Reed Smith Client Alerts

Increasingly, the antitrust agencies have been challenging unreported transactions post-closing under the Clayton Act, seeking an unwinding of the transactions or at least divestitures of some of the assets purchased. Until recently, however, the threat that a private plaintiff would obtain a court order requiring an unwinding or divestiture once the deal has closed has been more theoretical than real. The threat may now be more real than theoretical. In what is the first decision of its kind, a federal district court has ordered a defendant in a private action brought, in part, under Clayton Act Section 16 to divest assets approximately six years after they were purchased. In that case, the defendant, a door manufacturer and door component supplier, had acquired a competitor in 2012 in a transaction that was reviewed without a challenge by the Department of Justice (DOJ) Antitrust Division. Yet on October 5, the District Court for the Eastern District of Virginia ordered the defendant, in a case brought by a competitor/customer that had previously been awarded $175 million in damages, to sell key door component manufacturing assets that the defendant had acquired as part of the 2012 transaction. If allowed to stand, the decision could mean that, going forward, acquirers can be less confident about the finality of their acquisitions post-closure.

Authors: Edward B. Schwartz Karl E. Herrmann

In February of this year, following a trial in Steves and Sons, Inc. v. JELD-WEN, Inc., a jury awarded plaintiff Steves and Sons, Inc. (Steves) over $12 million in past damages and over $46 million in damages in future lost profits (pre-trebling) for injuries arising from the 2012 acquisition of Craftmaster International (CMI) by JELD-WEN. Steves manufactures and sells interior molded doors, and it purchases interior molded doorskins as a necessary component to manufacture its doors. As of 2012, CMI and JELD-WEN were two of the three U.S. manufacturers from which Steves and other door manufacturers could purchase interior molded doorskins. All three of the doorskin manufacturers were vertically integrated, manufacturing and selling interior molded doors in addition to the doorskins.

In anticipation of its acquisition of CMI, JELD-WEN entered into long-term supply agreements in early 2012 with a number of interior molded doorskin customers, including Steves. The Steves agreement included provisions: (1) limiting the prices that JELD-WEN could charge based upon a contractually defined formula relating to key input costs, and (2) providing for lengthy termination notice periods (seven years for JELD-WEN to terminate). Shortly after, the DOJ closed an investigation of the transaction in September 2012, and the deal closed in October 2012.

Steves filed suit against JELD-WEN in 2016, alleging that within a few years of the close of the deal, JELD-WEN began to wield its increased market power arising from the merger to harm competition, including by breaching the parties’ 2012 contract. For example, Steves alleged that JELD-WEN increased the prices it charged Steves – in violation of the contractually defined formula – even though key input costs that determined price in the formula were actually declining. Steves also alleged that JELD-WEN began to add a “capital” charge on sales to Steves, despite not being allowed to do so by contract. Because JELD-WEN was its only viable supplier, Steves continued to do business with JELD-WEN. Finally, in July 2014, JELD-WEN gave notice to Steves of its intention to terminate the supply agreement in 2021.