The Remedy of Divestiture: Steves and Sons, Inc. v. JELD-WEN, Inc.
For what is believed to be the first time ever, a private plaintiff successfully challenged an already consummated merger under antitrust law and won divestiture as part of its remedy. Does this pose a potential increased risk of antitrust enforcement remedies of divestiture only in private party lawsuits? Or does it also give rise to a risk of divestiture in cases brought against entities involved in public sector contracts, grants, and programs?
In Steves and Sons, Inc. v. JELD-WEN, Inc., 988 F.3d 690 (4th Cir. 2021), the Fourth Circuit upheld a district court decision that ordered, inter alia, JELD-WEN, Inc. (“JELD-WEN”) to divest a manufacturing plant that it acquired as part of its merger with a competitor, CMI.
This case involves the “doorskin” market—doorskins form the front and back of “molded doors.” Steves and Sons, Inc. (“Steves”) sells molded doors, but purchases its doorskins from other manufacturers such as JELD-WEN. In contrast, JELD-WEN is vertically aligned. That is, it produces and sells both molded doors and doorskins.
Before merging with CMI, JELD-WEN was one of three manufacturers of doorskins, along with CMI and Masonite. JELD-WEN entered into a long-term supply agreement with Steves (and other independent sellers of molded doors) under which prices would vary according to costs. The agreements were subject to automatic seven-year renewals. When it decided to merge, JELD-WEN and CMI notified the DOJ of the proposed merger. The DOJ investigated, did not take action, and in October 2012 JELD-WEN and CMI consummated the merger.
After the merger, Steves reported that it noted a quality decrease in JELD-WEN products, and that JELD-WEN increased its prices even though trial evidence showed that its costs decreased. Moreover, Masonite, the second of two manufacturers of doorskins post-merger, stopped selling to the independent molded door makers all together. Then, in 2014, JELD-WEN gave notice to Steves that it would terminate its long-term supply agreement, effective September 2021.
After unsuccessfully attempting to resolve the dispute without litigation, Steves filed a private action under the Clayton Act seeking treble damages as a party injured by the merger. A jury trial was conducted and the district court awarded Steves more than $36 million in past damages on the antitrust claim and, perhaps most important, ordered divestiture of Towanda, the doorskin manufacturing plant that JELD-WEN acquired from CMI.
On appeal, the Fourth Circuit considered eight distinct issues and, in addition to other holdings, affirmed the district court’s ruling that divestiture was the proper remedy. In doing so, the Fourth Circuit also denied JELD-WEN’s defense of laches. The court held that Steves’s four-year delay in bringing suit was not presumptively unreasonable because of the fact-intensive nature of the defense. Notably, the court stated that the delay should be measured from when Steves “discover[ed] or with reasonable diligence could have discovered the facts giving rise to its cause of action” and been “able to pursue a claim.” Under this standard, 2014 was the relevant date—that is, Steves did not learn of the threatened antitrust injury until JELD-WEN announced that it was terminating its long-term supply agreement with Steves. Further, the court held that Steves’s efforts to exhaust alternative remedies should not contribute to the establishment of laches.
As to the equitable factors leading to the divestiture remedy, the court focused on the fact that Steves was a family-owned business in operation for more than 150 years. Permanent loss of business and corresponding goodwill has long been recognized as an irreparable injury that money damages are incapable of curing. Moreover, the Clayton Act authorizes divestiture to serve “the high purpose of enforcing the antitrust laws.” Without divestiture, the threat to Steves would remain. The court noted that although the financial hardship to JELD-WEN would be significant, its hardship was outweighed by the threat of Steves non-existence in the future. Finally, the court concluded that the remedy of divestiture was appropriate in a private suit, just as it is in a government suit.
The Fourth Circuit ruled that this case was a “poster child” for the remedy of divestiture because it involved a merger that resulted in a duopoly of two companies that were vertically aligned and that had used their market power to threaten the existence of independent molded door manufacturers. True, the court said, the case was far from over given the remaining tasks of appointing a special master to locate a satisfactory buyer and possible future challenges, but, as affirmed here, divestiture was the proper remedy for Steves.
While divestiture has been pursued previously, this case is the first to show that private plaintiffs can be successful in challenging already consummated mergers and seeking divestiture as a remedy. More of these challenges may come, and courts deciding future cases may be more likely to consider divestiture as a remedy. Also noteworthy here is the defense of laches. Although JELD-WEN did not prevail, laches remains relevant as a defense to divestiture and may be addressed in the currently pending Federal Trade Commission suit against Facebook and the Department of Justice case against Google. The outcome of each case remains highly fact-dependent, however, and only time will tell whether divestiture cases (and divestiture orders) will become more common.
Government contractors and grant and program recipients need to take note of this new case on the availability of divestiture as an antitrust remedy. Government contractor antitrust activities have been a focal point for the Department of Justice. In 2019, the Antitrust Division of the Department of Justice announced the formation of a Procurement Collusion Strike Force (PCSF) “focusing on deterring, detecting, investigating and prosecuting antitrust crimes, such as bid-rigging conspiracies, which undermine competition in government procurement, grant, and program funding.” In 2020, the PCSF announced the addition of eleven new partners, raising the number of PCSF agencies and offices committed to the pursuit of antitrust crimes and related fraud to twenty-nine. The PCSF is active and currently pursuing antitrust crimes and related schemes in government procurement, grant, and program funding at Federal, state and local government levels. The PCSF webpage contains links for reporting COVID-19 procurement collusion, in addition to links for reporting other procurement collusion activities. As new laws are passed and programs are implemented to fund the new Administration’s anticipated environment, infrastructure and other programs, we can expect that the PCSF will be on the lookout for those who would take improper advantage of government programs and funding through collusive schemes and fraud-related crimes. Further, whistleblower actions are still actively being pursued under the civil False Claims Act. Antitrust actions in the Steves case, above, involved anti-competitive pricing and other activities to restrict competition by depriving competitors of necessary sources of supply. Given the importance of pricing and fair competition requirements and certifications in government contracts, such as those relating to the Truthfulness In Negotiations Act and the Independent Price Determination clauses, it is possible that not only the Government, but competitors in the government contracting space may see the remedies available in a private cause of action as another tool in their arsenal.
A key take-away from this case and the continuing focus on Antitrust in government contracting: if you are engaged in competing and supplying in the government contracting space, you need to take steps to ensure that such transactions are fair and in compliance with applicable law and regulation, and you need to prepare and preserve the documentation of your analyses and actions. At some point, if a challenge is raised, you may need to establish that you had proper bases for these actions. Documenting your decision-making and having an effective compliance program that proactively trains personnel on what is and is not acceptable conduct and includes self-audit and training may help you avoid antirust risks and the kind of situation in which divestiture is considered an appropriate option.
If you have questions about this blog, please contact the Nathaniel Gier, Susan Ebner, or your Stinson counsel.