitrust Div., U.S. Dep’t of Justice, Merger Remedies Manual, at 19 (Sept. 2020).
Complaint at ¶ 194(b), United States v. Google LLC, No. 1:20-cv-03010 (D.D.C. Oct. 20, 2020).
Complaint at 51, FTC v. Facebook, Inc., No. 1:20-cv-03590-JEB (D.D.C. Jan. 13, 2021).