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Packaging Corp. to Settle Suit at $17.6M

Zacks Equity Research

Packaging Corporation of America (PKG) recently agreed to settle a civil, class action lawsuit filed in 2010 by Kleen Products by paying $17.6 million into a settlement fund in exchange of dismissal of all the charges leveled against it.. The agreement will be finalized post approval by the U.S. District Court for the Northern District of Illinois.

Kleen Products led the class action lawsuit against leading North American manufacturers of containerboard. There were eight other defendants in the suit, including International Paper (IP), Weyerhaeuser Co. (WY) and Smurfit-Stone Container Corp., which was acquired by Rock-Tenn (RKT) in 2011.

The Lawsuit

In 2005, the containerboard industry was marked by high barriers to entry and an oligopolistic structure. The industry was prone to anti-competitive behavior owing to a small number of manufacturers and inelastic product demand. The defendants were integrated suppliers of containerboard products to the plaintiffs.

Plaintiffs alleged that the defendants repeatedly engaged in a coordinated arrangement to impose capacity constraints and subsequently hiked prices of containerboard products in the market. This resulted in an artificial shortage in the industry at a time of promising macroeconomic environment when product demand was steadily rising, resulting in significant market impact.

During 2005–2010, there were unprecedented number of plant shutdowns and capacity cutbacks. Prices across the board were increased eight times during this period, aggregating to a price-hike of over 50% without any underlying cost justifications.

In 2010, the plaintiffs, led by Kleen Paper, filed a class action lawsuit against Packaging Corporation and other defendants. The plaintiffs alleged that the said anti-competitive actions harmed their business and deprived them of the benefits of free and unrestricted competition in the market. They sought damages to the extent of three times the losses they sustained, as well as litigation costs.

The Agreement

Per the agreement, Packaging Corp. will pay the designated amount into a settlement fund to clear off its name from the lawsuit. A reserve fund will be created in the first-quarter 2014 financial statements of this Zacks Rank #3 (Hold) stock, creating an after-tax charge of $11.3 million or 11 cents per share.

Although Packaging Corp. still denies the legitimacy of the plaintiff’s allegations, the decision was made in the best interests of shareholders and was driven by the need to avoid substantial legal costs and the uncertainty caused by such litigation.

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