BHE - Avnet: $60 Million Win Could Signal The Start Of A Larger Legal Gain

Summary

• In August, we disclosed that Avnet and Benchmark Electronics were involved in an antitrust lawsuit that could lead to a court decision awarding up to $330 million in total damages.
• In the most recent quarter, Avnet reported a legal gain of $61.7 million related to this case, likely from settlements excluding their two largest targets.
• Avnet should end up receiving the lion's share of the total $330 million amount involved in the litigation. We estimate the company could seek another $200 million in damages.
• We try to decipher what the next moves, both in-court and out-of-court, could be.

Last August, we disclosed on Seeking Alpha that Avnet ( AVT ) and Benchmark Electronics ( BHE ), plus a smaller third party, were involved in an antitrust lawsuit that could award them up to $330 million in total damages.

Additional court documents were released in October 2022, when Reuters reported that Avnet should end up receiving the lion's share of the total amount involved in the litigation, as the company could "seek more than $274 million in damages".

The trial was originally due to start in November 2022, but later postponed to May 2023.

At the beginning of November 2022, Avnet started filing dockets revealing the first out-of-court settlements :

Other settlements, with defendants Rubycon Corporation and Hitachi, followed in November and December 2022.

We believe these out-of-court agreements lead to the $61.7 million gain disclosed in the most recent company's 10-Q (page 12):

To be honest, the amount surprised us on the upside, as these settlements were made with relatively small defendants.

The main targets in the Avnet trial are KEMET and AVX, as we will investigate later on.

In January, Avnet also filed a stipulation of dismissal against Soshin Electric, a sign that an agreement has been reached with this company, too.

Benchmark Electronics is following on Avnet's steps, although the amounts recovered are much smaller.

BHE reported a net gain of $2.3 million from legal settlements during its Q4 2022 Earnings Call, and a total of $3 million in fiscal 2022.

Benchmark's out-of-court settlements basically relate to the same companies we highlighted regarding AVT.

The best is yet to come?

Avnet's trial brief and the defendants' joint trial brief help us shed some light on what we should expect from the May 2023 trial, assuming no out-of-court settlement before this date.

Here is some background to the price-fixing conspiracy that lead to two different and successful class actions (for Direct and Indirect purchasers), and to some independent lawsuits launched by companies like Avnet, Benchmark, Jaco and AASI.

The U.S. Department of Justice [DOJ], along with regulators in other countries, actively investigated the capacitors price-fixing allegations.

One Japanese corporation was granted amnesty from prosecution in exchange for reporting about the capacitor manufacturers' illegal collusive conduct.

After this key event, eight additional capacitor manufacturers and two executives from some of these companies pleaded guilty. They were sentenced for violating federal antitrust laws, and served prison term.

To cut a long story short, the Direct and Indirect purchasers' class actions recovered $604.5 million and $81 million, respectively, from settlements with basically all the companies involved in the price-fixing conspiracy.

Avnet and Benchmark Electronics elected to opt out of the antitrust litigation, to pursue their own lawsuit.

As we noticed at the beginning of this article, Avnet's case is solid, and the company believes it has the right to seek damages in the $274 million range, plus attorney's fees.

The main targets of Avnet's legal action are KEMET and AVX - two long time partners of the company.

AVX Corporation received in 2011 Avnet's Supplier Award, while KEMET honored Avnet with its 2015 Distributor of the Year Award - it is not surprising that these two companies represented Avnet's main suppliers of capacitors during the 2001 to 2014 price-fixing conspiracy.

According to the joint defendants' trial brief (page 2) KEMET and AVX "account for more than 80% of Avnet's claimed damages", or roughly in excess of $200 million.

D eciphering the next moves in court

Avnet's case is strongly supported.

In the past eight years, several civil lawsuits due to the illegal actions of the conspirators resulted in valuable settlements.

This includes not only the direct and indirect class actions previously mentioned, but also settlements from an opt-out plaintiff, Flextronics.

Judge James Donato has clearly spoken in a favor of a settlement between the parties.

KEMET sorted out of the direct purchasers class action through a settlement payment of $62 million, back in 2020, while AVX agreed to pay a similar sum, $65 million, in 2020, for the same purpose.

KEMET and AVX defense strategy is quite interesting.

The two companies are not named as direct defendants in the lawsuit.

We previously noted that a few capacitor manufacturers pleaded guilty to participating in a price-fixing conspiracy. However, none of them directly implicated KEMET or AVX in their guilty pleas.

In addition, KEMET and AVX lawyers believe that Avnet cannot provide a non-speculative measure of its exact damages.

KEMET and AVX lawyers want the court to require the jury to confirm that the two companies directly participated in the conspiracy, after having installed the doubt that the two companies "behaved differently" from the other defendants.

Avnet lawyers highlighted, among other things, that "group meeting attendee NEC Tokin regularly shared the information received from AVX and KEMET with the other meeting attendees", as wells that "AVX and KEMET's executives also traveled to Asia and met with their co-conspirators, such as SANYO, Hitachi, and NEC TOKIN, who then reported back the information to the other Conspirators via email or at the group meetings in Japan".

Finally, it should be noted that in a previous decision related to the direct purchaser class action the court rejected a similar request:

Conclusion - Time to bring out the crystal ball

We expect that Avnet, AVX and KEMET will settle outside of court, but a resolution may not be immediate as the May 2023 deadline provides ample time to negotiate between the parties.

We were positively surprised by the $61.7 million gain related the first settlements, that we estimated as potentially lower.

However, we do not believe that such a strong figure may be used as an indication that Avnet will receive, from a settlement with both AVX and KEMET, the whole $200 million of triple damages.

The previous lawsuits have settled at an average ratio of 1.5 times the overcharged amount.

Our estimated range for the settlement amount is $120 million to $150 million, though this is purely speculative on our side.

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