United States: "Gun-Jumping" Companies Must Pay $3.8 Million In Fines And Disgorge $1.15 Million In Illegally Obtained Profits

Recently the Antitrust Division of the U.S. Department of Justice (DOJ) reached a $5 million settlement with Flakeboard America Limited, its parents and SierraPine to settle allegations that the parties engaged in "gun-jumping" activities while their transaction was pending review.  

Gun jumping is analyzed both under the Hart-Scott-Rodino (HSR) Act and Section 1 of the Sherman Act.  The HSR Act generally requires parties to file notifications, and observe mandatory waiting periods, prior to consummating transactions that meet the jurisdictional thresholds.  Gun jumping can occur when the parties begin to coordinate prior to the expiration of the HSR Act waiting period.  HSR Act violations can occur even if the parties to the transaction do not compete in the same markets.  In transactions involving competitors, Section 1 of the Sherman Act imposes a separate basis for liability.  The antitrust agencies view parties to a transaction as independent competitors until their transaction is actually completed.  Coordination of competitive activities, or detailed information exchanges that can effectively enable coordination of competitive activities, between parties that are competitors can lead to a Sherman Act Section 1 challenge.  Significantly, this liability can arise for pre-closing activities that occur following the expiration of any applicable HSR Act waiting period. 

The recent DOJ action is another example of how the antitrust agencies will use both statutes to challenge what they view as inappropriate premerger coordination.  The proposed settlement is an important reminder of the limitations on premerger activities of the parties to a transaction.

The Transaction

On January 13, 2014, Flakeboard and SierraPine—direct competitors in the sale of particleboard—executed an asset purchase agreement (APA) through which Flakeboard would acquire three wood-product mills, including one in Springfield, Oregon, from SierraPine.  Flakeboard had no intention of operating the Springfield mill, but Flakeboard did not want to manage the shutdown and its parent did not want incur any potential reputational harm from a closure announcement.  The APA thus included a provision obligating SierraPine to close the Springfield mill "five (5) days prior to the Closing," but the APA further noted that the shutdown would not be required until "[a]ny required waiting periods and approvals ... under applicable Antitrust Law shall have expired or been terminated."  This provision was apparently not publicly disclosed.  The DOJ did not allege that their agreement was unlawful.  The parties subsequently filed their HSR premerger notifications on January 22.  The DOJ issued a Second Request to investigate the potential competitive effects of the transaction further, and the parties substantially complied with the Second Request.

Flakeboard and SierraPine's Premerger Coordination

The DOJ's complaint alleges that the parties later entered into a series of agreements in violation of both Section 1 and the HSR Act.  Days after the deal announcement, a labor dispute arose at SierraPine that would have accelerated disclosure of the Springfield mill shutdown.  The DOJ alleges the parties discussed the shutdown notice, coordinated about it and "understood" that the mill would shut down within weeks of the announcement, and agreed on a press release stating that the plant would shut down within a few weeks.  SierraPine provided Flakeboard with competitively sensitive customer information; Flakeboard distributed that information to its sales team; and Flakeboard approved the content and timing of the press release, with SierraPine delaying announcement of the closure from February 3 to 4 at Flakeboard's request so that Flakeboard's sales personnel would be better positioned to contact the Springfield mill's customers.  Production at SierraPine's Springfield mill ceased on March 13; the statutory HSR waiting period would not expire until August 27.

Following the announcement of the closure, SierraPine, rather than compete for Springfield's sales from another mill, directed its customers to Flakeboard, promising, at Flakeboard's direction, that Flakeboard would match SierraPine's prices.  As a result, Flakeboard secured new customers as well as new business from existing customers, all of which resulted in increased profits.

The parties abandoned the transaction on September 30 in response to concerns expressed by the DOJ about the transaction's likely anticompetitive effects.

Alleged Violations

The HSR Act requires that parties to a transaction remain separate and independent prior to the expiration of the statutory waiting period.  The buyer cannot exercise operational control, or "beneficial ownership," of the target by directing how the seller conducts its business.  The DOJ alleged that Flakeboard exercised operational control over SierraPine prior to the expiration of the HSR waiting period and in violation of the HSR Act by coordinating the closure of the Springfield mill and moving Springfield's customers to Flakeboard.  Each party—buy-side and sell-side—is subject to a maximum civil penalty of $16,000 for each day that party is in violation of the HSR Act.

Section 1 of the Sherman Act prohibits any "contract, combination ... or conspiracy ... in restraint of trade."  This prohibition includes, among other things, customer allocation and output restrictions.  A pending acquisition between two competitors does not remove Section 1 restrictions prior to closing.  The DOJ alleged that Flakeboard directed the closure of a competing plant, obtained competitively sensitive information from SierraPine—including customer lists with contact information and types and volumes of products purchased—and coordinated with SierraPine to move its Springfield mill customers to Flakeboard (with promises to match SierraPine's prices).  The DOJ alleged that this constituted a per se illegal agreement between competitors to restrict output and allocate customers.

Proposed Settlement

For HSR violations, each side could have faced penalties of more than $3.5 million, but because of the parties' cooperation and voluntary production evidence of their premerger conduct the DOJ only sought $1.9 million in civil penalties from each party (for a total of $3.8 million) for HSR Act violations.  To remedy the Section 1 violation, the DOJ is requiring Flakeboard to disgorge $1.15 million in illegally obtained profits as a result of the output restrictions and customer allocation.

