A Cautionary Tale on Gun-Jumping: The Antitrust Division Expands its Use of Disgorgement in Enforcement of Civil Antitrust

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The success of a merger or acquisition often largely depends on pre-closing planning and the rapid integration of the merged entities or acquired assets. In any transaction, the need for planning and speed create certain antitrust risks. On Nov. 7, the Department of Justice, Antitrust Division (Division), announced a settlement and $5 million fine against several firms that ran afoul of the federal antitrust laws by beginning significant integration before the end of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) and before the transaction closed.

The HSR Act requires that parties engaged in transactions of a certain size make pre-merger notification filings with the Federal Trade Commission and the Division, and observe a waiting period before closing. The intent of the statute is to permit the agencies the opportunity to investigate the effect, if any, of the transactions on competition, and determine whether to challenge them. The HSR Act also prohibits improper pre-closing integration from the time companies agree to an acquisition until the end of the applicable waiting period. Premature integration and coordination may also violate the Sherman Act. Improper pre-closing coordination is often known as “gun-jumping.”

In its latest “gun jumping” case, the Division announced a $5 million civil settlement with SierraPine, Flakeboard America Limited, and its parent companies, Celulosa Arauco y Constitucion S.A., and Inversiones Angelini y Compagnia Limitada. The settlement includes $3.8 million in civil penalties, with $1.9 million to be paid by Flakeboard and its parent companies and $1.9 million to be paid by SierraPine. Flakeboard must also disgorge $1.15 million in profits. The complaint alleges that the buyer, Flakeboard, prematurely exercised operational control over a significant portion of SierraPine’s business in violation of the HSR waiting period requirements, and that it restrained trade in violation of Sherman Act §1.

The Facts

Flakeboard and SierraPine compete in the sale of particle board, an unfinished wood product frequently used in shelving, countertops and other products. They also compete in the medium-density fiberboard (MDF) business. In January 2014, Flakeboard agreed to acquire three competing mills of SierraPine. Two of the SierraPine mills to be acquired, located in Springfield, Ore. and Martell, Calif., manufactured particle board. These mills competed directly with Flakeboard’s particle mill in Albany, Ore. A third mill, located in Medford, Ore., manufactured MDF. This mill competed directly with SierraPine’s mill in Eugene, Ore.

On Jan. 22, the companies submitted their HSR filing, which began the statutory waiting period.  The Division raised objections to the proposed acquisition and issued a Second Request. According to the Division, if the transaction had been allowed to close, the number of MDF competitors on the West Coast would have decreased from four to three, and Flakeboard’s market share would have been 58 percent. On Aug. 27, the HSR waiting period expired, and in October, Flakeboard announced that it had voluntarily abandoned the transaction because of the objections raised by the Division.

However, abandonment of the acquisition did not resolve the Division’s concerns regarding gun-jumping. The Division alleged that the “coordination to close SierraPine’s particle mill in Springfield, Oregon, and to move the mill’s customers to Flakeboard constituted a contract, combination, or conspiracy in restraint of trade” and resulted in the improper, premature transfer of operational control to Flakeboard during the HSR waiting period.

During negotiation of the asset purchase agreement (APA), Flakeboard made clear that it did not intend to operate the Springfield Mill, and that it wanted SierraPine to shut down that mill prior to the closing of the transaction. Before negotiating the APA, SierraPine had no intention of shutting down the Springfield Mill, but ultimately agreed to do so in order to avoid saddling Flakeboard with the complexities associated with such a closure. In the APA, SierraPine agreed, “to take such actions as are reasonably necessary to shut down and close all business operations at its Springfield, Oregon facility five (5) days prior to the Closing” and after “[a]ny required waiting periods and approvals . . . under applicable Antitrust Law” expired or terminated.  The APA anticipated that the closure would occur after the HSR waiting period expired.

