State suit against Sappi dismissed

On a day when the Brainerd Potlatch mill began producing steam again as a sign it was gearing back up for a possible sale, a lawsuit filed by the state of Minnesota against Sappi Limited and Potlatch was dismissed.

"We are pleased it is all resolved," Mike Sullivan, Potlatch spokesman in Spokane, Wash., said today. "It is what we expected would happen."

Attorney General Mike Hatch argued the purchase agreement that sold Potlatch's printing papers division and its Cloquet mill to Sappi unreasonably restrained trade in violation of Minnesota law. Sappi argued the state was without authority to make its argument. And Sappi argued the district court lacked personal jurisdiction over it.

Retired District Court Judge Wayne Farnberg concluded the state failed to plead or present disputed evidence of material fact and he noted affidavits were not timely filed but were accepted. The court ruled it did have personal jurisdiction over Sappi Cloquet and that the attorney general had the authority to bring the action before the court.

Sullivan said the court decision has no effect on the potential sale of the mill. Sullivan said Potlatch is progressing with work to get the mill ready to restart operations as part of a potential sale to Missota Paper.

The court case has wound its way through the court system since the complaint was filed by the state on May 16. With the sale, Potlatch closed the Brainerd mill. The sale agreement included a non-compete clause prohibiting a buyer of Potlatch's Brainerd mill from producing coated paper.

In July, the state asked for summary judgment stating no material facts were in dispute. Sappi and Potlatch disagreed in court, asking for a dismissal. The state presented its arguments for a summary judgment during an Oct. 2 hearing in a Crow Wing County Courtroom.

In his findings of fact, Farnberg noted at the time the Brainerd mill closed it had higher production costs than every other coated paper production in the world.

"The Brainerd mill is not, and cannot feasibly be made, cost competitive for production of coated paper over the long term," the court stated.

Farnberg stated Sappi's purchase of Potlatch's coated paper business was conditioned upon closure of the Brainerd mill to permit Sappi time to transition the products and associated goodwill from the Brainerd mill to the Cloquet mill and other Sappi holdings.

"From the beginning and throughout these negotiations, Sappi Limited made it clear it would consider no purchase agreement which would permit the Brainerd mill or its equipment to reappear in competition with the purchased business while the Sappi organization was in the process of securing the intellectual property, goodwill and other intangible assets of that business," the court stated.

In order to preclude Potlatch from directly or indirectly reclaiming or selling to another buyer any of the value from Potlatch's coated paper business and its worldwide reputation for quality, the parties negotiated a protective covenant.

In the court document Potlatch acknowledged that Sappi is "entitled to protect and preserve the going concern value of the business to the extent permitted by law."

The non-compete clause is in effect for seven years.

The court noted the state conceded in its discovery process that it was unable to identify any paper producers who were willing to enter serious negotiations to buy the Brainerd mill and were held back by the restrictive covenant. Potlatch stated potential buyers had not indicated potential conflict with the covenant.

Farnberg's decision was filed with Darrell Paske, Crow Wing County Court Administrator, on Nov. 26.

Sappi Fine Paper North America responded to the ruling with a written statement.

"Sappi is pleased with Judge Farnberg's decision in dismissing both counts of the lawsuit. This decision will allow Sappi to continue to focus on making the Cloquet pulp and paper mill a world-class facility improving the mill's technology, infrastructure, and cost structure to allow it to compete on the world stage for many years to come.

"This is the single most important step Sappi can take to secure a long-term future for fine paper manufacturing and hundreds of jobs in Minnesota."