On February 18, 2021, the United States Court of Appeals for the Fourth Circuit affirmed a district court’s award divesting JELD-WEN—one of the world’s largest manufactures of Interior Molded Doors (“IMDs”) and one of two U.S. suppliers of doorskins, the primary component IMDs—of the Towanda doorskins manufacturing plant. The decision affirmed a judgment after trial requiring divesture, after the merger of the two manufacturers. The decision analyzed claims by private litigants under Section 7 of the Clayton Act, 15 U.S.C. § 18, which prohibits mergers and other corporate combinations which “may substantially lessen competition.” The Court distinguished the Supreme Court’s holding in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., confirmed that private litigants have standing to bring Section 7 claims, and explained the requirements for obtaining divestiture as a remedy. Prior to its decision, there were few reported decisions of appellate courts interpreting the antitrust standing requirement, and no appellate decisions awarding divestiture as a remedy in a private antitrust enforcement action. This decision will likely be cited often in the future, adding arrows to the quiver of private antitrust enforcement.
JELD-WEN purchased the Towanda plant from CraftMaster Manufacturing, Inc. (“CMI”) in 2012, reducing competition in the doorskins market from three manufacturers to two. Before the acquisition, IMD manufacturers that did not manufacture their own doorskins (“Independents”) relied on CMI, JELD-WEN, and Masonite (the only other doorskin manufacturer in the U.S.), to purchase doorskins to manufacturer IMDs. Recognizing that its purchase might raise antitrust concerns, JELD-WEN entered into several long-term supply agreements with Independents, including Steves and Sons (“Steves”). After JELD-WEN announced its plans to purchase Towanda, the DOJ investigated, and based at least in part on JELD-WEN’s assurances that its long-term supply agreements would not foreclose access to doorskins, concluded that the acquisition would not be anticompetitive.
Right after the DOJ closed its investigation, Steves ran into problems with its supply. JELD-WEN’s doorskins suffered from quality issues, and JELD-WEN began increasing the price of doorskins despite falling costs, in violation of its long-term supply agreement with Steves. JELD-WEN also introduced two new doorskin styles that it charged Steves more for than the contract allowed, claiming these styles were outside the scope of the agreement. JELD-WEN understood that the acquisition gave it added leverage in contract negotiations with the Independents, writing in a December 2013 email that the CMI acquisition left the Independents with “few options” for doorskin suppliers, and stating in a draft memorandum to JELD-WEN’s investors that the merger “made us and Masonite the only two manufacturers of facings [i.e., doorskins] in North America, which over time will improve our pricing power.”
The parties’ relationship deteriorated further after JELD-WEN hired a new CEO, Kirk Hachigian, in early 2014. Hachigian told Steves that the long-term supply agreement didn’t adequately compensate JELD-WEN for the capital improvements it had made to its doorskins facilities, and that JELD-WEN might exercise its seven-year termination option unless Steves agreed to renegotiate the supply agreement. JELD-WEN’s quality issues also persisted. Meanwhile, JELD-WEN tightened its policy for reimbursing defective doorskins and continued to increase the price.
In May 2014, Masonite announced that it would stop selling doorskins to the Independents. At a public presentation, a Masonite executive explained that this was “the right strategic call” and would “make sure that there are some effective barriers to entry within the [molded-door] space.” He also predicted that Masonite and JELD-WEN would maintain their doorskin duopoly because of such barriers to entry, and that the continued survival of the Independents was “less likely going forward.” In January 2015, JELD-WEN again increased prices for the upcoming year, and internal documents from 2015 and 2016 suggest that it planned to increase its doorskin prices, end contracts with customers, and ultimately stop selling to the Independents altogether over the next few years. JELD-WEN hoped that this would “kill off a few” of the Independents and allow it to “[i]ncrease [its molded] door market share.”
Steves’s relationship with JELD-WEN further deteriorated, and in June 2016, Steves sued JELD-WEN for breach of contract and antitrust violations under § 7 of the Clayton Act. In addition to damages, Steves sought to force JELD-WEN to unwind the merger and divest the Towanda plant.