A few days after announcing Flakeboard’s acquisition of the Springfield, Martell and Medford Mills, a labor issue arose at the Springfield Mill. SierraPine believed that the labor issue would require closing the plant during the HSR waiting period. SierraPine alerted Flakeboard to the situation, including the need to make a public announcement regarding the closing. SierraPine and Flakeboard had a series of discussions regarding how to deal with the Springfield Mill closure, including whether the  provision in the APA requiring SierraPine to close the Springfield Mill before the closing of the transaction could be waived. Ultimately, after consulting with its parent companies, Flakeboard would not agree to waive the provision.

The Division’s concerns extended beyond the mill closure. Flakeboard and SierraPine also allegedly agreed to transition the Springfield Mill’s customers to Flakeboard’s competing mill in Albany, Ore. To accomplish this transition, SierraPine provided Flakeboard with competitive, sensitive customer and purchase information, which was distributed to Flakeboard sales employees. At Flakeboard’s request, SierraPine also allegedly agreed (1) to delay the announcement of the Springfield closure to permit Flakeboard sales personnel to contact Springfield’s customers; (2) to have SierraPine’s sales employees inform Springfield customers that Flakeboard would serve their business and match SierraPine’s prices; and (3) to provide assurances of future employment to key SierraPine sales employees in exchange for directing SierraPine’s customers to Flakeboard.

The Springfield Mill was closed permanently in March 2014, and most of the Springfield customers were transitioned to Flakeboard’s Albany Mill.

A Drastic Remedy

For the first time since 2010, the Division, as part of a settlement, required a disgorgement remedy in a civil antitrust action.1 In the Division’s competitive impact statement, the government estimates that Flakeboard earned approximately $1.15 million in profits as a result of the unlawful transfer of SierraPine’s customers during the six-month period leading up to the settlement. According to the Division, disgorgement is particularly appropriate here because injunctive relief requiring the reopening of the Springfield Mill, which has been shuttered for several months, would be impractical.

The Division also made a point of predicting that disgorgement would deter parties from engaging in anticompetitive conduct during the pendency of a transaction, regardless of whether the transactions are subject to the HSR Act’s notification requirements. Generally, the maximum penalty for transfers of beneficial ownership before satisfaction of the HSR Act’s requirements is a fine of $16,000 per day. Here, the maximum penalty would have amounted to $3.568 million per party, but the Division accepted $1.9 million because Flakeboard and SierraPine cooperated with the agency during its investigation by voluntarily producing evidence and by entering into a timing agreement despite the daily accrual of the fine.

The Lessons

It is important to note that the Division did not object to the fact that the parties agreed to the closure of the mill, or that the closure would take place in advance of closing, immediately after the HSR waiting period expired. Instead, the Division objected to certain very specific coordinated acts of the parties, and that those acts resulted in the transfer of customers from one party to the other before the expiration of the statutory waiting period.

Neither Flakeboard nor SierraPine appear to have contemplated the need to close the Springfield Mill on the heels of announcing the proposed acquisition. The Division did not challenge the fact that the parties coordinated the announcement of the closing, and needed to do so, but Flakeboard and SierraPine took additional steps that raised concerns. The Division clearly enumerated its concerns: SierraPine’s sharing of sensitive competitive information regarding specific current customers; delaying the announcement of the plant closure to give Flakeboard time to contact SierraPine’s customers; directing SierraPine’s customers to Flakeboard; and incentivizing SierraPine’s sales employees to direct customers to Flakeboard.

Even in the face of the real world complications (such as those that caused the parties to close the Springfield Mill early), the parties must maintain their separateness, particularly when it comes to customer-specific, competitively sensitive information, and actions that could result in the allocation or transfer of customers before expiration of the HSR Act’s waiting periods and on the eve of the transaction closing.

Endnote

1 In United States v. KeySpan Corp., 763 F. Supp.2d 633 (S.D.N.Y. 2011), the Division required the defendant to pay $12 million to disgorge its earnings from the challenged anticompetitive arrangement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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