March 10, 2021

By: Poster Child for Divestiture: First-of-Its-Kind Divestiture Remedy in Private Merger Challenge

Takeaway:

Typically, avoiding a challenge by the DOJ, means a green light for the parties to a significant corporate merger transaction. However, in cases where an actual duopoly has been created, a court may change that light to red, and even unwind the transaction years later.

On February 18, 2021, the Fourth Circuit Court of Appeals issued a historic ruling that held that a district court was within its rights to issue a divestiture order after Jeld-Wen violated antitrust law when it acquired and merged with CMI. Jeld-Wen, a leading world-wide manufacturer of doors and windows, must unwind its merger. This divestment order follows a contentious court battle between Steves & Sons, Inc. “Steves,” and Jeld-Wen.

Five years after Steves first filed a breach-of-contract and antitrust claim in the Eastern District of Virginia, the Fourth Circuit affirmed the divestment order. When Jeld-Wen merged with CMI in 2012, Steves, a family owned business for over 150 years, found itself trapped and forced to deal with a duopoly. Even though divestiture is the customary form of relief under the Clayton Act §7, prior to this year, no court had ordered divestiture in a private suit. In affirming the District Court’s divestment order, the Fourth Circuit called the case a poster child for divestment.

Steves and Jeld-Wen sell “molded doors.” Jeld-Wen also manufactures doorskins. Jeld-Wen sold its doorskins to Independents—door manufacturer’s that don’t make their own doorskins—including Steves. In 2012, three companies manufactured doorskins in the U.S. Jeld-Wen held a 38% market share, Masonite held 46%, and CMI held the remaining 16%. By the end of 2012, Jeld-Wen held a 54% market share after merging with CMI. In addition to the market advantage this merger gave Jeld-Wen, Jeld-Wen gained CMI’s manufacturing plant in Towanda, PA.

Steves entered into a long-term purchase agreement with Jeld-Wen in May 2012, and almost immediately issues surfaced. A year into the deal, Steves noticed quality issues with Jeld-Wen’s doorskins. Despite these quality issues, Jeld-Wen unilaterally increased its contract price with Steves in 2013, 2014, and 2015.

In 2016, after several years of increased prices, quality issues, and threatened termination of the purchase agreement, Steves filed its breach of contract and antitrust claim against Jeld-Wen. In response, Jeld-Wen filed a counterclaim alleging that Steves misappropriated trade-secrets when it hired a former Jeld-Wen employee as a consultant. The District Court severed this counterclaim into a separate trial before another jury over Jeld-Wen’s objection.

Ultimately, in March of 2019, the District Court:

1. Awarded Steves $36.4 million in trebled past damages on its antitrust claim.
2. Ordered divestiture of the manufacturing plant in Towanda.
3. Ordered Steves to pay Jeld-Wen $1.2 million on the trade-secrets counterclaim.
4. Ordered Jeld-Wen to continue operating Towanda under a special master’s supervision pending appeal of the divestiture order.

On February 18, 2021, the Fourth Circuit affirmed the District Court’s ruling, finding that the merger resulted in a duopoly, and as a direct result, Steves suffered economic injury. The Court stated: “[T]his case is a poster child for divestiture.”