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From Antitrust Law Daily, February 9, 2015

Foam maker unable to suppress direct purchasers’ price fixing claims

By Greg Hammond, J.D.

One of the largest polyurethane foam manufacturers in the United States could not dispose of direct purchasers’ claims that the company engaged in a price fixing conspiracy after it acquired the assets of a bankrupt competitor. Although the manufacturer was not liable for the actions of the bankrupt competitor prior to the asset purchase, there was sufficient evidence for a jury to reasonably find that the manufacturer undertook meaningful activity in furtherance of the ongoing conspiracy after the purchase occurred, the federal district court in Toledo concluded when partially denying the manufacturer’s motion for summary judgment (In re Polyurethane Foam Antitrust Litigation, February 6, 2015, Zouhary, J.).

Background. Foamex International, Inc. was once the largest manufacturer of polyurethane foam in the United States. After filing for bankruptcy, Foamex’s assets were purchased by an entity known as MP-Foam-DIP, which subsequently converted into a Delaware corporation and renamed itself Foamex Innovations, Inc. (FXI). Direct purchasers allege that FXI participated in a conspiracy to fix the prices of flexible polyurethane foam and to allocate customers throughout the United States. They set forth two theories of liability: (1) FXI is liable for participating in the antitrust conspiracy because its predecessor Foamex is liable, and FXI succeeds to Foamex’s liability; and (2) FXI is liable because, after it came into existence in 2009, it joined the ongoing conspiracy. FXI moved for summary judgment on the direct purchasers’ claims.

Liability as successor. In support of their first theory of liability, the direct purchasers alleged that Foamex’s antitrust liability was not discharged in bankruptcy and FXI remains liable; the 2009 sale did not cleanse the assets from liability; even if the bankruptcy court’s approval of the asset sale cleansed the assets of antitrust liability, the order is not binding on the direct purchasers because they did not receive constitutionally adequate notice of the bankruptcy proceeding; and there was a de facto merger of Foamex with FXI, so FXI succeeded to Foamex antitrust liability.

Generally, under New York law, a corporation that purchases the assets of another corporation is not liable for the seller’s liabilities, the court noted. However, there are four exceptions to this rule. A purchaser of a corporation’s assets may be liable as successor if: (1) it expressly or impliedly assumed the predecessor’s liability; (2) there was a consolidation or de facto merger of seller and purchaser; (3) the purchasing corporation was a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape such obligations. The court determined that all of the direct purchasers’ arguments boil down to whether there was a de facto merger.

To demonstrate a de facto merger, the direct purchasers were required to demonstrate, in part, continuity of ownership. However, there was no overlap in ownership between Foamex and FXI. Further, the fact that managers who owned Foamex shares received FXI shares over six months after the asset sale closed could not reasonably fit within the definition of “continuous ownership.” Consequently, FXI was entitled to summary judgment on the direct purchasers’ argument that it is liable as successor to Foamex’s liability.

Independent liability. The direct purchasers also alleged that FXI is independently liable, because after it began conducting business, it joined the ongoing, existing conspiracy to fix prices in the polyurethane foam market. The issue, according to the court, was whether enough evidence exists for a jury to reasonably conclude FXI knowingly joined the alleged conspiracy and undertook at least some “slight” activity to accomplish its objectives. The direct purchasers set forth emails demonstrating that FXI conspired to collude with competitors by sharing pricing information, setting nearly identical prices and price-increase effective dates, and agreeing not to compete for customers based on price.

FXI argued that nearly all of the evidence is related to conduct prior to when FXI came into existence, related to conduct of other defendants, and is demonstrably consistent with permissible, competitive conduct. While the court acknowledged that much of the direct purchasers’ evidence could be “explained away,” not all of it could be disposed of. Specifically, it noted numerous emails where executives allegedly admitted to discussing pricing information with competitors, where it enclosed its price increase, and where it set forth competitors’ future pricing intentions, along with FXI’s intentions.

The court therefore determined that a reasonable jury could conclude that: (1) Foamex has been conspiring for several years; (2) nearly all of its employees were hired by FXI to run the new business; (3) a former Foamex employee and current FXI employee sent an email before the asset sale closing, indicating he would take further action towards the conspiracy in the near future, and knowing it would be on behalf of FXI; and (4) FXI engaged in other overt acts after the asset sale. FXI’s motion for summary judgment regarding its independent liability was consequently denied.

The case number is 1:10 MD 2196.

Attorneys: Sanford I. Weisburst (Quinn Emanuel Urquhart & Sullivan) and William A. Isaacson (Boies, Schiller & Flexner) for Direct Purchaser Class. James H. Walsh (McGuire Woods) and Kendall Millard (Barnes & Thornburg) for defendants.

Companies: Foamex Innovations, Inc.

MainStory: TopStory Antitrust OhioNews

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