In Steves and Sons, Inc. v. Jeld-Wen, Inc., a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit unanimously affirmed the first-ever order requiring divestiture of assets as a remedy in a merger challenge brought by a private party.  Most merger challenges are brought by federal antitrust enforcement agencies, with private merger litigation only rarely attempted and even more rarely successful.  Further, divestiture is seldom ordered even in government cases because pre-merger notification requirements often allow the government to sue before transactions are consummated. Against this backdrop, Jeld-Wen serves as an important reminder that the risks from post-closing, private merger litigation should not be ignored.

A Merger of Doorskin Manufacturers

The Jeld-Wen case is about doors.  More specifically, many of the interior doors used in homes and other buildings are “molded” from materials that allow them to be lighter weight (and less expensive) than solid wood doors.  One of the components of a molded door is the “doorskin,” and there used to be three doorskin manufacturers in the U.S.:  Masonite (the largest), Jeld-Wen (number two), and CMI (the smallest).  Six “Independent” companies bought doorskins from these manufacturers and incorporated them into molded doors.  The three doorskin manufacturers also sold their own molded doors in competition with the Independents.

After the housing bubble burst, CMI fell on hard times and eventually decided to put its entire business (including its doorskin plant in Towanda, Pennsylvania) up for sale.  There were four or five serious prospective buyers, and CMI selected Jeld-Wen in early 2012.  Before notifying the Department of Justice (DOJ) of the merger, Jeld-Wen entered into long-term supply agreements with three of the Independents, including Steves and Sons (Steves), a family-owned company that had been making doors for 150 years.  As part of its investigation, DOJ contacted Steves, but Steves did not oppose the merger, and DOJ closed the investigation.  Jeld-Wen and CMI consummated the transaction in October 2012.

Steves soon noticed quality issues with Jeld-Wen’s doorskins, and Jeld-Wen also raised its prices more than the supply agreement allowed.  But Steves had nowhere else to turn because Masonite announced in May 2014 that it would stop selling doorskins to the Independents.  In August 2014, Jeld-Wen’s new CEO notified Steves that it would terminate the supply agreement effective September 2021.  Steves then complained to the DOJ that the merger had been anticompetitive. DOJ opened another investigation, but closed it after a few months.

The Litigation

In June 2016, Steves sued Jeld-Wen for breach of contract and for violating Section 7 of the Clayton Act, which prohibits mergers that may substantially lessen competition.  A jury found for Steves on both counts and awarded past damages and future lost profits that, after trebling, amounted to more than $175 million. 

For the first time in a private merger challenge, the district court also granted the plaintiff’s request for an order requiring divestiture of acquired assets.  The court adopted a two-step approach.  First, it required Jeld-Wen to divest the Towanda plant.  Second, the court explained that a special master would later conduct an auction of the plant, if the divestiture remedy were affirmed on appeal.

And that’s what happened:  calling the case “a poster child for divestiture,” the Fourth Circuit affirmed the district court’s decision.  The court of appeals held that, absent divestiture, there was a significant risk that Steves would suffer irreparable antitrust injury because, without a source of doorskin supply after September 2021, Steves would likely collapse.  According to the court, money damages could not compensate for the loss of a 150-year-old, family-owned business.  Although Jeld-Wen argued that less drastic injunctive relief would suffice, the court rejected a “conduct remedy” that it thought would offer only temporary protection and benefit only Steves, rather than competition as a whole.  The court also emphasized precedent describing divestiture as “the remedy best suited to redress the ills of an anticompetitive merger” and highlighted the risk that a conduct remedy would excessively entangle the government in the market.  In addition, the court of appeals agreed that divestiture would be in the public interest because it would add a third doorskin supplier to the market, thereby promoting competition.

After concluding that divestiture was an appropriate remedy, the Fourth Circuit rejected three Jeld-Wen arguments against specific aspects of the order.  First, the court approved the two-step process of ordering divestiture and proceeding to an auction only if the divestiture order were affirmed, reasoning that potential buyers would be more likely to place bids after appeals are resolved.  Second, the court cited evidence that divestiture of the Towanda plant would enable the buyer to compete effectively with Jeld-Wen and Masonite.  Third, the court dismissed concerns that Steves may buy the Towanda plant because, even though it would not be ideal for all three doorskin suppliers to be vertically integrated, it would be better to have three suppliers than two.

