Law and Order: Containerboard Makers Fight Antitrust Suits

SymbolPriceChangeIP29.77-0.54PKG27.48-0.41TIN21.90-0.40{“s” : “ip,pkg,tin”,”k” : “a00,a50,b00,b60,c10,g00,h00,l10,p20,t10,v00″,”o” : “”,”j” : “”}

In Sep 2010, North America’s containerboard makers were slapped with a category movement lawsuit underneath a Sherman Act alleging cost regulating from 2005 to 2009. During a final several months a box has slogged a approach by Judge Shadur’s courtroom in a Northern District of Illinois multiplication of a United States District Court system. We have been unchanging attendees of a standing hearings hold on a case.

While we are not authorised experts, we wish to support a operation of probable outcomes for this many new hitch of antitrust lawsuits regulating a containerboard industry’s prior conflict with price-fixing allegations. Should story repeat itself, authorised costs and allotment payments could have a slight disastrous impact on a valuations of firms like Packaging Corporation of America (NYSE:PKG – News), Temple Inland (NYSE:TIN – News), and Smurfit Stone, that have poignant bearing to a North American containerboard market. We trust investors should keep these risks in mind when deliberation a containerboard companies.

North American Containerboard Makers Are Currently in a Courtroom Battle Fighting Accusations of Price Fixing
Kleen Products, a tiny Minnesota-based manufacturer of building caring products, is a lead plaintiff in a case, seeking three-way indemnification and fees and losses from North America’s largest containerboard makers (including Packaging Corporation of America, Temple-Inland, International Paper (NYSE:IP – News), Smurfit-Stone, and Georgia Pacific) for allegedly regulating a cost of containerboard products from Aug 2005 by 2010.

According to Kleen Products’ complaint, a containerboard attention is rarely receptive to collusive function due to a rarely strong supply base, fragile product demand, and commodity inlet of a products. The plaintiffs lay that commencement in 2005 a defendants conspired to shorten containerboard supply, thereby assisting to lift prices and boost to a larger border than what rival markets would dictate.

Upon reading a 10-Ks filed by Temple-Inland, Packaging Corporation of America, and Smurfit Stone, it’s transparent that a defendants devise on energetically fortifying themselves and, for a many part, can't pretty guess a operation of probable loss. International Paper, however, did not discuss a Kleen Products lawsuit in a 2010 10-K filing. Rather, it initial mentioned a lawsuit in a initial entertain 2011 10-Q filing, where it also brought to light a identical price-fixing box filed opposite a organisation in Cocke County, Tenn., covering a years from 2005 by a present.

On Apr 8, 2011, a justice discharged all of a defendants’ motions to boot a case.

Previous Sherman Antitrust Lawsuits Against a Containerboard Companies Have Lasted Years and Cost a Industry Hundreds of Millions of Dollars
For approximately 10 years from 1999 to 2008, containerboard makers energetically shielded themselves opposite a price-fixing lawsuit travelling a time between Oct 1993 and Nov 1995. However, a firms paid out a sum of some-more than $390 million in allotment and opt-out payments between 2005 and 2008. In a finish containerboard makers paid out settlements homogeneous to about 2% of containerboard revenues during 1994 and 1995.

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In a early years of a lawsuit, containerboard makers downplayed a intensity financial impact of a lawsuits.

The Company believes that a plaintiffs’ allegations have no consequence and intends to urge opposite a fit vigorously. The Company does not trust that a outcome of this lawsuit should have a element inauspicious outcome on a financial position, formula of operations, or money flow.
–Temple Inland 2001 10-K
We trust a allegations have no merit, are energetically fortifying ourselves, and trust a outcome of this lawsuit should not have a element inauspicious outcome on a financial position, formula of operations, or money flow.
–Packaging Corporation of America 1999 10-K
Stone, JSC (U.S.), and SSCC trust they have commendable defenses and intend to energetically urge these cases.
–Smurfit Stone 1999 10-K

However, in after years a firm’s SEC filings started deliberating tens of millions of dollars of allotment costs. International Paper even commented that it was improved to settle a cases than to risk larger costs as a outcome of a jury verdict.

In new years, several antitrust category movement lawsuits have been filed opposite companies in a industry. Damages sought in these forms of actions are mostly estimable and, even where no indiscretion has occurred, companies contingency mostly settle rather than risk an inauspicious jury verdict.
– International Paper 2005 10-K

IP also emphasized in a 2005 10-K that it had adopted antitrust correspondence training requiring all U.S. employees to review a company’s antitrust correspondence manual.

Going serve back, in Jan 1978 a grand jury returned with a transgression self-assurance toward International Paper (United States vs. International Paper; H-78-11) for cost regulating in a corrugated enclosure marketplace (east of a Rocky Mountains) from 1960 by a seventies. In this case, IP pled nolo contendere (no contest) and was fined $617,000.

