Reliance Steel & Aluminum Co., the largest steel distributor in the country, and three co-defendants took a hit last month when a Texas jury found they had conspired to crush a Houston competitor.
Even worse, the $52 million verdict against the companies could triple under federal antitrust rules. And still worse, National Fire Insurance Co. of Pittsburgh, Reliance’s insurance company, has balked at covering the expense.
The insurer, a division of American International Group Inc., has filed a preemptive action in Los Angeles County Superior Court, arguing it shouldn’t have to cover its liability policy since Reliance broke the law through its anti-competitive actions.
While it was not clear how the Texas judgment would be apportioned among the four defendants, if the verdict were tripled and then apportioned equally among the four, each company would have to pay $39 million. That would wipe out nearly half of the $84 million in cash Reliance had on hand at the end of 2013.
Still, the overall impact on Reliance, which has vowed to appeal the Texas verdict, is not expected to be great.
Despite carrying relatively little cash on its books, Reliance is a behemoth in the industry, boasting sales last year of $9.2 billion and a market cap of $5.5 billion. From its headquarters in downtown Los Angeles, Reliance oversees 220 distribution centers in 38 states and nine foreign countries, selling more than 100,000 different metal products to more than 125,000 customers.
It and other metals service centers buy raw steel from mills, which the centers then process into more refined products such as alloy, titanium and carbon steel. Those are then sold to specialized manufacturers of steel products in a broad range of industries.
It was one of those small service center competitors, MM Steel, that a jury said Reliance and three other firms put out of business.
The Houston panel found that Reliance colluded with fellow steel distributor American Alloy Steel Inc. and Gulf Coast steel mills JSW Steel Inc. and Nucor Corp. to prevent MM from buying the raw plates necessary for it to effectively compete.
The losses were so catastrophic for MM that it shut down last summer. It was seeking up to $67 million in damages.
Should National Fire not have to cover the cost of the verdict, said Ravi Madhavan, co-director of the International Business Center at the University of Pittsburgh, “it would be a setback, but not a defeat. These things are part of doing business.”
Both Madhavan and Lisa Reisman, executive editor of MetalMiner.com, a website that covers the metals industry, said the verdict would likely not affect Reliance’s reputation in the industry.
“The steel industry is very much an old boys’ network,” Reisman said. “This case won’t make a bean of difference to the metal buying community.”
MM co-founders Mike Hume and Matt Schultz opened the Houston office of Chapel Steel, now a Reliance subsidiary, in 1999 after being poached away from their jobs at American Alloy. The pair continued to work at the profitable metals service center after Reliance bought Chapel in 2004.
After they left to form competitor MM seven years later, Reliance sued, asserting they violated noncompete agreements. Before a Texas judge could issue a temporary injunction against MM, the two sides agreed to a settlement in which Hume and Schultz agreed not to solicit certain Chapel customers.
In its suit, MM called that settlement a “sham,” alleging Reliance and Chapel never intended to allow the new company to compete as a distributor in the bustling Gulf Coast region. It claimed Chapel even set aside a 12-year feud with rival American Alloy, during which the two parties ceased all business activity, in order to destroy MM. Coincidentally, the dispute between Chapel and American Alloy arose after Hume and Schultz left to form Chapel’s Houston office.
The plaintiffs pointed to emails authored by American Alloy President Arthur Moore regarding a meeting with Reliance and Chapel as the smoking gun.
“Chapel, along with Reliance,” Moore wrote, “plan on taking all available courses of action, legally, and otherwise, including notifying any mill that is selling them (MM), that they can no longer expect any future business from Chapel/Reliance.”
By the end of 2011, Hume and Schultz were desperate to find a way around the boycott. They asked one of their well-established customers, Houston’s North Shore Steel, to buy steel on their behalf for a small fee.
The lawsuit claimed that once the defendants found out about the arrangement, Nucor threatened to cut off sales to North Shore.
“Given North Shore’s expectations of sales in the mid-eight figures within a short period of time after collaborating with MM Steel,” the complaint reads, “its decision to terminate the relationship speaks volumes about the gravity of the threats to the business from defendants.”
Neither Reliance officials nor its attorneys would discuss the case and hefty verdict, but Reliance said in a press release that it planned to appeal.
Meantime, National Fire has given notice that it has no intention of covering the potential multimillion-dollar hit.
Neither National Fire nor its attorney returned a request for comment, but in its March 28 complaint, the company argued that it should not be required to pay out since the underlying incident was “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another,” thus causing MM a loss of profits in violation of federal antitrust laws.
Reliance’s attorneys have yet to file a response to the insurer’s filing.
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