The district court held a jury trial as to Steves’s damages claims first, with the understanding that, if the jury found that the merger was anticompetitive, the court would then hold separate proceedings on the equitable claims. The jury found in favor of Steves and awarded damages. Next, the district court considered Steves’s claims for equitable relief, including its request that JELD-WEN divest the Towanda plant. The district court granted the request for divestiture, finding that each of the applicable factors were met:
- Steve’s suffered irreparable injury;
- other remedies available, such as money damages, were inadequate;
- the threat to Steves’s survival outweighed JELD-WEN’s hardships; and
- divestiture was in the public interest because it would restore competition.
After the proceedings concluded, the district court entered a final judgment to provide Steves its preferred remedies while avoiding inconsistent or double recovery. Relevant here:
- Steves was awarded $36.4 million in trebled past damages on its antitrust claim, in lieu of contract damages for the same injury;
- JELD-WEN was ordered to divest the Towanda plant, but if the divestiture didn’t go through for any reason, JELD-WEN would be required to pay Steves $139.4 million in treble antitrust damages for future lost profits; and that if those damages were set aside on appeal, JELD-WEN should pay Steves $9.9 million on its contractual claims.
JELD-WEN appealed on eight issues, including whether Steves suffered an antitrust injury and whether divestiture was the proper remedy.
As to antitrust injury, JELD-WEN argued that Steves’s purported antitrust injury was indivisible from its breach of contract claim, and therefore Steves did not suffer antitrust injury. The Fourth Circuit noted that “[c]ases that involve both contractual and antitrust claims present unique challenges” because Courts must ensure that a plaintiff’s antitrust claims aren’t “simply a contract claim masquerading as a candidate for treble damages.” But the Fourth Circuit held in Steves favor, finding that absent the merger, Steves could have more easily purchased doorskins from a different supplier, that the merger weakened competitive pressures on JELD-WEN to provide good customer service and quality products, and that JELD-WEN intended to use the merger as leverage to hurt the Independents. In coming to its conclusion, the Fourth Circuit distinguished the Supreme Court’s decision in Brunswick, which held that a bowling-equipment manufacturer that bought and operated 200 bowling centers in the U.S. that otherwise would have defaulted was not liable under Section 7 of the Clayton Act to plaintiffs that owned and operated competing bowling centers. Unlike in Brunswick, JELD-WEN’s acquisition of CMI reduced competition, causing antitrust injury.
As to divestiture, the Fourth Circuit again held in Steves’s favor, concluding that the district court properly denied JELD-WEN’s laches defense (i.e., that Steves waited too long to file its lawsuit) and properly applied the four equitable factors regarding divestiture. First, the “permanent loss of business, with its corresponding goodwill,” that Steves—a 150-year-old family-owned business—faced was an irreparable injury. Second, conduct remedies short of divestiture would only protect Steves temporarily, while divestiture would protect Steves permanently and protect other Independents. Third, Steves’s imminent collapse outweighed JELD-WEN’s financial hardships because JELD-WEN was much larger and more diversified. Fourth, divestiture would benefit the public by increasing competition, despite the identity of the potential buyer being unknown, and a divested Towanda plant would be able to compete effectively. The Fourth Circuit ended its analysis by noting that “This case is a poster child for divestiture.”
The Fourth Circuits decision provides valuable precedent to private plaintiffs attempting to establish antitrust injury and seeking divestiture as a remedy for anticompetitive mergers. Given scarce resources of federal and state antitrust enforcement agencies, and recent inattention to anticompetitive conduct, the Fourth Circuit’s opinion should help private plaintiffs combat combinations that “may substantially lessen competition.” In the future, expect to see more private enforcement plaintiffs seeking divestiture as a remedy, as can already be seen in In re Juul Labs, Inc. Antitrust Litigation.
Authored by: Kyle Quackenbush