On November 7, the Antitrust Division of the Department of Justice announced a settlement with Flakeboard America Ltd. (Flakeboard) and SierraPine for federal antitrust law violations. The settlement requires the companies to pay a combined $3.8 million for violating the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act). The settlement also requires Flakeboard to disgorge $1.15 million in illegally obtained profits from violating Section 1 of the Sherman Act.
On January 13, 2014, Flakeboard and SierraPine executed an asset purchase agreement in which Flakeboard agreed to acquire SierraPine’s three particleboard and medium-density fiberboard mills. As part of the asset purchase agreement, SierraPine agreed to close its mill in Springfield, Ore. five days prior to closing the transaction but after any antitrust waiting periods and approvals had expired or terminated. Prior to the transaction, SierraPine had no intention of closing its Springfield mill. The contemplated transaction was subject to pre-merger notification under the HSR Act, and the parties submitted their HSR filings on January 22, 2014. However, the DOJ had concerns about the competitive effects of the acquisition and issued a Second Request. Accordingly, the HSR waiting period expired August 27, 2014, 30 days after Flakeboard and SierraPine certified compliance with the DOJ’s Second Request.
Within two days of the transaction’s announcement on January 14, 2014, a labor issue arose at the SierraPine Springfield mill. Instead of making its own, unilateral business decision as to how to resolve the labor issue and when or if to close the Springfield mill, SierraPine discussed the issue with Flakeboard. As a result of these discussions, SierraPine closed the Springfield mill on March 13, 2014, months before the HSR waiting period expired. In addition, the companies further agreed to transition SierraPine’s Springfield customers to Flakeboard’s competing mill in Albany, Ore. The companies allegedly facilitated this transition by exchanging competitively sensitive information– including names, contact information and types and volume of products purchased by each Springfield customer. At Flakeboard’s request, SierraPine also instructed its own sales employees to inform customers that Flakeboard would serve them and match SierraPine’s prices. Flakeboard successfully secured a substantial amount of SierraPine’s business as a result of these agreements according to the DOJ. Moreover, although Flakeboard and SierraPine abandoned the transaction on September 30, 2014, SierraPine’s Springfield mill remains closed while Flakeboard’s Albany mill continues to operate.
Explanation of Charges
The DOJ made two claims against Flakeboard and SierraPine. First, the DOJ charged the companies with violating the HSR Act. The HSR Act requires that parties to a transaction remain independent and continue to act as competitors throughout the HSR waiting period. During this time, the acquiring party cannot exercise operational or beneficial control over the acquired party. Here, however, Flakeboard exercised operational control over SierraPine by coordinating with SierraPine to close the Springfield mill, coordinating the timing of the announcement of the closure specifically to give Flakeboard time to contact customers and then exchanging competitively sensitive information and coordinating to move the Springfield customers to Flakeboard. The HSR Act allows the DOJ to impose a fine of $16,000 per day for HSR Act violations. Thus, the DOJ could have fined the companies $3.568 million for violating the HSR Act for 223 days. The settlement reduced this amount to $1.9 million for each company.
Second, these same actions led the DOJ to charge the companies with violating Section 1 of the Sherman Act. Section 1 of the Sherman Act prohibits agreements that unreasonably restrain trade. In the context of a transaction, Section 1 prohibits parties to a transaction who are otherwise competitors from coordinating on price, output or other competitively sensitive matters. This type of pre-closing coordination is prohibited, even if the HSR Act waiting period has expired, and the parties must instead wait until after closing. In this case, Flakeboard’s and SierraPine’s actions regarding the closing of the mill and moving customers prior to closing the transaction eliminated products from the Springfield mill and allocated the mill’s customers to Flakeboard. Coordinating with a competitor to eliminate or reduce a competitor’s output and/or to allocate customers are per se violations of Section 1. The DOJ chose to require Flakeboard to disgorge its illegally obtained profits, in part because the remedy that would restore competition– re-opening the Springfield mill– was impractical. The mill had already been closed for months and virtually all employees had either left or been terminated. The DOJ believed that disgorgement of the $1.15 million illegally obtained profits would deter Flakeboard and others from such conduct in other transactions in the future.
This case is an important reminder of the prohibition on “gun-jumping”— competitors acting as one prior to closing the transaction. In every transaction between competitors, the parties must continue to operate as competitors until the HSR Act waiting period expires, and the transaction is closed. As reflected in this case, so called “gun-jumping” can be a violation of both the HSR Act and Section 1 of the Sherman Act. Even if the transaction is not subject to pre-merger notification filings under the HSR Act, the parties must nonetheless continue to operate as separate competitors until closing. A claimed violation of Section 1 of the Sherman Act is separate from the HSR Act and can be brought against companies regardless of whether HSR reporting is required in any situation where companies coordinate on competitively sensitive business operations prior to closing.