On November 7, 2014, the U.S. Department of Justice (DOJ) filed a complaint and consent decree in the U.S. District Court for the Northern District of California requiring Flakeboard America Limited, Flakeboard’s parent companies and SierraPine to pay nearly $5 million, including disgorged profits, to resolve the DOJ’s allegations that the parties engaged in illegal premerger coordination (“gun-jumping”) in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and a conspiracy in restraint of trade in violation of Section 1 of the Sherman Act. The settlement imposes gun-jumping penalties of $3.8 million on both firms. Flakeboard must also disgorge $1.15 million in illegally obtained profits. This case is important because it marks the first disgorgement remedy since 2010, and it is an example of parallel charges brought under the Sherman Act and Clayton Act.
The parties are competitors in the manufacture and sale of particleboard and medium-density fiberboard (MDF). Flakeboard and SierraPine signed an asset purchase agreement for Flakeboard to acquire SierraPine’s particleboard mills in Springfield, Oregon and Martell, California, and an MDF mill in Medford, Oregon. The terms of the APA required SierraPine to close the Springfield mill before the deal closed, but after expiration of the HSR waiting period. The parties submitted HSR filings on January 22, 2014 and the DOJ eventually issued a Second Request for documents and information, extending the investigation. However, on March 13, 2014, SierraPine permanently shut down the Springfield mill in the wake of a labor dispute at the facility. Before the closure, SierraPine and Flakeboard had consulted extensively and SierraPine had taken extraordinary measures to redirect its customers to Flakeboard’s competing Albany, Oregon facility. SierraPine encouraged its sales team to inform customers that Flakeboard would match prices, and shared with Flakeboard competitively sensitive information such as the name, contact information and types and volume of products purchased by each Springfield customer. At Flakeboard’s request, SierraPine also conveyed assurances of future employment with Flakeboard to key SierraPine personnel to further encourage customer diversion. In September 2014, the parties abandoned the transaction in light of DOJ concerns over a loss of competition in MDF.
In its complaint, the DOJ alleged that the parties’ actions to close the Springfield facility and divert the customers to Flakeboard’s Albany mill constituted an agreement between competitors to reduce output and allocate customers that is per se unlawful under Section 1 of the Sherman Act. In support of the allegation, the complaint cited the parties’ coordination regarding the manner and timing of the announcement of the closure, the exchange of competitively sensitive SierraPine customer information and Flakeboard’s offering of employment assurances to key SierraPine personnel. These were characterized as exercises of operational control of SierraPine’s business that conferred beneficial ownership of the SierraPine mills to Flakeboard before the HSR waiting period had expired. Flakeboard also had to disgorge the $1.15 million of profits earned following the closure.
There are several lessons to be drawn from this case. First, the antitrust agencies take gun-jumping seriously, and all premerger coordination must be carefully considered with antitrust counsel. Joint decision-making on key issues like plant closures clearly are off limits. And the exchange of potentially sensitive information—particularly with respect to customers, prices and pending bids—can be dangerous and should only be undertaken with a clear understanding of the risks and possibly through the use of “clean teams.” The agencies recognize that successful post-closing integration requires advance planning and a certain amount of information exchange during the review period, but the content, manner and scope of that conduct are critical elements in determining what is legal and what is not.
Second, before closing, the merging parties must remain independent competitors to avoid violations of the Sherman Act. The officers of each company continue to have fiduciary responsibilities to their respective firms. Exchanging sensitive information or otherwise engaging in activity that could indicate an unlawful agreement between competitors should be meticulously avoided.
Finally, the Flakeboard complaint came about even though the parties had abandoned the original transaction. Merging parties should be aware that abandoning a deal does not insulate them from civil and potential criminal penalties for conduct that occurred during the HSR waiting period.