Fourth Circuit Affirms Lower Court’s First Of Its Kind Divesture Order In Private Challenge To Merger
On February 18, 2021, the Fourth Circuit affirmed in relevant part a district court’s divestiture order in a Clayton Act challenge to a consummated merger by a private party. Steves & Sons, Inc. v. JELD-WEN, Inc., No. 19-1397, 2021 WL 630521 (4th Cir. Feb. 18, 2021). The divestiture order appears to be the first time that an appellate court has affirmed a post-consummation divestiture order of an acquired company in response to a Clayton Act challenge to a merger or acquisition by a private party.
Defendant JELD-WEN, Inc., is a manufacturer of both molded doors and “doorskins,” which are an essential component of molded doors. Plaintiff Steves & Sons, Inc., is a manufacturer of molded doors and competes with defendant in that business. Before the challenged merger, plaintiff purchased doorskins from defendant, which was one of only three doorskin manufacturers in the United States. In 2012, defendant acquired one of the three, reducing the number of doorskin manufacturers in the United States to only two. According to plaintiff, this resulted in a decline in quality of doorskins as well as an increase in prices to customers like plaintiff.
Although defendant continued to sell doorskins to plaintiff after the acquisition based on a long-term contract entered before the acquisition, the relationship deteriorated and in 2016, plaintiff filed lawsuit asserting antitrust and contract claims, seeking both damages and equitable relief in the form of divestiture. Plaintiff alleged that the merger violated the antitrust laws because “the merger gave [defendant] too much power in the doorskin market, which emboldened it to charge higher prices, offer inferior products and customer service, and eventually try to ‘kill off’ [plaintiff] by refusing to sell it doorskins.” 2021 WL 630521, at *5. After a trial, the jury ruled in plaintiff’s favor on all claims, including that defendant violated Section 7 of the Clayton Act because the merger’s effect was to “substantially . . . lessen competition,” and found that defendant was entitled to (i) treble damages and (ii) an award of future lost profits. After five days of hearings on the request for equitable relief, the district court granted plaintiff’s request for a divestiture and ordered the sale of the affected manufacturing facility and related assets. Defendant appealed.
On appeal, the Fourth Circuit, in an opinion by Judge Albert Diaz, affirmed the divestiture order. First, the court rejected defendant’s laches defense, finding that plaintiff did not have notice of an injury requiring divestiture until 2014 and plaintiff had acted reasonably in attempting to resolve the dispute through negotiation and mediation before filing a lawsuit. Second, the Fourth Circuit found that the district court did not abuse its discretion in concluding that the four traditional factors governing equitable relief – irreparable injury; inadequate remedy at law; balance of the equities; and the public interest – supported the divestiture order. As to irreparable injury and inadequate remedy at law, plaintiff demonstrated that damages could not repair the “threatened collapse” of its business as a result of defendant’s violation of the Clayton Act. The Fourth Circuit also found that the district court had not abused its discretion in concluding after an extensive analysis that the balance of hardships favored the plaintiff. With regard to the public interest, the Fourth Circuit found that the district court’s conclusion for divestiture would restore competition and would therefore be in the public interest. The panel noted that the district court had ordered a two-step process, ordering that an auction be conducted by a special master after the divestiture order was affirmed on appeal – the process typically used in merger litigation brought by the FTC – and rejected defendant’s argument that this process was not appropriate in private litigation. Judge Diaz rejected the idea that a conduct remedy was more appropriate, finding that the case was “a poster child for divestiture,” as the merger had resulted in a “duopoly” with evidence that each of the remaining doorskin suppliers—which were both vertically integrated—had used their market power to threaten the survival of their competitors in the molded door business.
In light of the affirmance of the divestiture award, the Fourth Circuit reversed the award to plaintiff of lost future profits. Judge Diaz explained that at this point plaintiff had not shown an actual injury needed to obtain damages and, in any event, such damages would result only if the divestiture did not occur.
The appropriateness of ordering divestiture well after a merger or acquisition has been consummated is a timely one in light of some of the recently-filed, high-profile Section Two cases in the technology sector that are based in part on long-consummated, allegedly anticompetitive acquisitions of actual or incipient competitors. As the district court and the Fourth Circuit’s detailed analyses illustrate, the appropriateness of divestiture of a consummated transaction will still be governed by the traditional four-factor test for equitable relief and that analysis will be intensely fact-bound. Notably, Judge Rushing filed a concurring opinion, which joined the panel opinion “in full” and agreed that plaintiff’s delay in bringing the suit was reasonable under the facts, but emphasized that antitrust injury from an anticompetitive merger is “often foreseeable” and that “the passage of time exacerbates” the complexities associated with divesture after combination, “not only for the combined entity but also for nonparties who will be affected.” These complexities would likely be even greater when the assets to be divided are integrated into unitary product offerings or networks, as opposed to discrete assets such as the manufacturing plant at issue here.