Despite affirming the divestiture order, the court of appeals opined that the lower court might have to revisit the issue if a satisfactory buyer could not be found.  It also recognized that Jeld-Wen could challenge whether sale to a particular buyer would be in the public interest.  Finally, the court vacated the portion of the damages award for future lost profits because Steves had not yet suffered the injury on which it was premised (loss of access to doorskins in September 2021) and it would not suffer that injury if Jeld-Wen reversed course and continued to supply Steves with doorskins, or if the divestiture were to take place.

Significance of Decision

The Fourth Circuit’s decision drives home several important takeaways for companies and practitioners alike.

Risks from Private Merger Challenges The foremost lesson from Jeld-Wen is that  private litigation can disrupt mergers. While private parties regularly complain to the government about mergers, this case is a reminder that US antitrust law also allows customers, competitors, and other private parties to bring their complaints directly to court. This possibility creates risks for merging parties that opponents may challenge a transaction, with an eye toward blocking it permanently or seeking some other strategic advantage.

Risks Persist Long After Closing Steves learned that its supply agreement would be terminated two years after the merger, and it did not sue until nearly four years after closing.  Yet the court still rejected Jeld-Wen’s argument that it had waited too long to seek divestiture, pointedly observing that “[i]f there is a presumptive deadline for Clayton Act injunction claims, it’s four years after the challenged action.”  Suggesting a somewhat more flexible approach in a concurring opinion, one of the judges explained that future plaintiffs may not be able to secure a divestiture order if they delay bringing suit after receiving notice that a merger threatens to harm them.  

Agency Inaction Is No Protection DOJ investigated the Jeld-Wen/CMI merger twice—before and after it was consummated—and both times declined to move against it.   Jeld-Wen tried to use DOJ’s inaction to argue that the merger was not anticompetitive, but the district court excluded evidence about the investigations from being presented to the jury.  Consistent with the arguments in DOJ’s amicus brief, the Fourth Circuit affirmed that decision, holding that DOJ’s “decision not to pursue the matter isn’t probative as to the merger’s legality because many factors may motivate such a decision, including the Department’s limited resources.”

Preference for Structural Remedies Antitrust agencies and policymakers frequently debate the appropriateness of conduct remedies (also referred to as behavioral remedies) as alternatives to structural remedies (such as divestiture).  In rejecting a conduct remedy as temporary, less complete, and difficult to administer, Jeld-Wen provides judicial support for those who favor structural solutions to anticompetitive mergers.

High Bar for Weakened-Competitor Defense.  Although unrelated to the divestiture issue, another interesting aspect of the court’s decision involved the rejection of a “weakened-competitor defense.”  Jeld-Wen wanted to show that, in the years leading up to the merger, CMI had lost money, depended on loans to stay afloat, and lost two large customers.  But the Fourth Circuit held that the district court’s exclusion of that evidence was, at worst, harmless error. The court reasoned that, even with that evidence, Jeld-Wen’s weakened-competitor defense still would have failed because CMI could have sold itself to a bidder other than Jeld-Wen or Masonite and because there was no evidence that CMI’s market share would have deteriorated enough for its acquisition by Jeld-Wen to avoid being considered presumptively anticompetitive.

Despite the unprecedented result, the facts of Jeld-Wen suggest that divestiture orders are unlikely to be entered very often in private merger suits.  Steves was able to demonstrate that the company would collapse because it had no other sources of supply.  In most cases, however, a merger will not threaten to completely drive a plaintiff from the market.  Further, Steves overcame the ordinary obstacles to injunctive relief in part because it was a 150-year-old, family business.  By contrast, the court explained that “the dissolution of a new enterprise, or one that’s not very important to its owner (who may own many companies), may be reparable by damages.”  It remains to be seen whether courts seize on these unusual circumstances to distinguish Jeld-Wen and shut the door on future divestiture requests in private merger challenges.