The proposed settlement enjoins Flakeboard, its parents and SierraPine from certain conduct in future pending transactions with other parties including: reaching agreements that affect price or output for competing products in the United States or that allocate markets or customers; exchanging certain competitively sensitive information; and closing a production facility that produces a competing product without prior written notice and approval from the DOJ.  The parties must also implement an antitrust compliance program.

The proposed settlement outlines conduct that is permissible, which provides helpful guidance as to the kinds of conduct and information exchanges that the DOJ is not likely to find unlawful.  The permitted conduct includes:

  • Pre-closing conduct provisions obligating the parties to continue operating in the ordinary course of business
  • Restricting a party to a transaction from taking any action that would cause a material adverse change in the value of the to-be-acquired assets
  • Conducting or participating in pre-closing reasonable and customary due diligence—provided that the information is reasonably related to a party's understanding of future earnings and prospects, and the disclosure is pursuant to a non-disclosure agreement that limits the use of the information to due diligence purposes and prohibits disclosure of the information to personnel directly responsible for the marketing, pricing or sales of competing products

Disgorgement is an unusual remedy in merger challenges, although it has been used infrequently in non-merger antitrust challenges.  The antitrust agencies are more inclined to seek disgorgement now than they have been previously, with the DOJ obtaining disgorgement in its 2010 case against KeySpan Corporation, alleging KeySpan entered into an anticompetitive agreement by taking a financial interest in a competitor.  In 2001, the Federal Trade Commission (FTC) obtained disgorgement of monopoly profits in a consummated merger action against Hearst Corporation where Hearst failed to provide required documents with its HSR notification, thereby hindering the FTC's ability to adequately assess the likely competitive effects of the transaction.  (The FTC also alleged that the transaction substantially lessened competition.) 

More recently in 2012, the FTC withdrew its statement on disgorgement as a remedy, which had limited its use to extraordinary cases, presumably so that it could seek disgorgement in a wider variety of circumstances.  Here, it appears the DOJ sought disgorgement because there was no effective injunctive remedy because the closed plant could not realistically be reopened.  Disgorgement provides a deterrent effect for the parties and other firms contemplating transactions.  Companies should keep this in mind with respect to other transactions, including especially non-reportable transactions raising competitive concerns, and that are subject to post-closing review.

Practical Implications

This action is an important reminder that parties to a pending acquisition are still subject to the antitrust laws.  Also, in addition to the settlement with the DOJ, the parties face the potential for complaints by private litigants.

In its Competitive Impact Statement (CIS) explaining the proposed settlement, the DOJ acknowledges that certain carefully tailored pre-closing coordination, restrictions on pre-closing conduct and information exchanges may be permissible, but the parties must not take additional actions that reduce competition pre-closing.

For example, the DOJ recognizes that closing a production facility before a transaction is consummated may be permissible under certain circumstances.  However, a competitor directing the shutdown (effectively taking operational control and reducing output) and coordinating the movement of customers to the competitor (effectively allocating customers) are steps too far under the HSR and Sherman Acts.

The DOJ states that "[a]s a general rule, competitors should not obtain prospective, customer-specific price information before consummating a transaction because it could be used to harm competition if the transaction is abandoned."  However, the DOJ also recognizes the need for a potential buyer to obtain what might be competitively sensitive information from the seller.  For example, a prospective buyer may need information about pending contracts to properly assess and value the business.  The CIS and the proposed settlement's outline of permitted conduct provide some contours around how competing parties to a transaction should structure due diligence activities.  Parties must observe some basic rules of engagement:

  • Pre-closing covenants to continue operating in the ordinary course of business are permissible.
  • Pre-closing restrictions on actions that would cause a material adverse change to the to-be-acquired business or assets are permissible, but parties must be reasonable in what they consider a material adverse change and not simply use this as a shield to protect all pre-closing interactions.
  • Prospective buyers cannot direct the actions of the target or take operational control of the target before the expiration of the HSR waiting period, even where the parties have executed a definitive agreement.
  • Prospective buyers that compete with the target generally should not coordinate with the target or direct the actions of the target pre-closing with regard to competing products—even after the expiration of the HSR waiting period.  Generally, jointly promoting the transaction is permissible (e.g., calling customers to tell them about the benefits of the transaction), but joint activity beyond this may be subject to scrutiny.
  • Reasonable and customary due diligence is permissible between competitors as long as appropriate protections are employed, such as a non-disclosure agreement and firewalls to protect the use and dissemination of the information gathered.  Even competitively sensitive information may be obtained provided that it is reasonably necessary to assess the potential transaction or value of the business and personnel with day-to-day responsibility over marketing, pricing, sales, R&D or other strategic functions related to competing products do not have access to the information.

Although these are some basic rules of the road, every transaction presents a unique set of circumstances and facts—including whether or not the transaction is notifiable in the United States or internationally, and whether or not the parties are actual or potential competitors.  What may be permissible in some scenarios, may not be permissible in others.  Parties can often meet their legitimate business objectives while managing the potential antitrust risk, but it is important to evaluate that risk early in the transaction planning process.  Counsel should be closely involved in developing, implementing and monitoring appropriate procedures to manage the risk that the antitrust regulators will investigate parties' pre-closing activities as impermissible gun jumping.

"Gun-Jumping" Companies Must Pay $3.8 Million in Fines and Disgorge $1.15 Million in Illegally Obtained Profits

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions