On February 18, the Fourth Circuit affirmed a district court decision ordering a divestiture in a private merger challenge. Although the FTC and DOJ have successfully challenged a few closed transactions, the Jeld-Wen decision marks the first time that a private business has obtained an order to unwind a consummated merger.
The case involves a 3-to-2 merger between two vertically integrated firms—Jeld-Wen and CMI—that sell both doorskins (the outer casing of a molded door) and finished molded doors. The challenge was brought by Steves, a finished door competitor that relies on third parties to supply its doorskins. Describing the case as “a poster child for divestiture,”1 the Fourth Circuit affirmed the district court's order requiring Jeld-Wen to unwind the merger and auction off the business it acquired.2
The decision includes several significant holdings:
- First, the court agreed that Steves had suffered antitrust injury and not simply harm from a breach of contract; Steves was injured because it lost access to a supply of doorskins as a result of the merger and because the merger reduced competitive pressures for Jeld-Wen to provide quality services at competitive prices.
- Second, a divestiture—rather than some lesser remedy—was necessary to address the harm to competition and protect Steves and other customers from anticompetitive harm.
- Third, although Steves waited nearly four years to challenge the transaction, the requested divestiture remedy was not time-barred because Steves did not learn about its relevant injury until two years after the merger closed.
Cases like Jeld-Wen, where a merger challenge has succeeded after the FTC or DOJ reviewed and decided not to challenge a transaction, are rare. But Jeld-Wen nonetheless serves as an important reminder that consummated transactions can be successfully challenged, particularly in cases where a plaintiff can tell a compelling story of competitive harm. Further, it highlights the magnitude of the risk: although Jeld-Wen had invested heavily in the acquired business for years, the Fourth Circuit affirmed a divestiture order years after the transaction closed. Managers of businesses that have been involved in potentially controversial mergers are well advised to consider the potential for merger-based antitrust challenges when contemplating actions that could anger customers and be alleged to have resulted from a lessening of competition. The decision is also particularly noteworthy because there are several pending cases brought by private plaintiffs seeking to divest consummated transactions. While plaintiffs will likely use Jeld-Wen to support their claims, defendants will likely argue that the decision rested on unique facts.
I. Facts of the Case
Jeld-Wen, Masonite, and CMI were the only doorskin manufacturers in the United States when Jeld-Wen acquired CMI in 2012. In mid-2012, shortly after Jeld-Wen agreed to acquire CMI, it entered into a long-term doorskins supply contract with Steves, the largest manufacturer of finished doors in the United States. Jeld-Wen could cancel only on seven years' notice to Steves.
In September 2014, Jeld-Wen gave notice that it would stop supplying to Steves in September 2021. In May 2014, Masonite separately announced that it would stop selling doorskins to independent door manufacturers. The district court found that these decisions to stop supplying doorskins were anticompetitive effects of the merger: It was only after the merger that the two remaining doorskin suppliers “shared an incentive to kill off” independent door manufacturers like Steves, and “stopped selling to the Independents altogether for the express purpose of killing them off and forming a duopoly” in the finished doors market.3
In June 2016, Steves sued under Section 7 of the Clayton Act, alleging that the effect of the Jeld-Wen/CMI merger was “substantially to lessen competition.” Steves sought damages for the inflated prices it paid for doorskins following the merger, damages for future lost profits, and a divestiture to remedy the merger's anticompetitive effects. A jury found that the merger violated Section 7, and that Steves proved both past damages and future lost profits. The district court then determined that a divestiture of CMI's Towanda plant was the appropriate equitable remedy.
II. The Fourth Circuit Decision
A. Private Plaintiff Had Standing to Sue
Jeld-Wen argued that Steves failed to prove antitrust injury because any injury flowed from an alleged breach of its 2012 contract with Steves and not from a lessening of competition resulting from the merger. The Fourth Circuit affirmed the district court's finding that Steves suffered antitrust injury because the merger directly “hindered Steves's access to other doorskin suppliers”4 by (i) eliminating CMI as a source of independent supply; and (ii) incenting Masonite, the only other source of doorskins, to stop supplying independent door makers. The merger therefore limited Steves's ability to mitigate its harm from a breach of the Jeld-Wen contract. Moreover, the court found that the merger “weakened the competitive pressures on Jeld-Wen to provide good customer service beyond its contractual duties.”5 Steves's evidence that the effects of the merger exacerbated the harm from the contract breach was sufficient to show antitrust injury.
B. Divestiture Was Necessary to Remedy the Section 7 Violation
The Fourth Circuit agreed with the district court's determination that monetary remedies were insufficient to protect Steves and other customers from the anticompetitive effects of the merger. The court found that conduct remedies, such as forcing Jeld-Wen to continue selling doorskins at a competitive price, would be insufficient. Such a remedy would protect Steves only temporarily because it would leave only two doorskin manufacturers in the market, with Steves remaining vulnerable to the anticompetitive effects of the merger.6 And the court observed that a structural remedy better suited the broader purposes of the antitrust laws—protecting competition generally—not simply providing relief to an individual plaintiff.7
Accordingly, the Fourth Circuit determined that the divestiture remedy was appropriate to remedy the anticompetitive merger. Applying an equitable assessment, the court found that even though the divestiture would cost Jeld-Wen “a great deal,” Jeld-Wen was “larger and more diversified than Steves,” and thus could “weather these hardships.”8 The Fourth Circuit did, however, note that if “the special master can't locate a satisfactory buyer, the district court may have to revisit its ruling.”9 And even if a buyer is found, the Fourth Circuit invited Jeld-Wen to challenge whether “a sale to that particular buyer will serve the public interest.”10
C. No Unreasonable Delay in Bringing Suit
The Fourth Circuit rejected Jeld-Wen's argument that laches barred Steves's equitable claim for divestiture.11 To prevail on a laches defense, Jeld-Wen was required to show both (1) that Steves unreasonably delayed in bringing suit and (2) that its delay prejudiced Jeld-Wen.12 The court found that the four-year gap between the merger and the suit was not unreasonable because delay is evaluated based on “when the plaintiff ‘discovers or with reasonable diligence could have discovered the facts giving rise to his cause of action,'” not necessarily when the merger closed.13 The court determined that Steves did not become aware of an antitrust injury until 2014, when Jeld-Wen gave notice that it would terminate the contract effective in 2021.14 The court observed that Steves then spent 2014 to 2016 searching for alternative remedies, and found that Steves did not unreasonably delay litigation once it learned about its injury.
Because the Fourth Circuit found no unreasonable delay, it did not address in detail whether the delay prejudiced Jeld-Wen.15 Notably, however, the district court found that Jeld-Wen was not prejudiced in part because Jeld-Wen continued investing heavily in Towanda after Steves brought the lawsuit, which undercut Jeld-Wen's assertion that Steves's delay in suing had caused Jeld-Wen to invest when it would not have done so if Steves had sued in a timely manner.16 The district court further reasoned that Jeld-Wen had already “recovered its investment in Towanda and made a considerable profit.”17
1 Steves & Sons, Inc. v. Jeld-Wen, Inc., No. 19-1397, published op. at 54 (4th Cir. Feb. 18, 2021) (order affirming in part, vacating in part, and remanding), Dkt. 92.
2 Id. at 3-4.
3 Id. at 28.
5 Id. at 29.
6 Id. at 46.
8 Id. at 48.
9 Id. at 53
10 Id. at 54.
11 Id. at 39.
12 Id. at 20, 39.
13 Id. at 39.
14 Id. at 41.
15 Id. at 43.
16 Id. at 20-21.
17 Id. at 21.
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