The Containerboard Makers’ Early Attempts to Have a Current Lawsuits Dismissed Have Failed; We Expect a Vigorous Defense That Could Take Years
A category movement lawsuit (No. 10 C 5711) has been brought about by Kleen Products, LLC et al., opposite Packaging Corporation of America, International Paper, Cascades Canada, Norampac, Weyerhaeuser, Georgia Pacific, Temple-Inland, and Smurfit-Stone charging defilement of a Sherman Act. The plaintiffs lay that from Aug 2005 to Sep 2010, a defendants reduced prolongation ability by plant closures, ability idling, and prolongation downtime during a duration of high demand. It is also purported that a defendants lifted prices shortly after association member attended several attention conferences. The plaintiffs lay that a defendants’ actions vaunt a unwavering correspondence as partial of a devise to revoke supply and boost price.

In Apr 2011, Judge Shadur deserted all of a containerboard makers’ motions to boot a case. During a May 9, 2011, standing conference we schooled that a plaintiffs have asked for a find routine to start and will be looking to get entrance to association emails around a refuge order. The successive standing conference is scheduled for Aug. 16, 2011.

We note that while many procedural courtroom events can be rather mundane, a standing hearings for this box are anything but. Judge Shadur frequently shares his pearls of knowledge and pointy wit with authorised legislature from both sides, and a courtroom is packaged with attorneys. The many new standing conference featured 8 lawyers representing a invulnerability and 3 attorneys representing a plaintiffs (slightly fewer than in progressing hearings), to that Judge Shadur quipped that a economy contingency be doing good saying as how many cost attorneys are ably employed.

On May 2, a defendants any filed 80-100 page “answers to a complaint.” These authorised filings yield a paragraph-by-paragraph brawl to a plaintiff’s allegations, and during a finish of any request invulnerability attorneys yield 8-10 points of defense. The many visit and distinct points of invulnerability include:

There is no swindling to repair prices.
The plaintiffs are suing over a duration of 5 years, when a Sherman Act is singular to only 4 years.
Some contracts with a plaintiffs need imperative arbitration.
Some plaintiffs have already settled.
Customers could have conducted their possess due attention and motionless to fist their wrapping element elsewhere.
If indiscretion did occur, a plaintiffs should not have behind in filing charges, as it could outcome in increasing damages. This authorised scheme is ordinarily called a invulnerability of “estoppel and latches.”
International sales should not be theme to Sherman act regulations.

On Apr 15, 2011, one of a plaintiffs (Thule) willingly discharged a charges opposite a containerboard makers. It appears that they have staid out of justice with a defendants. However, terms of a allotment were not disclosed and a containerboard makers have not supposing any explanation in a successive events sections of their many new quarterly filings.

We trust that if a justice manners in a containerboard makers’ favor, a impact will be negligible. However, if a plaintiffs possibly win a outcome or establish to a allotment their batch valuations could be negatively impacted by 1%-8% of a firms’ marketplace capitalizations. If we provide a 1993-95 Sherman act lawsuits as a precedent, we see that a cost per year per share prove ranged from around $2.2 million for International Paper to $5.4 million for Weyerhaeuser, with a normal payout equating to roughly $4 million per year per share point. Furthermore, in Temple-Inland’s 2006 10-K, a organisation reported that settlements had ranged from 0.2% to 7% of corrugated sales (our calculations prove a normal cost to Temple-Inland was roughly 1.8% of sales).

We trust any settlements paid in propinquity to a Kleen Products lawsuit could be practiced ceiling since a cost of containerboard has risen and a converging turn within a attention has also increasing during a past 15 years. From 1993 to 1995, a cost of containerboard sundry between roughly $300 and $500 per ton. From 2005 by 2010, a prices fluctuated between roughly $600 and $775 per ton. Additionally, in 1995 a tip 6 makers of containerboard had about 60% marketplace share and by 2010 a tip 5 manufacturers of North American containerboard tranquil 77% of sum capacity.

Legal Battles Can Result in a Range of Possible Outcomes
If things go a containerboard makers’ way, these lawsuits will be a nonevent and a gratefulness impact will be negligible. However, if penalties land in a same ballpark as a final turn of antitrust lawsuits, we trust it will outcome in a 1%-2% rebate to a companies’ satisfactory value estimates. On a other hand, if a plaintiffs successfully disagree their box and fist out aloft allotment payouts, a impact on valuations could operation from around 3% for International Paper to about 8% for Temple Inland and Smurfit Stone. We note that a impact on IP is pale compared to a peers since it is a some-more diversified company–both in terms of products and geographic mix.

Legal cases such as this one have a engorgement of variables that are formidable to predict. Currently, we are not adjusting a satisfactory value estimates given that a operation of probable outcomes falls good within a domain of reserve bands. However, we will sojourn observant in watching a justice box record and a expansion of denunciation in a legalese used in a companies’ SEC filings to establish either any destiny changes to a gratefulness estimates will be justified.

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